0001193125-17-174054.txt : 20170920 0001193125-17-174054.hdr.sgml : 20170920 20170517195543 ACCESSION NUMBER: 0001193125-17-174054 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20170518 DATE AS OF CHANGE: 20170622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEGG MASON PARTNERS INSTITUTIONAL TRUST CENTRAL INDEX KEY: 0000889512 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-218068 FILM NUMBER: 17853246 BUSINESS ADDRESS: STREET 1: LEGG MASON & CO., LLC STREET 2: 620 EIGHTH AVENUE, 49TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 1-877-721-1926 MAIL ADDRESS: STREET 1: LEGG MASON & CO., LLC STREET 2: 620 EIGHTH AVENUE, 49TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: CITIFUNDS INSTITUTIONAL TRUST DATE OF NAME CHANGE: 19981030 CENTRAL INDEX KEY: 0000889512 S000008908 Western Asset Institutional Liquid Reserves C000024235 Institutional Shares CILXX CENTRAL INDEX KEY: 0000889512 S000008906 Western Asset Institutional Cash Reserves C000024230 Institutional Shares CARXX N-14 1 d366715dn14.htm LEGG MASON PARTNERS INSTITUTIONAL TRUST Legg Mason Partners Institutional Trust
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As filed with the U.S. Securities and Exchange Commission on May 18, 2017

Securities Act File No.            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-14

REGISTRATION STATEMENT

UNDER

   THE SECURITIES ACT OF 1933   
   Pre-Effective Amendment No.       
   Post-Effective Amendment No.       

 

 

Legg Mason Partners Institutional Trust

(Exact Name of Registrant as Specified in Charter)

 

 

620 Eighth Avenue, New York, New York 10018

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, including Area Code (877) 721-1926

 

 

Robert I. Frenkel

Legg Mason Partners Institutional Trust

100 First Stamford Place

Stamford, Connecticut 06902

(Name and Address of Agent for Service)

 

 

COPY TO:

Roger P. Joseph, Esq.

Morgan, Lewis & Bockius LLP

One Federal Street

Boston, Massachusetts 02110

 

 

Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.

TITLE OF SECURITIES BEING REGISTERED:

Institutional Shares of Western Asset Institutional Liquid Reserves

The Registrant has registered an indefinite amount of securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended; accordingly, no fee is payable herewith in reliance upon Section 24(f).

It is proposed that this filing will become effective on June 17, 2017 pursuant to Rule 488.

 

 

 


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LEGG MASON PARTNERS INSTITUTIONAL TRUST

WESTERN ASSET INSTITUTIONAL CASH RESERVES

620 Eighth Avenue

New York, New York 10018

June 19, 2017

Dear Shareholder:

The Board of Trustees of your fund, Western Asset Institutional Cash Reserves (the “Target Fund”), a series of Legg Mason Partners Institutional Trust, a Maryland statutory trust (the “Trust”), has approved the reorganization of the Target Fund into Western Asset Institutional Liquid Reserves (“Institutional Liquid Reserves”), also a series of the Trust, after considering the recommendation of Legg Mason Partners Fund Advisor, LLC, the investment manager to the Target Fund, and concluding that such reorganization would be in the best interests of the Target Fund. The Target Fund and Institutional Liquid Reserves have the same investment objectives, strategies and policies, and the same investment manager and subadviser. Each fund invests as a feeder fund through Liquid Reserves Portfolio, an underlying mutual fund having the same investment objectives and strategies under a master/feeder structure. The reorganization is expected to occur on or about August 18, 2017. Upon completion of the reorganization, you will become a shareholder of Institutional Liquid Reserves, and you will receive Institutional Shares of Institutional Liquid Reserves having an aggregate net asset value equal to the aggregate net asset value of your shares of the Target Fund. The reorganization is expected to be tax-free to you for federal income tax purposes, and no commission, redemption fee or other transactional fee will be charged as a result of the reorganization.

The reorganization does not require shareholder approval, and you are not being asked to vote. We do, however, ask that you review the enclosed information statement/prospectus, which contains information about Institutional Liquid Reserves and provides details about the terms and conditions of the reorganization.

The Board of Trustees of the Trust has unanimously approved the Target Fund’s reorganization and believes the reorganization is in the best interests of the Target Fund.

If you have any questions, please call 1-800-625-4554.

Sincerely,

Jane Trust, President

Legg Mason Partners Institutional Trust


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LEGG MASON PARTNERS INSTITUTIONAL TRUST

WESTERN ASSET INSTITUTIONAL CASH RESERVES

 

 

IMPORTANT NEWS FOR SHAREHOLDERS

 

 

The enclosed Information Statement/Prospectus describes the contemplated reorganization of Western Assets Institutional Cash Reserves (the “Target Fund”) into a compatible fund. While we encourage you to read the full text of the enclosed Information Statement/Prospectus, here is a brief overview of the fund reorganization. Please refer to the more complete information about the reorganization contained elsewhere in the Information Statement/Prospectus.

 

 

COMMON QUESTIONS ABOUT THE REORGANIZATION

 

  Q. HOW WILL THE REORGANIZATION AFFECT ME?

A.    In connection with the reorganization, the Target Fund’s assets and liabilities will be combined with the assets and liabilities of Western Asset Institutional Liquid Reserves (the “Acquiring Fund”), also a series of Legg Mason Partners Institutional Trust, and you will become a shareholder of the Acquiring Fund (the “Reorganization”). You will receive shares of the Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shares of the Target Fund that you own on the date of the Reorganization, but to the extent that the Funds have different net asset values per share at the time of closing of the Reorganization, you would receive a slightly different number of shares of the Acquiring Fund in the Reorganization than you hold in the Target Fund.

 

  Q. WHY IS THE REORGANIZATION OCCURRING?

A.    The board of trustees (the “Board”) of Legg Mason Partners Institutional Trust and management believe that the Reorganization is in the best interests of the Target Fund. The Target Fund and the Acquiring Fund have the same investment objectives, strategies and policies, and the same investment manager and subadviser. The Target Fund’s manager believes that a larger, combined fund offers operational efficiencies and potential economies of scale that may lower expenses paid by shareholders in the long term. The Board notes that the Acquiring Fund and the Target Fund have had similar average annual performance over the one-, three-, five- and ten-year periods ended December 31, 2016.

 

  Q. ARE MY FUND’S INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED POLICIES SIMILAR TO THOSE OF THE ACQUIRING FUND?

A.    Yes. The funds have the same investment objectives and strategies. Each fund is an institutional “prime” money market fund that invests in high quality, U.S. dollar-denominated short-term debt securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality in accordance with the requirements of Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”). Each fund invests as a feeder fund through Liquid Reserves Portfolio, an underlying mutual fund having the same investment objectives and strategies as both funds under a master/feeder structure. Please see “Comparison of Investment Objectives, Strategies and Principal Risks of Investing in the Funds” in the Information Statement/Prospectus.

 

  Q. HOW WILL THE REORGANIZATION AFFECT FUND FEES AND EXPENSES?

A.    The Reorganization will have the following effects on the fees and expenses of shares of the Target Fund:

 

   

Total annual fund operating expenses (before and after fee waivers and/or expense reimbursements) of shares of the Target Fund are not expected to increase as a result of the Reorganization.

 

   

The contractual management fee schedules for the Target Fund and the Acquiring Fund are the same.

Please see “Summary—Comparison of Fees and Expenses” in the Information Statement/Prospectus for a detailed breakdown of the fees and expenses paid by the Target Fund in comparison with those paid by the Acquiring Fund.


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  Q. WILL I HAVE TO PAY ANY SALES LOAD, CHARGE OR OTHER COMMISSION IN CONNECTION WITH THE REORGANIZATION?

A.    No. No sales load, contingent deferred sales charge, commission, redemption fee or other transactional fee will be charged as a result of the Reorganization. You will receive shares of the Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shares of the Target Fund that you own on the date of the Reorganization.

 

  Q. WHAT CLASSES OF SHARES WILL I RECEIVE?

A.    You will receive Institutional Shares of the Acquiring Fund.

 

  Q. WHAT IF I REDEEM MY SHARES BEFORE THE CLOSING OF THE REORGANIZATION?

A.    Redemptions of fund shares that occur before the closing of the Reorganization will be processed according to the Target Fund’s policies and procedures in effect at the time of the redemption.

 

  Q. WILL MY SHAREHOLDER PRIVILEGES CHANGE AS A RESULT OF THE REORGANIZATION?

A.    No. You will receive the same class of shares as you hold in the Target Fund with the same privileges.

Please see “Summary—Comparison of Sales Loads and Purchase and Redemption Policies and Procedures” and “Purchases and Redemptions of Fund Shares; Other Shareholder Information” in the Information Statement/Prospectus.

 

  Q. CAN I PURCHASE ADDITIONAL SHARES IN MY FUND PRIOR TO THE REORGANIZATION?

A.    Yes.

 

  Q. WILL I HAVE TO PAY ANY TAXES AS A RESULT OF THE REORGANIZATION?

A.    It is expected that you will not recognize a gain or loss for federal income tax purposes as a direct result of the Reorganization. You will receive, in one or more distributions, all or a portion of which may be taxable, your share of the net investment income and net capital gain of the Target Fund that has not previously been distributed for the taxable year ending on the Closing Date. The Acquiring Fund may make a comparable distribution to its shareholders shortly before the Reorganization. You should talk to your tax adviser about any state, local and other tax consequences of the Target Fund’s Reorganization.

 

  Q. WHO WILL PAY FOR THE REORGANIZATION?

A.    The costs and expenses related to the Reorganization (the “Reorganization Costs”) will be allocated to the Acquiring Fund and the Target Fund pro rata based on the aggregate net assets of each Fund. The Reorganization Costs are expected to be approximately $155,000. No transaction costs are anticipated to be incurred in connection with the Reorganization.

 

  Q. WHEN IS THE REORGANIZATION OF MY FUND EXPECTED TO HAPPEN?

A.    The Reorganization of the Target Fund is expected to occur on or about August 18, 2017.

 

  Q. WHOM DO I CALL IF I HAVE QUESTIONS?

A.    If you need more information or have any questions, please call 1-800-625-4554.

 

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The information in this Information Statement/Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Information Statement/Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION

INFORMATION STATEMENT/PROSPECTUS

June 19, 2017

INFORMATION STATEMENT FOR:

LEGG MASON PARTNERS INSTITUTIONAL TRUST

Western Asset Institutional Cash Reserves

(the “Target Fund”)

620 Eighth Avenue

New York, NY 10018

1-877-721-1926

PROSPECTUS FOR:

LEGG MASON PARTNERS INSTITUTIONAL TRUST

Western Asset Institutional Liquid Reserves

(the “Acquiring Fund”)

(each a “Fund” and, together, the “Funds”)

620 Eighth Avenue

New York, NY 10018

1-877-721-1926

This Information Statement/Prospectus is being furnished in connection with the Reorganization of the Target Fund into the Acquiring Fund.

Each Fund is a separate series of Legg Mason Partners Institutional Trust (the “Trust”), a registered open-end management investment company organized as a Maryland statutory trust. Each Fund is a money market fund. The investment objectives, policies and principal investment strategies of the Target Fund are the same as those of the Acquiring Fund. Legg Mason Partners Fund Advisor, LLC is the investment manager of each Fund. Please see “Comparison of Investment Objectives, Strategies and Principal Risks of Investing in the Funds” in this combined Information Statement and Prospectus (the “Information Statement/Prospectus”).

The Form of Agreement and Plan of Reorganization (the “Reorganization Agreement”) contemplates the transfer of all of the assets of the Target Fund to the Acquiring Fund in exchange for full and fractional Institutional Shares of the Acquiring Fund and the assumption of the Target Fund’s liabilities by the Acquiring Fund. The Target Fund would then distribute to its shareholders the portion of the shares of the Acquiring Fund to which each such shareholder is entitled in redemption of the outstanding shares of the Target Fund, with each shareholder receiving shares of the Acquiring Fund.

 

Western Asset Institutional Cash Reserves

(the “Target Fund”)

  

Western Asset Institutional Liquid Reserves

(the “Acquiring Fund”)

Institutional Shares    Institutional Shares
Trading Symbol: CARXX    Trading Symbol: CILXX


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The Acquiring Fund also offers Investor Shares and each Fund offers Administrative Shares. There were no Administrative Shares of the Target Fund outstanding as of April 30, 2017. Administrative Shares and Investor Shares of the Acquiring Fund are not offered in this Information Statement/Prospectus.

The Reorganization is expected to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), for federal income tax purposes. See “Information about the Reorganization—Federal Income Tax Consequences” below. Shareholders should consult their tax advisers to determine the actual impact of the Reorganization in light of their individual tax circumstances.

This Information Statement/Prospectus, which you should retain for future reference, sets forth concisely the information about the Acquiring Fund that a prospective investor should know before investing. A Statement of Additional Information (the “Reorganization SAI”) dated June 19, 2017, relating to this Information Statement/Prospectus and the Reorganization has been filed with the Securities and Exchange Commission (the “SEC”) and is incorporated by reference into this Information Statement/Prospectus. A copy of the Reorganization SAI is available upon request and without charge by writing to the Acquiring Fund at 100 First Stamford Place, Attn: Shareholders Services—5th Floor, Stamford, Connecticut 06902 or calling 1-800-625-4554.

For more information regarding the Funds, see the Funds’ current prospectus (the “Prospectus”) and statement of additional information (the “Fund SAI”) filed with the SEC on the dates as listed in Appendix A. The Target Fund Prospectus and the Target Fund SAI are incorporated into this Information Statement/Prospectus by reference. The Prospectus of the Acquiring Fund is not being incorporated by reference.

The audited financial statements and related independent registered public accounting firm’s report for the Target Fund contained in the annual report for the fiscal year ended August 31, 2016 are incorporated herein by reference. The unaudited financial statements for the Target Fund contained in the semi-annual report for the period ended February 28, 2017 are incorporated herein by reference. You may receive without charge a copy of the Prospectus, Fund SAI, and annual and semi-annual report for each Fund by calling 1-800-625-4554, or by writing the Funds at 100 First Stamford Place, Attn: Shareholders Services—5th Floor, Stamford, Connecticut 06902.

The financial highlights for the Acquiring Fund contained in the semi-annual report for the fiscal period ended February 28, 2017 are attached to this Information Statement/Prospectus as Appendix B.

In addition, you can copy and review this Information Statement/Prospectus and the complete filing on Form N-14 containing the Information Statement/Prospectus and any of the above-referenced documents at the SEC’s Public Reference Room in Washington, DC. You may obtain information about the operation of the Public Reference Room by calling the SEC at (202) 551-8090. Reports and other information about each Fund are available on the EDGAR Database on the SEC’s internet site at www.sec.gov. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Room, 100 F Street, N.E., Washington, DC 20549.

A copy of the form of the Reorganization Agreement pertaining to the Reorganization accompanies this Information Statement/Prospectus as Appendix C.

The information contained herein concerning the Target Fund has been provided by, and is included herein in reliance upon, the Target Fund. The information contained herein concerning the Acquiring Fund has been provided by, and is included herein in reliance upon, the Acquiring Fund.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

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TABLE OF CONTENTS

 

SUMMARY

     1  

Reorganization

     1  

Certain Defined Terms Used in this Information Statement/Prospectus

     1  

Comparison of Investment Objectives and Principal Investment Strategies

     1  

Effect on Expenses

     2  

Comparison of Fees and Expenses

     2  

Comparison of Sales Loads and Purchase, Redemption Policies and Procedures

     3  

INVESTMENT OBJECTIVES, STRATEGIES AND PRINCIPAL RISKS OF INVESTING IN THE FUNDS

     4  

Investment Objective

     4  

Primary Investment Policies and Strategies

     4  

Risk Factors

     4  

Additional Investment Strategies and Risks

  

Fundamental Investment Policies

     16  

PURCHASES AND REDEMPTIONS OF FUND SHARES; OTHER SHAREHOLDER INFORMATION

     18  

Buying shares

     18  

Exchanging shares

     19  

Redeeming shares

     20  

Other things to know about transactions

     22  

Signature guarantees

  

Anti-money laundering

     23  

Small account balances/Mandatory redemptions

     24  

Frequent trading of fund shares

     24  

Record ownership

     24  

Dividends, distributions and taxes

     24  

Share price/Fund business day

     26  

INFORMATION ABOUT THE REORGANIZATION

     28  

The Reorganization Agreement

     28  

Description of the Acquiring Fund’s Shares

     28  

Reasons for the Reorganization and Board Considerations

     28  

Federal Income Tax Consequences

     29  

Information Regarding Tax Capital Loss Carryovers

     30  

TERMINATION OF THE TARGET FUND

     32  

PORTFOLIO SECURITIES

     32  

INFORMATION ABOUT MANAGEMENT OF THE ACQUIRING FUND

     32  

Investment Manager and Subadviser

     32  

ADDITIONAL INFORMATION ABOUT THE TARGET FUND AND THE ACQUIRING FUND

     34  

Financial Highlights

     34  

Performance of the Funds

     34  

Distribution Arrangements

     34  

Form of Organization

     35  

Capitalization

     35  

Dividends and Distributions

     35  

Shareholder Communications with the Board

  

INDEX OF APPENDICES

     37  

Appendix A: Dates of Prospectuses, Fund SAIs and Shareholder Reports

     A-1  

Appendix B: Financial Highlights of the Acquiring Fund

     B-1  

Appendix C: Form of Agreement and Plan of Reorganization

     C-1  

Appendix D: Historical Performance for Each Fund

     D-1  

Appendix E: 5% Shareholders of the Target Fund and Acquiring Fund

     E-1  


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SUMMARY

This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Information Statement/Prospectus and the Reorganization Agreement, the form of which is attached to this Information Statement/Prospectus as Appendix C.

Reorganization

At a meeting held on May 8-9, 2017, the Board of Trustees (the “Board”) of Legg Mason Partners Institutional Trust (the “Trust”), including all of the Board members who are not “interested persons” of the Funds under the Investment Company Act of 1940, as amended (the “1940 Act”) (“Independent Board Members”), unanimously approved the Reorganization Agreement. The Reorganization Agreement provides for:

 

  1. the transfer of all of the assets of the Target Fund, in exchange for the assumption of all of the liabilities of the Target Fund by the Acquiring Fund and for Institutional Shares of the Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shares of the Target Fund;

 

  2. the distribution of those Institutional Shares of the Acquiring Fund to the shareholders of the Target Fund; and

 

  3. the termination of the Target Fund (collectively the “Reorganization”).

The Reorganization Agreement is not subject to approval by the shareholders of the Target Fund. The Reorganization is scheduled to be effective as of the close of business on August 18, 2017, or on such later date as the parties may agree (“Closing Date”). As a result of the Reorganization of the Target Fund, each shareholder holding Institutional Shares of the Target Fund will become the owner of the number of full and fractional Institutional Shares of the Acquiring Fund having an aggregate net asset value equal to that aggregate net asset value of the shareholder’s Target Fund shares as of the close of business on the Closing Date. Accordingly, in the Reorganization, a shareholder of the Target Fund may receive fewer or more shares of the Acquiring Fund than the shareholder holds in the Target Fund. The Funds’ valuation policies are identical. See “Information about the Reorganization” below. For more information about the shares of the Target Fund and the Acquiring Fund, see “Summary—Comparison of Sales Loads and Purchase and Redemption Policies and Procedures” below and “Purchases and Redemptions of Fund Shares; Other Shareholder Information” below.

For the reasons set forth below in “Information about the Reorganization—Reasons for the Reorganization and Board Considerations,” the Board, including all of the Independent Board Members, has concluded that participation in the Reorganization of the Target Fund is in the best interests of the Target Fund and that the interests of the Target Fund’s existing shareholders would not be diluted as a result of the Reorganization. The Board has also approved the Reorganization on behalf of the Acquiring Fund.

It is expected that, subject to the limited potential exceptions described below under the heading “Information about the Reorganization—Federal Income Tax Consequences,” neither the Target Fund nor its shareholders will recognize gain or loss as a direct result of the Reorganization, and that the aggregate tax basis of the Acquiring Fund shares received by each Target Fund shareholder will be the same as the aggregate tax basis of the shareholder’s Target Fund shares. For more information, see “Information about the Reorganization—Federal Income Tax Consequences” below.

Target Fund shareholders will receive, in one or more distributions, all of the net investment income and net capital gain of the Target Fund not previously distributed for the taxable year ending on the Closing Date. Any such distributions will generally be taxable to you. The Acquiring Fund may make a comparable distribution to its shareholders shortly before the Reorganization. It is not anticipated that any transaction costs will be incurred by shareholders in connection with the Reorganization.

Certain Defined Terms Used in this Information Statement/Prospectus

The Target Fund and the Acquiring Fund are each series of the Trust, a Maryland statutory trust. For ease of reference and clarity of presentation, shares of beneficial interest of the Acquiring Fund and Target Fund are referred to herein as “shares,” holders of shares are referred to herein as “shareholders” and the Board of Trustees overseeing the Acquiring Fund and the Target Fund is referred to herein as the “Board.”

Comparison of Investment Objectives and Principal Investment Strategies

The Target Fund and the Acquiring Fund have the same investment objectives and investment strategies. Accordingly, the combined Fund will have the same investment objectives and investment strategies as the Target Fund. Following is a

 

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brief discussion regarding the Funds’ investment objectives and investment strategies. A more detailed discussion regarding the Funds’ investment objectives, investment strategies, risks and management appear below in this Information Statement/Prospectus. More information can be found in each Fund’s Prospectus and Fund SAI.

Each Fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

Each Fund is a money market fund that invests in high quality, U.S. dollar-denominated short-term debt securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality in accordance with the requirements of Rule 2a-7 under the 1940 Act. Each Fund may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments. Each Fund does not invest directly in securities but instead invests as a feeder fund through Liquid Reserves Portfolio, an underlying mutual fund having the same investment objectives and strategies under a master/feeder structure. Each Fund sells and redeems its shares at prices based on the current market value of the securities it holds. Therefore, the share price of each Fund will fluctuate along with changes in the market-based value of such Fund’s assets. Because the share price of each Fund fluctuates, each Fund has what is called a “floating net asset value” or “floating NAV”.

Each Fund has the same investment manager, Legg Mason Partners Fund Advisor, LLC and the same subadviser, Western Asset Management Company. Accordingly, the combined Fund will have the same investment manager and subadviser as the Target Fund.

Effect on Expenses

Total annual fund operating expenses (before and after fee waivers and/or expense reimbursements) of shares of the Target Fund are not expected to increase as a result of the Reorganization. Existing fee waivers for both the Target Fund and the Acquiring Fund are in effect through December 31, 2018. Additional voluntary waivers may also apply.

Comparison of Fees and Expenses

The tables below compare the fees and expenses of shares of the Target Fund and shares of the Acquiring Fund for the twelve-month period ended March 31, 2017. The tables also show the estimated fees and expenses of shares of the combined Fund, on a pro forma basis, for the twelve-month period ended on March 31, 2017. As a general matter, changes (positive or negative) in a Fund’s expense ratio resulting from fluctuations in the Target Fund’s or Acquiring Fund’s net assets will be borne by the shareholders of the applicable Fund and the combined Fund. The actual fees and expenses of the Funds and the combined Fund as of the Closing Date may differ from those reflected in the tables below. The Acquiring Fund will be the accounting survivor of the Reorganization. As the accounting survivor, the Acquiring Fund’s operating history will be used for the combined Fund’s financial reporting purposes.

 

     Pre-Reorganization        
     Target Fund1     Acquiring
Fund1
    Pro Forma
Combined  Fund1
 
     Institutional
Shares
    Institutional
Shares
    Institutional
Shares
 

Shareholder Fees (fees paid directly from your investment)

      

Maximum Sales Charge (Load) imposed on purchases

     None       None       None  

Maximum Deferred Sales Charge (Load)

     None       None       None  

Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment) (%)

      

Management Fees

     0.20       0.20       0.20  

Distribution and/or Service (12b-1) Fees

     None       None       None  

Other Expenses

     0.07       0.06       0.04  
  

 

 

   

 

 

   

 

 

 

Total Annual Fund Operating Expenses

     0.27       0.26       0.24  

Fees Waived and/or Expenses Reimbursed2

     (0.07     (0.06     (0.04
  

 

 

   

 

 

   

 

 

 

Total Annual Fund Operating Expenses After Waiving Fees and/or Reimbursing Expenses

     0.20       0.20       0.20  
  

 

 

   

 

 

   

 

 

 

 

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(1) 

Each Fund is a feeder fund that invests in securities through an underlying mutual fund, Liquid Reserves Portfolio. The information in this table and in the Example below reflects the direct fees and expenses of each Fund and its allocated share of fees and expenses of Liquid Reserves Portfolio. The gross expenses in the financial highlights do not reflect the reduction in a Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid to Liquid Reserves Portfolio.

 

(2) 

The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses) for Institutional Shares of each Fund so that total annual operating expenses are not expected to exceed 0.20%. This arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. The manager is permitted to recapture amounts waived and/or reimbursed to the class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the limits described above. In no case will the manager recapture any amount that would result, on any particular business day of the fund, in the class’ total annual operating expenses exceeding the applicable limits described above or any other lower limit then in effect.

The following examples help you compare the costs of investing in Institutional Shares of the Target Fund, the Acquiring Fund and the combined Fund with the costs of investing in other mutual funds. The examples assume that: you invest $10,000 for the periods shown, your investment has a 5% return each year, each Fund’s operating expenses remain the same and you reinvest all distributions and dividends. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

     1 Year      3 Years      5 Years      10 Years  

Institutional Shares

           

Target Fund

   $ 20      $ 79      $ 144      $ 335  

Acquiring Fund

   $ 20      $ 77      $ 140      $ 325  

Pro Forma Combined Fund

   $ 20      $ 73      $ 131      $ 301  

Comparison of Sales Loads and Purchase and Redemption Policies and Procedures

There are no sales loads or contingent deferred sales charges with respect to Institutional Shares of the Target Fund or the Acquiring Fund.

The purchase and sale policies and procedures with respect to shares of the corresponding classes of the Target Fund and the Acquiring Fund are the same.

The minimum investment amounts for shares of the corresponding classes of the Target Fund and the Acquiring Fund are the same.

There are currently no exchange privileges in effect with respect to the Target Fund or the Acquiring Fund, and no exchange privileges are anticipated for the combined Fund.

More information about the sales load, distribution and shareholder servicing arrangements for the shares of the Acquiring Fund and the procedures for making purchases, redemptions of shares are set forth in “Purchases and Redemptions of Fund Shares; Other Shareholder Information” below.

 

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INVESTMENT OBJECTIVES, STRATEGIES AND

PRINCIPAL RISKS OF INVESTING IN THE FUNDS

The following discussion regarding the investment objectives, policies, strategies and principal risks of the Target Fund and the Acquiring Fund is based upon and qualified in its entirety by the disclosure appearing in each Fund’s Prospectus (as supplemented). Each Fund’s Prospectus (as supplemented from time to time) is dated as follows:

 

Target Fund

   Prospectus Dated  

Western Asset Institutional Cash Reserves

     December 28, 2016  

Acquiring Fund

   Prospectus Dated  

Western Asset Institutional Liquid Reserves

     December 28, 2016  

The Funds have the same investment objectives, principal investment strategies and principal risks. Accordingly, the combined Fund will have the same investment objectives, principal investment strategies and principal risks as the Target Fund. The Funds’ investment objectives, principal investment strategies and principal risks also correspond to those of Liquid Reserves Portfolio, the underlying mutual fund through which each Fund invests in securities.

Investment objective

Each Fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

Primary investment policies and strategies

Each Fund invests in high quality, U.S. dollar-denominated short-term debt securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality. Each Fund may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments. These securities may pay interest at fixed, floating or adjustable rates, or may be issued at a discount. The Funds may invest without limit in bank obligations, such as certificates of deposit, fixed time deposits and bankers’ acceptances. The Funds generally limit investments in foreign securities to U.S. dollar denominated obligations of issuers, including banks and foreign governments, located in the major industrialized countries, although with respect to bank obligations, the branches of the banks issuing the obligations may be located in the Bahamas or the Cayman Islands.

Under Rule 2a-7 of the 1940 Act, the Funds must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Where required by these rules, the Funds’ subadviser or the Board will decide whether a security should be held or sold in the event of credit downgrades or certain other events occurring after purchase.

Each Fund sells and redeems its shares at prices based on the current market value of the securities it holds. Therefore, the share price of the Funds will fluctuate along with changes in the market-based value of the Funds’ assets. Because the share price of the Funds fluctuates, it has what is called a “floating net asset value” or “floating NAV”.

Risk factors

Because the Funds have the same objectives, principal investment policies and principal investment strategies, the Funds have the same risks. The following summarizes the principal risks of investing in either of the Funds.

You could lose money by investing in the Funds. Because the share price of the Funds will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Funds may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Funds’ liquidity falls below required minimums

 

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because of market conditions or other factors. An investment in either Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to the Funds, and you should not expect that the sponsor will provide financial support to the Funds’ at any time.

If one or more money market funds were to incur a sizeable loss or impose fees on redemptions or suspend redemptions, there could be significant redemptions from money market funds in general, potentially driving the market prices of money market instruments down and adversely affecting market liquidity.

Either Fund could underperform other short-term debt instruments or money market funds, or you could lose money, as a result of risks such as:

Market and interest rate risk. The market prices of each Fund’s securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. When market prices fall, the value of your investment will go down. The value of your investment will generally go down when interest rates rise.

A rise in rates tends to have a greater impact on the prices of longer term securities. Interest rates have been historically low, so a Fund faces a heightened risk that interest rates may rise. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale, which could adversely affect the price and liquidity of fixed income securities and could also result in increased redemptions from each Fund.

Market events risk. In the past several years financial markets, such as those in the United States, Europe, Asia and elsewhere, have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Events that have contributed to these market conditions include, but are not limited to, major cybersecurity events; measures to address U.S. federal and state budget deficits; downgrading of U.S. long-term sovereign debt; declines in oil and commodity prices; dramatic changes in currency exchange rates; and public sentiment.

The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, have taken steps to support financial markets, including by keeping interest rates at historically low levels. This and other government intervention may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The Federal Reserve has reduced its market support activities and recently has begun raising interest rates. Certain foreign governments and central banks are implementing or discussing so-called negative interest rates (e.g., charging depositors who keep their cash at a bank) to spur economic growth. Further Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases, or contrary actions by different governments, could negatively affect financial markets generally, increase market volatility and reduce the value and liquidity of securities in which the Funds invest.

Policy and legislative changes in the United States and in other countries are affecting many aspects of financial regulation, and may in some instances contribute to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.

Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not a Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Funds’ investments may be negatively affected.

Credit risk. An issuer or other obligor (such as a party providing insurance or other credit enhancement) of a security held by the Funds or a counterparty to a financial contract with the Funds may default or its credit may be downgraded, or the value of assets underlying a security may decline.

 

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Yield risk. The amount of income received by a Fund will go up or down depending on variations in short-term interest rates, and when interest rates are very low a Fund’s expenses could absorb all or a significant portion of such Fund’s income. If interest rates increase, the Funds’ yield may not increase proportionately. For example, the Funds’ manager may discontinue any temporary voluntary fee limitation or recoup amounts previously waived and/or reimbursed. In addition, the implementation of the new requirements recently adopted for money market funds may have a negative effect on each Fund’s yield.

Structured securities risk. The payment and credit qualities of structured securities derive from their underlying assets, and they may behave in ways not anticipated by the Funds, or they may not receive tax, accounting or regulatory treatment anticipated by the Funds.

Risks associated with concentration in the banking industry. The Funds may invest a significant portion of its assets in obligations that are issued or backed by U.S. and non-U.S. banks and thus will be more susceptible to negative events affecting banks and the financial services sector worldwide.

Foreign investments risk. The Funds’ investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which the Funds may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of the Funds’ investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable or unsuccessful government actions, reduction of government or central bank support and political or financial instability. Lack of information may also affect the value of these securities.

Portfolio management risk. The value of your investment may decrease if the subadviser’s judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates is incorrect, or if there are imperfections, errors or limitations in the tools and data used by the subadviser. In addition, the Funds’ investment strategies or policies may change from time to time. Those changes may not lead to the results intended by the subadviser and could have an adverse effect on the value or performance of the Funds.

Liquidity risk. The Funds may make investments that are illiquid or that become illiquid after purchase. The liquidity and value of investments can deteriorate rapidly, and they may become difficult or impossible to sell, particularly during times of market turmoil. Illiquid investments may also be difficult to value. Markets may become illiquid when, for instance, there are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make markets for certain securities. If the Funds are forced to sell an illiquid investment to meet redemption requests or other cash needs, the Funds may be forced to sell at a loss. In addition, if either Fund’s liquidity falls below certain levels, each Fund may impose a fee of up to 2% on redemptions from the Fund or temporarily restrict redemptions from the Fund for up to 10 business days in any given 90 day period.

Valuation risk. The sales price the Funds could receive for any particular portfolio investment may differ from the Funds’ valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem either Fund’s shares on days when the Fund is holding fair-valued securities may receive fewer or more shares or lower or higher redemption proceeds than they would have received if the Fund had not fair-valued securities or had used a different valuation methodology. The Funds’ ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.

Redemption risk. The Funds may experience heavy redemptions that could cause either Fund to liquidate its assets at inopportune times or at a loss or depressed value, which could cause the value of your investment to decline. In addition, the Funds may impose a fee or suspend redemptions under certain conditions.

Cybersecurity risk. Cybersecurity incidents may allow an unauthorized party to gain access to the Funds’ assets, customer data (including private shareholder information), or proprietary information, or cause either Fund, the manager, the subadviser and/or its service providers (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

 

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Management

The Target Fund and the Acquiring Fund have the same investment manager and subadviser. Accordingly, the combined Fund will have the same investment manager and subadviser as the Target Fund, as follows:

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Purchase and Sale of Fund Shares

The Target Fund and the Acquiring Fund have the same procedures for making purchases and redemptions of shares. Accordingly, the combined Fund will have the same procedures for making purchases and redemptions of shares as the Target Fund, as follows:

In general, you may purchase or redeem shares of each Fund during Fund business hours on any day on which both the New York Stock Exchange and the Federal Reserve Bank of New York are open for business, subject to certain exceptions.

Each Fund’s initial and subsequent investment minimums for Institutional Shares are generally set forth in the accompanying table:

 

Investment Minimum Initial/Additional Investment

   Institutional Shares  

General/Institutional Investors purchasing through the Fund

   $ 1 million/50  

Accounts managed/advised by an investment advisory subsidiary of Legg Mason

   $ 50,000/50  

Your financial intermediary may impose different investment minimums.

Each Fund normally calculates its net asset value as of 8:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern time) on each Fund business day. Each Fund may close early under certain circumstances. For more information, please contact your financial intermediary, or contact the Acquiring Fund by phone (1-877-721-1926 or 1-203-703-6002).

Each Fund may impose a fee of up to 2% on redemptions from the Fund or temporarily restrict redemptions from the Fund for up to 10 business days in any given 90 day period in the event that the Fund’s weekly liquid assets fall below certain designated thresholds. Any announcement regarding the imposition of a liquidity fee or redemption gate, or the termination of a liquidity fee or a redemption gate, will be available at the Fund’s website below and will be filed with the Securities and Exchange Commission.

 

Institutional Liquid Reserves

   https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-liquid-reserves.html

Institutional Cash Reserves

   https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-cash-reserves.html

More information about the procedures for making purchases and redemptions of shares are set forth in “Purchases and Redemptions of Fund Shares; Other Shareholder Information” below.

Tax information

Each Fund’s distributions are generally taxable as ordinary income or capital gains.

Payments to broker/dealers and other financial intermediaries

Each Fund’s related companies may pay broker/dealers or other financial intermediaries (such as a bank or an insurance company) for the sale of Fund shares, shareholder services and other purposes. These payments create a conflict of interest by influencing your broker/dealer or other intermediary or its employees or associated persons to recommend the Fund over another investment. Ask your financial adviser or salesperson or visit your financial intermediary’s or salesperson’s website for more information.

 

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More on the Funds’ Investment Strategies, Investments and Risks

Credit quality

Each Fund invests in securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality. In addition, each security, at the time of purchase by a Fund, has been determined by the subadviser to present minimal credit risk. Where required by applicable rules, the Funds’ subadviser or Board will decide whether a security should be held or sold in the event of certain credit events occurring after purchase.

Maturity

Each Fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. For example, in determining the remaining maturity of a security for the purposes of these regulations, features such as a floating or variable rate of interest or a demand feature may be taken into account under some circumstances. Each Fund maintains a weighted average maturity of not more than 60 days. In addition, each Fund must comply with rules with respect to the Fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the Funds’ subadviser or Board will decide whether the security should be held or sold.

Liquidity

Each Fund must follow strict rules with respect to the liquidity of its portfolio securities including daily and weekly liquidity requirements. In addition, neither Fund may purchase illiquid securities if, as a result of the acquisition, more than 5% of the Fund’s total assets would be invested in illiquid securities. Illiquid securities are those that, as determined by the subadviser, may not be disposed of in the ordinary course of business within seven days at approximately the value ascribed to them by the Fund. Securities that are deemed liquid at the time of purchase by a Fund may become illiquid following purchase. If either Fund’s weekly liquid assets fall below certain designated thresholds, the Fund may impose a fee of up to 2% on redemptions from the Fund or temporarily restrict redemptions from the Fund for up to 10 business days in any given 90 day period.

Money Market Instruments

Money market instruments are short-term IOUs issued by banks or other non-governmental issuers, the U.S. or foreign governments, or state or local governments. Money market instruments generally have maturity dates of 13 months or less, and may pay interest at fixed, floating or adjustable rates, or may be issued at a discount. Money market instruments may include certificates of deposit, bankers’ acceptances, variable rate demand securities (where the interest rate is reset periodically and the holder may demand payment from the issuer or another obligor at any time), preferred shares, fixed-term obligations, commercial paper (short-term unsecured debt), asset-backed commercial paper, other asset-backed securities and repurchase agreements. Asset-backed commercial paper refers to a debt security with an original term to maturity of up to 270 days that may be backed by consumer loans or other types of receivables. Payments due on asset-backed commercial paper are supported by cash flows from underlying assets, or one or more liquidity or credit support providers, or both.

U.S. Treasury Obligations

U.S. Treasury obligations are direct debt obligations issued by the U.S. government. Treasury bills, with maturities normally from 4 weeks to 52 weeks, are typically issued at a discount as they pay interest only upon maturity. Treasury bills are non-callable. Treasury notes have a maturity between two and ten years and typically pay interest semi-annually, while Treasury bonds have a maturity of over ten years and pay interest semi-annually. Treasuries also include STRIPS, TIPS and FRNs. STRIPS are Treasury obligations with separately traded principal and interest component parts that are transferable through the federal book-entry system. Because payments on STRIPS are made only at maturity, during periods of changing interest rates, STRIPS may be more volatile than unstripped U.S. Treasury obligations with comparable maturities. TIPS are Treasury Inflation-Protected Securities, the principal of which increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, a TIPS holder is entitled to the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the

 

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principal, interest payments rise with inflation and fall with deflation. However, because the interest rate is fixed, TIPS may lose value when market interest rates increase, particularly during periods of low inflation. FRNs are newly introduced floating rate notes that are indexed to the most recent 13-week Treasury bill auction High Rate, and which pay interest quarterly. U.S. Treasury obligations typically offer lower interest rates than other obligations.

U.S. Government Obligations

U.S. government obligations include U.S. Treasury obligations and other obligations of, or guaranteed by, the U.S. government, its agencies or government-sponsored entities. Although the U.S. government guarantees principal and interest payments on securities issued by the U.S. government and some of its agencies, such as securities issued by the Government National Mortgage Association (“Ginnie Mae”), this guarantee does not apply to losses resulting from declines in the market value of these securities. U.S. government obligations include zero coupon securities that make payments of interest and principal only upon maturity and which therefore tend to be subject to greater volatility than interest bearing securities with comparable maturities. Some of the U.S. government securities that the Funds may hold are not guaranteed or backed by the full faith and credit of the U.S. government, such as those issued by Fannie Mae (formally known as the Federal National Mortgage Association) and Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation). The maximum potential liability of the issuers of some U.S. government obligations may greatly exceed their current resources, including any legal right to support from the U.S. government.

Structured instruments

Structured instruments in which the Funds invests are specifically structured so that they are eligible for purchase by money market funds, including securities that have demand, tender or put features, or interest rate reset features. Structured instruments may take the form of participation interests or receipts in underlying securities or other assets, and in some cases are backed by a financial institution serving as a liquidity provider. Some of these instruments may have a feature which substitutes a floating or variable interest rate for the fixed interest rate on an underlying security. The payment and credit qualities of these instruments derive from the underlying assets embedded in the structure.

Structured securities include variable rate demand instruments and participation interests that are backed by underlying municipal or other securities. Variable rate demand instruments require the issuer or a third party, such as a bank, insurer or broker/dealer, to repurchase the security for its face value upon demand and typically have interest rates that reset on a daily or weekly basis. In a participation interest, a bank or other financial institution sells undivided interests in a municipal or other security it owns. Participation interests may be supported by a bank letter of credit or guarantee. The interest rate generally is adjusted periodically, and the holder can sell the interests back to the issuer after a specified notice period.

Asset-backed securities

Asset-backed securities represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables.

Municipal securities

Municipal securities include debt obligations issued by any of the 50 states and their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the U.S. Virgin Islands and Guam) and other qualifying issuers, participation or other interests in these securities and other structured securities. Although municipal securities are issued by qualifying issuers, payments of principal and interest on municipal securities may be derived solely from revenues from certain facilities, mortgages or private industries, and may not be backed by the issuers themselves.

Municipal securities include general obligation bonds, revenue bonds, housing authority bonds, private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial receipts. General obligation bonds are backed by the full faith and credit of the issuing entity. Revenue bonds are typically used to fund public works projects, such as toll roads, airports and transportation facilities, that are expected to produce income to make the payments on the bonds, since they are not backed by the full taxing power of the municipality. Housing authority bonds are

 

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used primarily to fund low to middle income residential projects and may be backed by the payments made on the underlying mortgages. Tax and revenue anticipation notes are generally issued in order to finance short-term cash needs or, occasionally, to finance construction. Tax and revenue anticipation notes are expected to be repaid from taxes or designated revenues in the related period, and they may or may not be general obligations of the issuing entity. Bond anticipation notes are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds and may be issued to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects. Some of these securities may have stated final maturities of more than 397 days but have demand features that entitle a fund to receive the principal amount of the securities either at any time or at specified intervals.

Municipal securities include municipal lease obligations, which are undivided interests issued by a state or municipality in a lease or installment purchase contract which generally relates to equipment or facilities. In some cases payments under municipal leases do not have to be made unless money is specifically approved for that purpose by an appropriate legislative body.

Banking industry concentration

Each Fund may invest without limit in obligations of U.S. banks and up to 25% of its assets in U.S. dollar-denominated obligations of non-U.S. banks. Obligations of foreign branches of U.S. banks and U.S. branches of foreign banks may be considered obligations of U.S. banks if they meet certain requirements. Bank obligations include bank notes, certificates of deposit, time deposits, banker’s acceptances, commercial paper and other similar obligations. They also include Eurodollar and Yankee obligations, such as certificates of deposit issued in U.S. dollars by foreign banks and foreign branches of U.S. banks. Bank obligations also include participation interests in municipal securities issued and/or backed by banks and other obligations that have credit support or liquidity features provided by banks.

When-issued securities, delayed delivery and forward commitment transactions

Each Fund may purchase securities under arrangements (called when-issued, delayed delivery, to be announced or forward commitment basis) where the securities will not be delivered or paid for immediately. A Fund will set aside assets to pay for these securities at the time of the agreement. Such transactions involve a risk of loss, for example, if the value of the securities declines prior to the settlement date or if the assets set aside to pay for these securities decline in value prior to the settlement date. Therefore, these transactions may have a leveraging effect on the Funds, making the value of an investment in the Funds more volatile and increasing the Funds’ overall investment exposure. Typically, no income accrues on securities either Fund has committed to purchase prior to the time delivery of the securities is made, although the Fund may earn income on securities it has set aside to cover these positions.

Repurchase agreements

In a repurchase agreement, a Fund purchases securities from a counterparty, upon the agreement of the counterparty to repurchase the securities from the Fund at a later date, and at a specified price, which is typically higher than the purchase price paid by the Fund. The securities purchased serve as a Fund’s collateral for the obligation of the counterparty to repurchase the securities. If the counterparty does not repurchase the securities, a Fund is entitled to sell the securities, but a Fund may not be able to sell them for the price at which they were purchased, thus causing a loss. Additionally, if the counterparty becomes insolvent, there is some risk that the Fund will not have a right to the securities, or the immediate right to sell the securities.

Reverse repurchase agreements and other borrowings

Each Fund may borrow money as a means of raising money to satisfy redemption requests or for other temporary or emergency purposes by entering into reverse repurchase agreements or other borrowing transactions. In a reverse repurchase agreement, a Fund sells securities to a counterparty, in return for cash, and the Fund agrees to repurchase the securities at a later date and for a higher price, representing the cost to the Fund for the money borrowed. Although the Funds do not intend to use these transactions for leveraging purposes, reverse repurchase agreements and other borrowing transactions may make the value of an investment in a Fund more volatile and increase a Fund’s overall investment exposure.

 

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Variable rate demand notes

Variable rate demand notes (VRDNs) and other similar obligations are typically long term instruments issued with a floating rate of interest by municipalities or other issuers. The interest rate usually resets every one to seven days, based on a published interest rate index. Investors typically may resell a VRDN to a third-party financial intermediary serving as a remarketing agent on up to seven days’ notice. A VRDN may be supported by a liquidity facility or a letter of credit. These features permit the VRDN to be treated by both Funds as a short-term instrument. Investments in VRDNs involve credit risk with respect to the issuer as well as with respect to the financial institutions providing remarketing, liquidity or credit support. In addition, failures or defaults by one or more of those entities could result in a Fund holding a long-term fixed rate illiquid investment.

Defensive investing

Each Fund may, without limit, hold cash uninvested and, if so, the Fund may be subject to risk with respect to the depository institution holding the cash. In addition, a Fund will not earn income on those assets and it will be more difficult for the Fund to achieve its investment objective. Although the subadviser has the ability to take defensive positions, it may choose not to do so for a variety of reasons, even during volatile market conditions.

Investments by other funds

Both Funds may be an investment option for other funds, including affiliated funds.

Other investments

Each Fund may also use other strategies and invest in other investments that are described, along with their risks, in the SAI. However, a Fund might not use all of the strategies and techniques or invest in all of the types of investments described in this Prospectus or in the SAI.

Selection process

In selecting individual securities, the subadviser:

 

   

Uses fundamental credit analysis to estimate the relative value and attractiveness of various securities and sectors

 

   

Measures the potential impact of supply/demand imbalances for fixed versus variable rate securities and for obligations of different issuers

 

   

Measures the yields available for securities with different maturities and a security’s maturity in light of the outlook for interest rates to identify individual securities that offer return advantages at similar risk levels

Because the Funds are subject to maturity limitations on the investments they may purchase, many of their investments are held until maturity. The subadviser may sell a security before maturity when it is necessary to do so to meet redemption requests or regulatory requirements. The subadviser may also sell a security if the subadviser believes the issuer is no longer as creditworthy, or in order to adjust the average weighted maturity of either Fund’s portfolio (for example, to reflect changes in the subadviser’s expectations concerning interest rates), or when the subadviser believes there is superior value in other market sectors or industries.

Investment structure

Each Fund does not invest directly in securities but instead invests as a feeder fund through an underlying mutual fund having the same investment objectives and strategies under a master/feeder structure. Unless otherwise indicated, references to each Fund in this Information Statement/Prospectus include the underlying master fund. Each Fund may stop investing in its corresponding underlying fund at any time, and will do so if the Fund’s Board believes it to be in the best interests of the Fund’s shareholders. A Fund could then invest in one or more other mutual funds or pooled investment vehicles, or could invest directly in securities. Investors should note that other feeder funds may invest in the same underlying mutual fund. Those other funds may have lower fees and/or expenses, and correspondingly higher performance, than each Fund. In

 

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addition, large purchases or redemptions by one feeder fund could negatively affect the performance of other feeder funds that invest in the same master fund.

More on risks of investing in the Funds

You could lose money by investing in the Funds. Because the share price of a Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. Both Funds may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if a Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in either Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to a Fund, and you should not expect that the sponsor will provide financial support to a Fund at any time.

If one or more money market funds were to incur a sizeable loss or impose fees on redemptions or suspend redemptions, there could be significant redemptions from money market funds in general, potentially driving the market prices of money market instruments down and adversely affecting market liquidity.

There is no assurance that a Fund will meet its investment objective.

A Fund could underperform other short-term debt instruments or money market funds, or you could lose money, as a result of risks such as:

Market and interest rate risk. The market prices of each Fund’s securities may go up or down, sometimes rapidly or unpredictably. If the market prices of the securities owned by a Fund fall, the value of your investment in the Fund will decline. The value of a security may fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. Changes in market conditions will not typically have the same impact on all types of securities. The value of a security may also fall due to specific conditions that affect a particular sector of the securities market or a particular issuer.

The market prices of securities may fluctuate significantly when interest rates change. When interest rates rise, the value of fixed income securities, and therefore the value of your investment in a Fund generally goes down. Interest rates have been historically low, so the Funds face a heightened risk that interest rates may rise. Generally, the longer the maturity of a fixed income security, the greater the impact of a rise in interest rates on the security’s value. Moreover, securities can change in value in response to other factors, such as credit risk. In addition, different interest rate measures (such as short- and long-term interest rates and U.S. and foreign interest rates), or interest rates on different types of securities or securities of different issuers, may not necessarily change in the same amount or in the same direction. When interest rates decline, investments made by a Fund may pay a lower interest rate, which would reduce the income received by a Fund. Also, when interest rates go down, either Fund’s yield will decline. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale, which could adversely affect the price and liquidity of fixed income securities held by a Fund and could also result in increased redemptions from a Fund.

Market events risk. In the past several years financial markets, such as those in the United States, Europe, Asia and elsewhere, have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Events that have contributed to these market conditions include, but are not limited to, major cybersecurity events; measures to address U.S. federal and state budget deficits; downgrading of U.S. long-term sovereign debt; declines in oil and commodity prices; dramatic changes in currency exchange rates; and public sentiment.

The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, have taken steps to support financial markets, including by keeping interest rates at historically low levels. This and other government intervention may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The Federal Reserve has reduced its market support activities and recently has begun raising interest rates. Certain foreign governments and central banks are implementing or discussing so-called negative interest rates (e.g., charging depositors who keep their cash at a bank) to spur economic growth. Further Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments,

 

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could negatively affect financial markets generally, increase market volatility and reduce the value and liquidity of securities in which the Funds invest.

Policy and legislative changes in the United States and in other countries are affecting many aspects of financial regulation, and may in some instances contribute to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.

Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not a Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of a Fund’s investments may be negatively affected.

Credit risk. An issuer or other obligor (such as a party providing insurance or other credit enhancement) may fail to make the required payments on securities held by a Fund. Debt securities also go up or down in value based on the perceived creditworthiness of issuers or other obligors. If an obligor for a security held by a Fund fails to pay, otherwise defaults or is perceived to be less creditworthy, a security’s credit rating is downgraded, which could happen rapidly, or the credit quality or value of any underlying assets declines, the value of your investment in a Fund could decline significantly, particularly in certain market environments. If a single entity provides credit enhancement to more than one of a Fund’s investments, the adverse effects resulting from the downgrade or default will increase the adverse effects on a Fund. If a Fund enters into a financial contract (such as a repurchase agreement or reverse repurchase agreement) the Fund will be subject to the credit risk presented by the counterparty. In addition, a Fund may incur expenses in an effort to protect the Fund’s interests or to enforce its rights.

Although a Fund’s investments may be treated as short-term securities for the purposes of meeting regulatory maturity limitations, the actual maturity of a security may be longer, and the security’s value may decline on the basis of perceived longer term credit risk of the issuer.

Upon the occurrence of certain triggering events or defaults on a security held by a Fund, or if the subadviser believes that an obligor of such a security may have difficulty meeting its obligations, a Fund may obtain a new or restructured security or underlying assets. In that case, a Fund may become the holder of securities or assets that it could not purchase or might not otherwise hold (for example, because they are of lower quality or are subordinated to other obligations of the issuer) at a time when those assets may be difficult to sell or can be sold only at a loss. Any of these events may cause you to lose money.

Yield risk. Each Fund invests in short-term money market instruments. As a result, the amount of income received by a Fund will go up or down depending on variations in short-term interest rates. Investing in high quality, short-term instruments may result in a lower yield (the income on your investment) than investing in lower quality or longer-term instruments. When interest rates are very low, a Fund’s expenses could absorb all or a significant portion of the Fund’s income, and, if a Fund’s expenses exceed the Fund’s income, a Fund’s share price could decline. If interest rates increase, a Fund’s yield may not increase proportionately. For example, each Fund’s manager may discontinue any temporary voluntary fee limitation or recoup amounts previously waived and/or reimbursed.

A money market fund is also required to maintain liquidity levels based on the characteristics and anticipated liquidity needs of its shareholders. A Fund with greater liquidity needs may have a lower yield than money market funds with a different shareholder base. The implementation of the new requirements recently adopted for money market funds may have a negative effect on a Fund’s yield.

Risk of increase in expenses. Your actual costs of investing in a Fund may be higher than the expenses shown in “Annual fund operating expenses” for a variety of reasons. For example, expense ratios may be higher than those shown if average net assets decrease, as a result of redemptions or otherwise, or if a fee limitation is changed or terminated.

 

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Structured securities risk. The value of a structured security depends on the value of the underlying assets and the terms of the particular security. Investment by a Fund in certain structured securities may have the effect of increasing a Fund’s exposure to interest rate, market or credit risk, even if they are not primarily intended for these purposes. Structured securities may behave in ways not anticipated by a Fund, and they raise certain tax, legal, regulatory and accounting issues that may not be presented by direct investments in the underlying assets. These issues could be resolved in a manner that could hurt the performance of a Fund.

Risks associated with concentration in the banking industry. Each Fund may invest a significant portion of its assets in obligations that are issued or backed by U.S. and non-U.S. banks. This means that an investment in a Fund may be particularly susceptible to adverse events affecting banks and the financial services sector worldwide. Banks depend upon being able to obtain funds at reasonable costs and upon liquidity in the capital and credit markets to finance their lending and other operations. This makes them sensitive to changes in money market and general economic conditions. Banks are highly regulated. Decisions by regulators may limit the loans banks make and the interest rates and fees they charge, and may reduce bank profitability. The ongoing global financial crisis has severely affected many banks. When a bank’s borrowers get into financial trouble, their failure to repay the bank will adversely affect the bank’s financial situation. Banks have been particularly hard hit by problems in the real estate industry including defaults by borrowers and litigation relating to mortgage banking practices. Other bank activities such as investments in derivatives and foreign exchange practices also have caused losses. Governmental entities have in the past provided support to certain financial institutions, but there is no assurance they will continue to do so. Some of the entities backing a Fund’s investments may be non-U.S. institutions and, therefore, an investment in a Fund may involve foreign investments risk.

Asset-backed securities risk. The value of asset-backed securities may be affected by changes in credit quality or value of the assets that support the securities as well as by changes in the credit risk of the servicing agent for the pool, the originator of the loans or receivables or the financial institution providing credit support, if any. In addition, the ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets or to otherwise recover from the underlying obligor in the event of default may be limited and the liquidation value of the underlying assets may be inadequate to pay any unpaid principal or interest. Asset-backed securities are also sensitive to changes in interest rates which may increase prepayments or extend the duration of the securities.

Risks relating to investments in municipal securities. Issuers of municipal securities tend to derive a significant portion of their revenue from taxes, particularly property and income taxes, and decreases in personal income levels and property values and other unfavorable economic factors, such as a general economic recession, adversely affect municipal securities. Municipal issuers may also be adversely affected by rising health care costs, increasing unfunded pension liabilities and by the phasing out of federal programs providing financial support. Where municipal securities are issued to finance particular projects, such as those relating to education, health care, transportation, and utilities, issuers often depend on revenues from those projects to make principal and interest payments. Adverse conditions and developments in those sectors can result in lower revenues to issuers of municipal securities, potentially resulting in defaults, and can also have an adverse effect on the broader municipal securities market.

There may be less public information available on municipal issuers or projects than other issuers, and valuing municipal securities may be more difficult. In addition, the secondary market for municipal securities is less well developed and liquid than other markets, and dealers may be less willing to offer and sell municipal securities in times of market turbulence. Changes in the financial condition of one or more individual municipal issuers (or one or more insurers of municipal issuers), or one or more defaults by municipal issuers or insurers, can adversely affect liquidity and valuations in the overall market for municipal securities. The value of municipal securities can also be adversely affected by regulatory and political developments affecting the ability of municipal issuers to pay interest or repay principal, actual or anticipated tax law changes or other legislative actions, and by uncertainties and public perceptions concerning these and other factors. In recent periods an increasing number of municipal issuers have defaulted on obligations, been downgraded or commenced insolvency proceedings. Financial difficulties of municipal issuers may continue or worsen.

Foreign investments risk. A Fund’s investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which a Fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of a Fund’s investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable or unsuccessful

 

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government actions, reduction of government or central bank support and political or financial instability. Lack of information may also affect the value of these securities.

The value of a Fund’s foreign investments may also be affected by foreign tax laws, special U.S. tax considerations and restrictions on receiving the investment proceeds from a foreign country. Dividends or interest on, or proceeds from the sale or disposition of, foreign securities may be subject to non-U.S. withholding or other taxes.

In some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. It may be difficult for a Fund to pursue claims against a foreign issuer in the courts of a foreign country. Some securities issued by non-U.S. governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of such governments. Even where a security is backed by the full faith and credit of a government, it may be difficult for a Fund to pursue its rights against the government. Some non-U.S. governments have defaulted on principal and interest payments, and more may do so. In certain foreign markets, settlement and clearance procedures may result in delays in payment for or delivery of securities not typically associated with settlement and clearance of U.S. investments.

Prepayment or call risk. Many issuers have a right to prepay their securities. Issuers may be more likely to prepay the securities if interest rates fall. If this happens, a Fund will be forced to reinvest prepayment proceeds at a time when yields on securities available in the market are lower than the yield on prepaid securities.

Extension risk. When interest rates rise, repayments of fixed income securities, particularly asset-backed securities, may occur more slowly than anticipated, extending the effective duration of these fixed income securities at below market interest rates and causing their market prices to decline more than they would have declined due to the rise in interest rates alone.

Portfolio management risk. The value of your investment may decrease if the subadviser’s judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates is incorrect, or if there are imperfections, errors or limitations in the tools and data used by the subadviser. In addition, a Fund’s investment strategies or policies may change from time to time. Those changes may not lead to the results intended by the subadviser and could have an adverse effect on the value or performance of a Fund.

Liquidity risk. Liquidity risk exists when particular investments are impossible or difficult to sell. Although most of the Funds’ investments must be liquid at the time of investment, investments may become illiquid after purchase by a Fund, particularly during periods of market turmoil. Markets may become illiquid when, for instance, there are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make a market for certain securities. As a general matter, dealers recently have been less willing to make markets for fixed income securities. When a Fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if a Fund is forced to sell these investments to meet redemption requests or for other cash needs, the Fund may suffer a loss. A Fund may experience heavy redemptions that could cause the Fund to liquidate its assets at inopportune times or at a loss or depressed value, which could cause the value of your investment to decline. In addition, when there is illiquidity in the market for certain investments, a Fund, due to limitations on illiquid investments, may be unable to achieve its desired level of exposure to a certain sector. Further, certain securities, once sold, may not settle for an extended period. A Fund will not receive its sales proceeds until that time, which may constrain the Fund’s ability to meet its obligations (including obligations to redeeming shareholders). If a Fund’s weekly liquid assets fall below certain designated thresholds, such Fund may impose a fee of up to 2% on redemptions from the Fund or temporarily restrict redemptions from the Fund for up to 10 business days in any given 90 day period.

Valuation risk. The sales price either Fund could receive for any particular portfolio investment may differ from the Fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem Fund shares on days when a Fund is holding fair-valued securities may receive fewer or more shares or lower or higher redemption proceeds than they would have received if the Fund had not fair-valued securities or had used a different valuation methodology. A Fund’s ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.

 

 

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Redemption risk. A Fund may experience periods of heavy redemptions that could cause the Fund to liquidate its assets at inopportune times or at a loss or depressed value, particularly during periods of declining or illiquid markets. Redemption risk is greater to the extent that a Fund has investors with large shareholdings, short investment horizons, or unpredictable cash flow needs. In addition, redemption risk is heightened during periods of overall market turmoil. The redemption by one or more large shareholders of their holdings in a Fund could hurt performance and/or cause the remaining shareholders in the Fund to lose money. Further, if one decision maker has control of Fund shares owned by separate Fund shareholders, including clients or affiliates of a Fund’s investment manager, redemptions by these shareholders may further increase a Fund’s redemption risk. If a Fund is forced to liquidate its assets under unfavorable conditions or at inopportune times, the Fund’s share price could decline. In addition, a Fund may impose a fee or suspend redemptions under certain conditions.

Risk relating to investments by other funds. Other funds, including affiliated funds, may invest in a Fund. From time to time, a Fund may experience relatively large redemptions or investments from these funds as a result of their rebalancing their portfolios or for other reasons. In the event of such redemptions or investments, a Fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so.

Operational risk. Your ability to transact with a Fund or the valuation of your investment may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It is not possible to identify all of the operational risks that may affect a Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. A Fund and its shareholders could be negatively impacted as a result.

Cybersecurity risk. Cybersecurity incidents may allow an unauthorized party to gain access to Fund assets, customer data (including private shareholder information), or proprietary information, or cause a Fund, the manager, the subadviser and/or its service providers (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

Please note that there are other factors that could adversely affect your investment and that could prevent a Fund from achieving its investment objective. More information about risks appears in the SAI. Before investing, you should carefully consider the risks that you will assume.

Portfolio holdings

A description of the Funds’ policies and procedures with respect to the disclosure of portfolio securities is available in the Funds’ SAI. Each Fund intends to make complete portfolio holdings information as of the last business day of each month available at www.leggmason.com/moneymarketfunds (click on the name of the Fund) no later than five business days after month-end. Monthly portfolio holdings information will be available on the Fund’s website for at least six months after posting.

Fundamental investment policies

The Target Fund and the Acquiring Fund have the same fundamental investment policies. Following are the Funds’ fundamental investment policies. The Funds’ fundamental investment policies also correspond to those of Liquid Reserves Portfolio.

1.        A Fund may not borrow money except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

2.        A Fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

 

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3.        A Fund may lend money or other assets to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

4.        A Fund may not issue senior securities except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

5.        A Fund may not purchase or sell real estate except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

6.        A Fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

7.        A Fund may not purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, except that each Fund may invest at least 25% of its assets in bank obligations issued by domestic banks.

 

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PURCHASES AND REDEMPTIONS OF FUND SHARES;

OTHER SHAREHOLDER INFORMATION

This section describes Institutional Shares of the Acquiring Fund and how shareholders may buy and sell Institutional Shares, therefore references to “the Fund” in this section relate to the Acquiring Fund. It also describes how the Fund values its securities and the Fund’s policies on frequent trading of Fund shares. This Information Statement/Prospectus describes only Institutional Shares of the Fund. The Fund also offers Investor Shares and Administrative Shares, but these share classes are not involved in the Reorganization.

Institutional Shares

You may buy shares:

 

   

Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the Fund’s distributor to sell shares of the Fund (each called a “Service Agent”)

 

   

Directly from the Fund

Please note that Institutional Shares are not available to individual investors, except for individual investors buying directly from the Fund.

Your Service Agent may provide shareholder services that differ from the services provided by other Service Agents. Services provided by your Service Agent may vary by class. You should ask your Service Agent to explain the shareholder services it provides for each class and the compensation it receives in connection with each class. Remember that your Service Agent may receive different compensation depending on the share class in which you invest.

Your Service Agent may not offer all classes of shares. You should contact your Service Agent for further information.

Investment minimums

Minimum initial and additional investment amounts vary depending on the class of shares you buy and the nature of your investment.

 

Investment Minimum Initial/Additional Investment

   Institutional Shares  

General/Institutional Investors purchasing through the Fund

   $ 1 million/50  

Accounts managed/advised by an investment advisory subsidiary of Legg Mason

   $ 50,000/50  

Your financial intermediary may impose different investment minimums.

The Fund normally calculates its net asset value as of each hour from 8:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern time) on each Fund business day. The Fund may close early under certain circumstances. For more information, please contact your financial intermediary, or contact the Fund by phone (1-877-721-1926 or 1-203-703-6002).

Buying shares

 

Generally   

You may buy shares of the Fund on any day that the Fund is open for business, as described under “Share price/Fund business days.” Shares are sold at their net asset value next determined after receipt by the transfer agent of your purchase request in good order. Shares of the Fund may only be purchased by the wiring of federal funds.

 

The Fund may not be available for sale in certain states. Prospective investors should inquire as to whether the Fund is available for sale in their state of residence.

 

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You must provide the following information for your order to be processed:

 

•    Name of the Fund being bought

 

•    Class of shares being bought

 

•    Dollar amount or number of shares being bought

 

•    Account number (if existing account)

Through a Service Agent   

You should contact your Service Agent to open an account and make arrangements to buy shares. You must contact your Service Agent to arrange for the wiring of federal funds.

 

Your Service Agent may charge an annual account maintenance fee.

 

All orders through a Service Agent are processed at the net asset value next calculated by the Fund following receipt by the Fund’s transfer agent of your purchase request in good order. It is your Service Agent’s responsibility to transmit orders to the Fund’s transfer agent in a timely fashion.

Through the Fund   

Investors should contact the Fund at 1-877-721-1926 or 1-203-703-6002 to open an account and make arrangements to buy shares.

 

You must contact the Fund at 1-877-721-1926 or 1-203-703-6002 to arrange for the wiring of federal funds.

 

For initial purchases, complete and send your account application to the Fund as follows:

  

 

Regular Mail:

 

Western Asset Money Market Funds

P.O. Box 55083

Boston, Massachusetts 02205-5083

 

Express, Certified or Registered Mail:

 

Western Asset Money Market Funds

c/o Boston Financial Data Services

30 Dan Road

Canton, Massachusetts 02021-2809

    

 

If the Fund does not receive your purchase wire by the close of the Federal Reserve wire transfer system on the day you placed your order, your order will be canceled and you could be liable for any losses or fees incurred by the Fund or its agents.

 

Purchase requests placed by telephone during the Fund’s service desk’s hours of operation and received in good order will be accepted for processing at the net asset value next determined. The Fund’s service desk’s normal hours of operations are between 7:30 a.m. and 5:30 p.m. (Eastern time) on each Fund business day.

When shares begin to earn dividends   

If your order for a purchase to be made in federal funds is received by the Fund in good order prior to the Fund’s close of business on a Fund business day, shares purchased will normally be entitled to receive dividends declared on that day and orders received after the Fund’s close of business on a Fund business day will normally begin to earn dividends on the following business day.

 

If you are purchasing through a Service Agent, you should check with your Service Agent to determine when your purchase order will be effective.

Exchanging shares
Generally    There are currently no exchange privileges in effect with respect to the Fund.

 

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Redeeming shares
Generally   

You may redeem shares of the Fund on any day that the Fund is open for business, as described under “Share price/Fund business days” below. Shares are redeemed at their net asset value next determined after receipt by your Service Agent or the transfer agent of your redemption request in good order. However, the Fund may impose a liquidity fee or temporarily restrict redemptions from the Fund under certain circumstances, as set forth below under “Redemption Fees and Gates.”

 

If the shares are held by a fiduciary or corporation, partnership or similar entity, other documents may be required.

 

Contact your Service Agent or, if you hold shares directly with the Fund, call the Fund at 1-877-721-1926 or 1-203-703-6002 to redeem shares of the Fund.

Redemption proceeds   

If your request is received in good order by your Service Agent or the transfer agent prior to the time the Fund makes its final net asset value calculation on any day the Fund is open for business (normally 3:00 p.m. (Eastern time)), your redemption proceeds normally will be sent that day, but in any event within seven days.

 

You generally are entitled to receive dividends on Fund shares through the business day prior to the day on which your proceeds are sent to you.

 

Your redemption proceeds may be delayed, or your right to receive redemption proceeds suspended, if the New York Stock Exchange (“NYSE”) is closed (other than on weekends or holidays) or trading is restricted, if an emergency exists, or otherwise as permitted by the rules of or by the order of the Securities and Exchange Commission (“SEC”).

 

If you hold your shares through a Service Agent, your Service Agent may have its own earlier deadlines for the receipt of a redemption request. All orders through a Service Agent are processed at the net asset value next calculated by the Fund following receipt by the Fund’s transfer agent of your redemption request in good order. It is your Service Agent’s responsibility to transmit orders to the Fund’s transfer agent in a timely fashion. Your sale or redemption proceeds will be sent by federal wire to your Service Agent. You should check with your Service Agent to determine when your proceeds will be available to you.

 

If you hold your shares through the Fund, redemption proceeds will be sent by federal wire to the bank account you have designated on your application form or other written authorization. To change the bank account designated to receive wire transfers, you will be required to deliver a new written authorization and may be asked to provide other documents. You may be charged a fee on a wire transfer.

 

The Fund reserves the right to pay redemption proceeds by giving you securities instead of cash. You may pay transaction costs to dispose of the securities, and you may receive less than the price at which they were valued for purposes of the redemption.

By mail   

Contact your Service Agent or, if you hold shares directly with the Fund, write to the Fund as follows:

 

Regular Mail:

 

Western Asset Money Market Funds

P.O. Box 55083

Boston, Massachusetts 02205-5083

 

Express, Certified or Registered Mail:

 

Western Asset Money Market Funds

c/o Boston Financial Data Services

30 Dan Road

Canton, Massachusetts 02021-2809

 

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Your written request must provide the following:

 

•    The Fund name, the class of shares being redeemed and your account number

 

•    The dollar amount or number of shares being redeemed

 

•    Signature of each owner exactly as the account is registered

 

•    Signature guarantees, as applicable (see “Other things to know about transactions”)

By telephone   

If your account application permits, you may be eligible to redeem shares by telephone. Contact your Service Agent or, if you hold shares directly with the Fund, call the Fund at 1-877-721-1926 or 1-203-703-6002.

 

Please have the following information ready when you place your redemption request:

 

•    Name of the Fund being redeemed

 

•    Class of shares being redeemed

 

•    Account number

 

If you hold your shares directly with the Fund and your telephonic redemption request is placed with the Fund service desk during the Fund service desk’s hours of operation and received in good order, your request will be accepted for processing at the net asset value next determined. The Fund service desk’s normal hours of operations are between 7:30 a.m. and 5:30 p.m. (Eastern time) each Fund business day.

Redemption

Fees and Gates

  

The Fund may impose a liquidity fee of up to 2% on redemptions from the Fund or temporarily restrict redemptions from the Fund for up to 10 business days in any given 90 day period (a “redemption gate”) in the event that the Fund’s weekly liquid assets fall below the following thresholds:

 

•    30% weekly liquid assets2—if the Fund’s weekly liquid assets fall below 30% of the Fund’s total assets, and the Board of the Fund determines that it is in the best interests of the Fund, the Fund may, as early as the same day, impose a liquidity fee of not more than 2% of the amount redeemed or a redemption gate that temporarily suspends the right of redemption.

 

•    10% weekly liquid assets—if the Fund’s weekly liquid assets fall below 10% of the Fund’s total assets, the Fund will impose at the beginning of the next business day, a liquidity fee of 1% of the amount redeemed, unless the Board of the Fund determines that imposing such a fee would not be in the best interests of the Fund or determines that a lower or higher fee (not to exceed 2%) would be in the best interests of the Fund.

 

If the Fund imposes a redemption gate, the Fund and the Fund’s authorized agent or intermediary will not accept redemption orders until the Fund has notified shareholders that the redemption gate has been lifted. Any redemption orders submitted while a redemption gate is in effect will be cancelled without further notice. Pending redemption orders may be affected if the Fund imposes a redemption gate. If you still wish to redeem shares once the redemption gate has been lifted, you will need to submit a new redemption request to the Fund or the Fund’s authorized agent or intermediary.

 

Liquidity fees and redemption gates may be terminated at any time at the judgment of the Board. In addition, liquidity fees and redemption gates will terminate at the beginning of the next business day once the Fund has invested 30% or more of its total assets in weekly liquid assets. The Fund may only suspend redemptions for up to 10 business days in any 90-day period.

 

2  Weekly liquid assets” include (i) cash; (ii) direct obligations of the U.S. Government; (iii) Government securities issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States, that are issued at a discount to the principal amount to be repaid at maturity without the provision for the payment of interest and have a remaining maturity of 60 days or less; (iv) securities that will mature or are subject to a demand feature that is exercisable and payable within five business days; and (v) amounts receivable and due unconditionally within five business days on pending sales of portfolio securities.

 

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A liquidity fee imposed by the Fund will reduce the amount you will receive upon the redemption of your shares, and could cause you to recognize a capital loss or could decrease the capital gain or increase the capital loss you would otherwise recognize. Liquidity fees would be retained by the Fund. Pending redemption orders may be affected if the Fund imposes a liquidity fee.

 

Any announcement regarding the imposition of a liquidity fee or redemption gate, or the termination of a liquidity fee or a redemption gate, will be available on the Fund’s website below and will be filed with the SEC: https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-liquid-reserves.html

 

If the Fund’s weekly liquid assets fall below 10% of the Fund’s total assets, the Fund reserves the right to permanently suspend redemptions and liquidate if the Board of the Fund determines that it is not in the best interests of the Fund to continue operating.

 

Additional information regarding redemption fees and gates is included in the Fund SAI.

Other things to know about transactions

When you buy or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

 

   

Name of the Fund

 

   

Your account number

 

   

In the case of a purchase, the class of shares being bought

 

   

In the case of a redemption, the class of shares being redeemed (if you own more than one class)

 

   

Dollar amount or number of shares being bought or redeemed

 

   

In certain circumstances, the signature of each owner exactly as the account is registered (see “Redeeming shares”)

In certain circumstances, such as during periods of market volatility, severe weather and emergencies, shareholders may experience difficulties placing redemption orders by telephone. In that case, shareholders should consider using the Fund’s other redemption procedures described under “Redeeming shares.”

The transfer agent or the Fund will employ reasonable procedures to confirm that any telephone redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the Fund nor its agents will bear any liability for these transactions, subject to applicable law.

The Fund has the right to:

 

   

Suspend the offering of shares

 

   

Waive or change minimum initial and additional investment amounts

 

   

Reject any purchase order

 

   

Suspend telephone transactions

 

   

Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted or as otherwise permitted by the SEC

 

   

Impose fees or gates on redemptions as permitted or required by Rule 2a-7 under the 1940 Act

 

   

Close your account after a period of inactivity, as determined by state law, and transfer your shares to the appropriate state

 

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For your protection, the Fund or your Service Agent may request additional information in connection with large redemptions, unusual activity in your account, or otherwise to ensure your redemption request is in good order. Please contact your Service Agent or the Fund for more information.

Medallion signature guarantees

To be in good order, your redemption request must include a Medallion signature guarantee if you:

 

   

Are redeeming shares and sending the proceeds to an address or bank not currently on file

 

   

Changed your account registration or your address within 30 days

 

   

Are transferring the redemption proceeds to an account with a different registration

A Medallion signature guarantee may also be required if you:

 

   

Are making changes to the account registration after the account has been opened; and

 

   

Are transferring shares to an account in another Legg Mason fund with a different account registration

When a Medallion signature guarantee is called for, the shareholder should have a Medallion signature guarantee stamped under his or her signature. You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, national securities exchanges, registered securities associations and clearing agencies (each an “Eligible Guarantor Institution”), but not from a notary public. The Fund and its agents reserve the right to reject any Medallion signature guarantee pursuant to written signature guarantee standards or procedures, which may be revised in the future to permit them to reject Medallion signature guarantees from Eligible Guarantor Institutions. The Fund may change the signature guarantee requirements from time to time without prior notice to shareholders.

Restrictions on the availability of the Fund outside the United States

The distribution of this Prospectus and the offering of shares of the Fund are restricted in certain jurisdictions. This Prospectus is not an offer or solicitation in any jurisdiction where such offer or solicitation is unlawful, where the person making an offer or solicitation is not authorized to make it or a person receiving an offer or solicitation may not lawfully receive it or may not lawfully invest in the Fund. Investors should inform themselves as to the legal requirements within their own country before investing in the Fund.

This Prospectus, and the offer of shares hereunder, are not directed at persons outside the United States. In particular, the Fund is not intended to be marketed to prospective investors in any member state of the European Union, Iceland, Liechtenstein or Norway (collectively, the “European Economic Area” or “EEA”). No notification or application has been made to the competent authority of any member state of the EEA under the Alternative Investment Fund Managers Directive (or any applicable legislation or regulations made thereunder) to market the Fund to investors in the EEA and it is not intended that any such notification or application shall be made.

U.S. citizens with addresses in the United States, and non-U.S. citizens who reside in the United States and have U.S. addresses, are permitted to establish accounts with the Fund. For these purposes, the “United States” and “U.S.” include U.S. territories.

The Fund generally does not permit persons who do not reside in the United States or who do not have U.S. addresses to establish accounts. Therefore, U.S. citizens residing in foreign countries, as well as non-U.S. citizens residing in foreign countries, generally will not be permitted to establish accounts with the Fund.

For further information, you or your Service Agent may contact the fund at 877-721-1926 or 203-703-6002.

Anti-money laundering

Federal anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide

 

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additional information in order for the Fund to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and other federal regulations.

Small account balances/Mandatory redemptions

The Fund reserves the right to ask you to bring your account up to a minimum investment amount determined by your Service Agent if the aggregate value of the Fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period). You will be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the Fund may close your account and send you the redemption proceeds. If your share class is no longer offered, you may not be able to bring your account up to the minimum investment amount. Some shareholders who hold accounts in multiple classes of the Fund may have those accounts aggregated for the purposes of these calculations. If your account is closed, you will not be eligible to have your account reinstated without imposition of any sales charges that may apply to your new purchase. Please contact your Service Agent for more information. Any redemption of Fund shares may result in tax consequences to you (see “Taxes” for more information). The Fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, the Fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or the Fund or consult the Fund SAI.

Frequent trading of Fund shares

Money market funds are often used by investors for short-term investments, in place of bank checking or saving accounts, or for cash management purposes. Investors value the ability to add and withdraw their funds quickly, without restriction. For this reason the Fund’s Board has not adopted policies and procedures, or imposed restrictions such as minimum holding periods, in order to deter frequent purchases and redemptions of money market fund shares. The Board also believes that money market funds, such as the Fund, are not typically targets of abusive trading practices. However, some investors may seek to take advantage of a short-term disparity between the Fund’s yield and current market yields, which could have the effect of reducing the Fund’s yield. In addition, frequent purchases and redemptions of Fund shares could increase the Fund’s portfolio transaction costs and may interfere with the efficient management of the Fund’s portfolio, which could detract from the Fund’s performance.

Record ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that the Fund holds a shareholder meeting, your Service Agent, as record holder, will be entitled to vote your shares and may seek voting instructions from you. If you do not give your Service Agent voting instructions, your Service Agent, under certain circumstances, may nonetheless be entitled to vote your shares.

Dividends, other distributions and taxes

Dividends and other distributions

The Fund calculates its net income and declares dividends each business day when it makes its final net asset value calculation. See “Buying shares” above for information about when recently purchased shares begin to earn dividends and “Redeeming shares” above for information about when shares redeemed cease to earn dividends. Dividends are distributed once a month, on or before the last business day of the month.

You can elect to receive dividends and/or other distributions in cash.

Unless you elect to receive dividends and/or other distributions in cash, your dividends and capital gain distributions will be automatically reinvested in shares of the same class you hold, at the net asset value determined on the reinvestment date.

 

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If you hold shares directly with the Fund and you elect to receive dividends and/or distributions in cash, you have the option to receive such dividends and/or distributions via a direct deposit to your bank account or, provided that the dividend and/or distribution is $10.00 or more, by check. If you choose to receive dividends and/or distributions via check, amounts less than $10.00 will automatically be reinvested in Fund shares as described above.

If you do not want dividends and/or distributions in amounts less than $10.00 to be reinvested in Fund shares, you must elect to receive dividends and distributions via a direct deposit to your bank account.

The Board reserves the right to revise the dividend policy or postpone the payment of dividends if warranted in the Board’s judgment due to unusual circumstances.

Taxes

The following discussion is very general, applies only to shareholders who are U.S. persons, and does not address shareholders subject to special rules, such as those who hold Fund shares through an IRA, 401(k) plan or other tax-advantaged account. Except as specifically noted, the discussion is limited to federal income tax matters, and does not address state, local, foreign or non-income taxes. Further information regarding taxes, including certain federal income tax considerations relevant to non-U.S. persons, is included in the SAI. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about federal, state, local and/or foreign tax considerations that may be relevant to your particular situation.

You normally will have to pay federal income tax on any dividends and other distributions you receive from the Fund, whether the distributions are paid in cash or additional shares. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) that are reported by the Fund as capital gain dividends are taxable to you as long-term capital gain regardless of how long you have owned your shares. Other distributions are generally taxable as ordinary dividends. The Fund does not expect any distributions to be treated as qualified dividend income, which for non-corporate shareholders may be taxed at reduced rates.

If you redeem shares it is generally a taxable event.

You may elect the “NAV method” for computing gains and losses from redemptions. Under the NAV method, rather than computing gain or loss separately for each taxable disposition of Fund shares, you would determine gain or loss on an aggregate basis for each “computation period” (which could be a taxable year or certain shorter periods within a taxable year). Gain or loss under the NAV method would be based on the change in the aggregate value of your shares during the applicable period (or, for the first period in which the NAV method applies, the difference between the aggregate value at the end of the period and the adjusted tax basis at the beginning of the period), reduced by your purchases of Fund shares (including purchases through the reinvestment of dividends) and increased by the proceeds of redemptions of Fund shares during that period. Under the NAV method, if you hold your shares as a capital asset, any resulting net gain or loss would be treated as short-term capital gain or loss. If you hold shares in the Fund through more than one account, you must treat your holdings in each such account as a separate fund for purposes of applying the NAV method. If you do not elect the NAV method, any capital gain or loss will generally be long-term capital gain or loss if you held your shares for more than one year and short-term capital gain or loss if you held the shares for one year or less. Any such loss will be disallowed to the extent your Fund shares are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the Fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares you acquired will be increased to reflect the disallowed loss.

There is uncertainty with respect to the tax treatment of liquidity fees received by the Fund. The tax treatment of liquidity fees may be the subject of future guidance issued by the Internal Revenue Service (the “IRS”). The imposition of a liquidity fee on your redemption of Fund shares could cause you to recognize a loss or could decrease the gain or increase the loss you would otherwise recognize. Although there is no definitive guidance, any liquidity fees received by the Fund may result in distributions or gains that would be taxable to the Fund’s shareholders.

A Medicare contribution tax is imposed at the rate of 3.8% on net investment income of U.S. individuals with income exceeding specified thresholds, and on undistributed net investment income of certain estates and trusts. Net investment income generally includes for this purpose dividends and capital gain distributions, if any, paid by the Fund.

 

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A dividend declared by the Fund in October, November or December and paid during January of the following year will, in certain circumstances, be treated as paid in December for tax purposes.

If the Fund meets certain requirements with respect to its holdings, it may elect to “pass through” to shareholders foreign taxes that it pays, in which case each shareholder will include the amount of such taxes in computing gross income, but will be eligible to claim a credit or deduction for such taxes, subject to generally applicable limitations on such deductions and credits.

After the end of each year, your Service Agent or the Fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the Fund.

Share price/Fund business days

You may buy or redeem shares at their net asset value (“NAV”) next determined after receipt of your request in good order.

The Fund’s NAV per share is the value of its assets minus its liabilities divided by the number of shares outstanding rounded to the fourth decimal place. NAV is calculated separately for each class of shares. The Fund is open for business and calculates its NAV every day on which both the NYSE and the Federal Reserve Bank of New York (“FRBNY”) are open for business. Therefore, the Fund will be closed on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. Both the NYSE and FRBNY are also closed on weekends and may be closed because of an emergency or other unanticipated event. In the event the Federal Reserve wire payment system is open and the NYSE is open, the Fund may close for purchase or redemption transactions if—due to an emergency or other unanticipated event—the bond markets are closed for business as recommended by the Securities Industry and Financial Markets Association (“SIFMA”).

The Fund typically values its securities and calculates its NAV as of 8:00 a.m., 12:00 p.m., and 3:00 p.m. (Eastern time) on each Fund business day. However, the Fund could, without advance notice, determine not to make one or more intraday calculations for a number of reasons such as unusual conditions in the bond, credit or other markets or unusual Fund purchase or redemption activity. If the Fund determined not to make an intraday calculation, purchases or redemptions would be effected at the next determined intraday or closing NAV, which may be greater or less than the price at which the purchase or redemption would otherwise have been effected.

On any day when the NYSE, the FRBNY or the bond markets (as recommended by SIFMA) close early due to an unanticipated event, or if trading on the NYSE is restricted, an emergency arises or as otherwise permitted by the SEC, the Fund reserves the right to close early and make its final NAV calculation as of the time of its early close.

The Fund normally closes for business at 3:00 p.m. (Eastern time). When SIFMA recommends an early close to the bond markets on a business day before or after a day on which a holiday is celebrated, the Fund reserves the right to close at or prior to the SIFMA recommended closing time. For calendar year 2017, SIFMA recommends an early close of the bond markets on April 13, 2017, May 26, 2017, July 3, 2017, November 24, 2017, December 22, 2017 and December 29, 2017. The schedule may be changed by SIFMA due to market conditions.

Valuation of the Fund securities and other assets is performed in accordance with procedures approved by the Board. These procedures delegate most valuation functions to the manager, which generally uses independent third party pricing services approved by the Fund’s Board. Under the procedures, assets are valued as follows:

 

   

The valuations for fixed income securities are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of fair valuation techniques and methodologies.

 

   

The valuations of securities traded on foreign markets and certain other fixed income securities will generally be based on prices determined as of the earlier closing time of the markets on which they primarily trade, unless a

 

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significant event has occurred. Foreign markets are open for trading on weekends and other days when the Fund does not price their shares. Therefore, the value of the Fund’s shares may change on days when you will not be able to purchase or redeem the Fund’s shares.

 

   

If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. These procedures permit, among other things, the use of a formula or other method that takes into consideration market indices, yield curves and other specific adjustments to determine fair value. Fair value of a security is the amount, as determined by the manager in good faith, that the Fund might reasonably expect to receive upon a current sale of the security. The Fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the Fund’s net asset value is calculated.

Many factors may influence the price at which the Fund could sell any particular portfolio investment. The sales price may well differ—higher or lower—from the Fund’s last valuation, and such differences could be significant, particularly for securities that trade in relatively thin markets and/or markets that experience extreme volatility. Moreover, valuing securities using fair value methodologies involves greater reliance on judgment than valuing securities based on market quotations. A fund that uses fair value methodologies may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that the Fund could obtain the value assigned to a security if it were to sell the security at approximately the time at which the Fund determines its net asset value. Investors who purchase or redeem Fund shares on days when the Fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the Fund had not fair-valued the security or had used a different methodology.

To determine whether the Fund is open for business, please call the Fund at 1-877-721-1926 or 1-203-703-6002. The Fund service desk is generally open between 7:30 a.m. and 5:30 p.m. (Eastern time) but may close early under certain circumstances. You should contact your Service Agent to determine whether your Service Agent will be open for business.

It is the responsibility of the Service Agent to transmit all orders to buy or redeem shares to the transfer agent on a timely basis.

 

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INFORMATION ABOUT THE REORGANIZATION

The Reorganization Agreement

The following summary of the Reorganization Agreement is qualified in its entirety by reference to the form of Reorganization Agreement attached as Appendix C to this Information Statement/Prospectus. The Reorganization Agreement provides for (1) the transfer of all of the assets of the Target Fund to the Acquiring Fund, in exchange for the assumption of all of the liabilities of the Target Fund by the Acquiring Fund and for Institutional Shares of the Acquiring Fund having an aggregate net asset value equal to the aggregate net asset value of the shares of the Target Fund, (2) the distribution of the Institutional Shares received to the shareholders of the Target Fund in redemption of the Target Fund shares and (3) the termination of the Target Fund. Subject to the satisfaction of the conditions described below, the Reorganization is scheduled to occur as of the close of business on August 18, 2017, or on such later date as the parties may agree (“Closing Date”).

The number of full and fractional shares of the Acquiring Fund to be received by the Target Fund shareholder in the Reorganization will be equal to the aggregate net asset value of the shares of the Target Fund held by that shareholder as of the close of regularly scheduled trading on the NYSE on the Closing Date or such later time as the Target Fund’s net asset value is calculated.

After such distribution, the Target Fund will take all necessary steps under Maryland law, its declaration of trust and any other applicable law to effect its termination.

The Reorganization Agreement may be terminated and the Reorganization abandoned at any time prior to the Closing Date if circumstances develop that, in the opinion of the Board of the Target Fund or the Acquiring Fund, make proceeding with the Reorganization inadvisable. The Reorganization Agreement provides that the Target Fund and the Acquiring Fund may waive compliance with any of the covenants or conditions made therein for the benefit of either Fund. The Reorganization Agreement may be amended, modified or supplemented in such manner as may be deemed necessary or advisable by the authorized officers of the Target Fund and the Acquiring Fund, provided, however, that no such amendment shall have the effect of changing the provisions for determining the number of Acquiring Fund shares to be issued to Target Fund shareholders to the detriment of such shareholders.

Description of the Acquiring Fund’s Shares

Shareholders holding Institutional Shares of the Target Fund will receive Institutional Shares of the Acquiring Fund. Each such share will be fully paid and non-assessable when issued and will have no preemptive or conversion rights. The Acquiring Fund will not issue share certificates.

Reasons for the Reorganization and Board Considerations

The Reorganization was presented to the Target Fund’s Board for consideration at a Board meeting held on May 8-9, 2017, and was approved at that meeting. Following extensive discussions of the advantages and disadvantages to the Target Fund, based on its evaluation of all material factors, including those described below, the Board, including all of the Independent Board Members, determined that: (1) participation in the Reorganization is in the best interests of the Target Fund; and (2) the Reorganization would not result in the dilution of the interests of the Target Fund’s shareholders. In considering the proposal, the Board did not identify any single factor or piece of information as all-important or controlling.

The Board considered a number of factors prior to approving the Reorganization, including the following:

 

   

the recommendations of Legg Mason Partners Fund Advisor, LLC (“LMPFA”) with respect to the Reorganization;

 

   

the potential efficiencies and economies of scale that are expected to result from the Reorganization;

 

   

the benefits to shareholders of the Target Fund expected to result from the Reorganization;

 

   

the costs and expenses related to the Reorganization to be borne by each Fund;

 

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the fact that the investment objectives, strategies, policies and risks of the Acquiring Fund and the Target Fund are the same and they both invest substantially all their assets in Liquid Reserves Portfolio;

 

   

the fact that the contractual management fee schedules of the Acquiring Fund and the Target Fund are the same;

 

   

the annual fund operating expenses and shareholder fees and services that Target Fund shareholders are expected to pay as shareholders of the Acquiring Fund after the Reorganization;

 

   

the relative performance histories of the two Funds; and

 

   

the fact that it is expected that shareholders will not recognize a gain or loss for federal income tax purposes as a direct result of the Reorganization

The Board considered the benefits to LMPFA. If the Reorganization is consummated, LMPFA is expected to achieve higher profitability due to decreased costs. LMPFA is expected to reduce the level of its operational expenses for administrative and compliance services as the number of separate funds declines.

The proposed Reorganization was presented to the Board, on behalf of the Acquiring Fund, for consideration at a Board meeting held on May 8-9, 2017. The Board, on behalf of the Acquiring Fund, including all of the Independent Board Members, determined that: (1) participation in the proposed Reorganization is in the best interests of the Acquiring Fund; and (2) the Reorganization would not result in the dilution of the interests of the Acquiring Fund’s shareholders.

Federal Income Tax Consequences

It is expected that the parties to the Reorganization Agreement (other than LMPFA) will receive an opinion from Morgan, Lewis & Bockius LLP, substantially to the effect that, based upon certain facts, assumptions and representations of the parties, for federal income tax purposes:

(i) the Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Target Fund and the Acquiring Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code;

(ii) no gain or loss will be recognized by the Acquiring Fund upon receipt of the assets of the Target Fund solely in exchange for Institutional Shares of the Acquiring Fund and the assumption by the Trust, on behalf of the Acquiring Fund, of the liabilities of the Target Fund as part of the Reorganization;

(iii) the tax basis in the hands of the Acquiring Fund of the assets transferred to the Acquiring Fund in the Reorganization will be the same as the tax basis of such assets in the hands of the Target Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Target Fund upon the transfer;

(iv) the holding periods in the hands of the Acquiring Fund of the assets transferred to the Acquiring Fund in the Reorganization, other than any asset with respect to which gain or loss is required to be recognized in the Reorganization, will include the periods during which the respective assets were held by the Target Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an asset);

(v) no gain or loss will be recognized by the Target Fund upon the transfer of the assets of the Target Fund to the Acquiring Fund in the Reorganization solely in exchange for Institutional Shares of the Acquiring Fund and the assumption by the Trust, on behalf of the Acquiring Fund, of the liabilities of the Target Fund, or upon the distribution of Institutional Shares of the Acquiring Fund by the Target Fund to its shareholders in complete liquidation, except for (A) any gain or loss that may be recognized with respect to contracts subject to Section 1256 of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain or loss that may be required to be recognized as a result of the closing of the Target Fund’s taxable year or upon the transfer of an asset regardless of whether such transfer would otherwise be a nonrecognition transaction under the Code;

(vi) no gain or loss will be recognized by the Target Fund shareholders upon the exchange of their Target Fund shares solely for Institutional Shares of the Acquiring Fund as part of the Reorganization;

 

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(vii) the aggregate tax basis of the Institutional Shares of the Acquiring Fund that each Target Fund shareholder receives in the Reorganization will be the same as the aggregate tax basis of its Target Fund shares exchanged therefor; and

(viii) a Target Fund shareholder’s holding period for its Institutional Shares of the Acquiring Fund received in the Reorganization will include the period for which it held the Target Fund shares exchanged therefor, provided that it held the Target Fund shares as capital assets on the date of the exchange.

The opinion will not express an opinion as to the tax effects to the Target Fund, the Acquiring Fund or the respective shareholders of each of any other transactions undertaken in connection with the Reorganization or of the marking to market of certain categories of assets as of the closing of the taxable year of the Target Fund at the time of the Reorganization.

While neither the Acquiring Fund nor the Target Fund is aware of any adverse state or local tax consequences of the Reorganization, they have not requested any ruling or opinion with respect to such consequences and shareholders should consult their own tax advisers with respect to such matters.

The Target Fund will declare a dividend or dividends, which together with all previous dividends are intended to have the effect of distributing to its shareholders all of its investment company taxable income for taxable years ending on or prior to the Closing Date (computed without regard to any deduction for dividends paid), all of its net tax-exempt interest income, and all of its net capital gain, if any, realized in taxable years ending on or prior to the Closing Date (after reduction for any available capital loss carryover). Any such dividends will generally be included in the taxable income of the Target Fund’s shareholders. The Acquiring Fund may make a comparable distribution to its shareholders shortly before the Reorganization.

Information Regarding Tax Capital Loss Carryovers

Federal income tax law permits a regulated investment company, such as each Fund, to carry forward its net capital losses realized in taxable years that began on or before December 22, 2010 (“Pre-2011 Losses”) for a period of up to eight taxable years. Unused capital losses realized during taxable years beginning after December 22, 2010 (“Post-2010 Losses”) may be carried forward for an unlimited number of taxable years, but such carryovers must be fully utilized before the regulated investment company is permitted to use any carryovers of Pre-2011 Losses.

In the tax year of the Acquiring Fund during which the Reorganization occurs, the Acquiring Fund will be able to use carryovers of the Target Fund (including from the Target Fund’s short tax year ending on the Closing Date), subject to the limitations described below, to offset only a prorated portion of the Acquiring Fund’s capital gains for the Acquiring Fund’s tax year, based on the number of days remaining in its tax year after the Closing Date.

In addition, the Reorganization may result in a limitation on the Acquiring Fund’s ability, in the post-Reorganization period, to use a portion of its carryovers (including any carryover generated in its tax year that includes the Reorganization) and potentially on the Acquiring Fund’s ability to use unrealized capital losses inherent in the tax basis of its assets. That limitation, imposed by Section 382 of the Code, will generally apply if the shareholders of the Acquiring Fund own less than 50% of the combined fund after the Reorganization, and will be imposed on an annual basis. Losses in excess of the limitation may be carried forward, subject to generally applicable limitations. If applicable, the annual limitation on the use of those carryovers for periods following the Reorganization generally will equal the product of the net asset value of the Acquiring Fund and the “long-term tax-exempt rate” in effect on the date of the Reorganization. The long-term tax-exempt rate is published monthly by the IRS.

As of August 31, 2016, the Acquiring Fund had unused Pre-2011 Losses of $2,624,485 that are scheduled to expire on August 31, 2017. It is expected that some or all of these Pre-2011 will expire unutilized.

The foregoing Section 382 rules may also result in a limitation on the Acquiring Fund’s ability to use loss carryovers of the Target Fund, including any loss carryovers generated in the taxable year of the Target Fund ending as a result of the Reorganization. That limitation will generally apply if the shareholders of the Target Fund own less than 50% of the Acquiring Fund immediately after the Reorganization, and will be imposed on an annual basis. The Acquiring Fund’s ability to use unrealized losses inherent in the Target Fund’s assets at the time of the Reorganization may also be limited under these

 

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rules. Losses in excess of the limitation may be carried forward, subject to the generally applicable limitations on the carryforward of losses. The annual Section 382 limitation applicable to Target Fund losses for periods following the Reorganization generally will equal the product of the net asset value of the Target Fund immediately prior to the Reorganization and the “long-term tax-exempt rate,” as described above. The limitation may be prorated in the taxable year of the Acquiring Fund in which the Reorganization occurs based on the number of days remaining after the Closing Date in such taxable year.

As of August 31, 2016, the Target Fund had no unused capital loss carryovers.

If the Acquiring Fund or the Target Fund has a net unrealized gain inherent in its assets at the time of the Reorganization, then, under certain circumstances, the combined Acquiring Fund may not offset that gain, to the extent realized within five years of the Reorganization, by a carryover of pre-Reorganization losses (other than a carryover of the Fund with the net unrealized gain) or, in certain cases, by a net unrealized loss inherent at the time of the Reorganization in the assets of the other Fund.

As a result of the Reorganization, losses and loss carryovers will benefit the shareholders of the combined Acquiring Fund, rather than only the shareholders of the Acquiring Fund or Target Fund that incurred them. Even if a particular limitation described above would not be triggered solely by the Reorganization, the limitation may be triggered by the Reorganization and one or more other transactions entered into by the Target Fund or Acquiring Fund (including, potentially, another transaction constituting a “reorganization” within the meaning of Section 368(a) of the Code).

The capital loss carryovers, unrealized gains and losses, and limitations described above may change significantly between now and the Closing Date, expected to be approximately August 18, 2017. Further, the ability of each Fund to use these losses (even in the absence of the Reorganization) depends on factors other than loss limitations, such as the future realization of capital gains or losses. The combination of these factors on the use of loss carryovers may result in some portion of the loss carryovers expiring unused.

 

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TERMINATION OF THE TARGET FUND

If the Reorganization of the Target Fund is effected, the Target Fund will be terminated.

PORTFOLIO SECURITIES

Each of the Target Fund and the Acquiring Fund invests all of its assets in Liquid Reserves Portfolio. Accordingly, the assets that will be transferred by the Target Fund to the Acquiring Fund in the Reorganization will be the Target Fund’s interest in Liquid Reserves Portfolio. No transaction or other costs will be incurred in connection with the Target Fund’s transfer of its interest in Liquid Reserves Portfolio to the Acquiring Fund.

INFORMATION ABOUT MANAGEMENT OF THE ACQUIRING FUND

Investment Manager and Subadviser

LMPFA is the Acquiring Fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the Acquiring Fund. As of March 31, 2017, LMPFA’s total assets under management were approximately $192.5 billion.

Western Asset Management Company (“Western Asset”) provides the day-to-day portfolio management to the Acquiring Fund as subadviser. Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101 and 620 Eighth Avenue, New York, New York 10018. Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of March 31, 2017, the total assets under management of Western Asset and its supervised affiliates were approximately $426.9 billion.

LMPFA pays the subadviser a portion of the management fee that it receives from the Acquiring Fund. The Acquiring Fund did not pay any additional advisory or other fees for advisory services provided by Western Asset.

LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason. Legg Mason, whose principal executive offices are at 620 Eighth Avenue, New York, New York 10018, is a global asset management company. As of March 31, 2017, Legg Mason’s asset management operations, including Western Asset and its supervised affiliates, had aggregate assets under management of approximately $728.4 billion.

 

Investment Adviser

  

Management Fee Rate (percentage of
average daily net assets)

  

Subadviser

  

Rate Received by Subadviser

LMPFA   

0.200% of average daily net assets on the first $5 billion;

0.175% on assets over $5 billion and up to and including $10 billion; and

0.150% on assets over $10 billion

   Western Asset    The subadvisory fee is 70% of the management fee paid to LMPFA, net of expense waivers and reimbursements

For the fiscal year ended August 31, 2016, the Acquiring Fund paid management fees equal to 0.11% of the Acquiring Fund’s average daily net assets for management services, after waivers and/or reimbursements.

A discussion regarding the basis for the Board of the Acquiring Fund approving the investment management agreement with LMPFA and the sub-advisory agreement with Western Asset is contained in the Semi-Annual Report for the Acquiring Fund for the fiscal period ended February 28, 2017.

 

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Expense limitation

The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses) so that the total annual operating expenses for Institutional Shares of the Acquiring Fund will not exceed 0.20% of the class’ average daily net assets, subject to recapture as described below.

This arrangement is expected to continue until December 31, 2018, may be terminated prior to that date by agreement of the manager and the Board, and may be terminated at any time after that date by the manager. Additional amounts may be voluntarily waived and/or reimbursed from time to time. The manager is also permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the limit described above. In no case will the manager recapture any amount that would result, on any particular business day of a Fund, in the class’ total annual operating expenses exceeding the applicable limit described above, or any other lower limit then in effect.

Additional information

The Acquiring Fund enters into contractual arrangements with various parties, including, among others, the Fund’s investment manager and subadviser, who provide services to the Fund. Shareholders are not parties to, or intended (or “third-party”) beneficiaries of those contractual arrangements.

The Prospectus and the Fund SAI provide information concerning the Acquiring Fund that you should consider in determining whether to purchase shares of the Fund. The Acquiring Fund may make changes to this information from time to time. Neither the Prospectus nor the Fund SAI is intended to give rise to any contract rights or other rights in any shareholder, other than any rights conferred explicitly by federal or state securities laws that may not be waived.

Recordkeeping fees

The Acquiring Fund is authorized to pay fees for recordkeeping services to Service Agents. As a result, operating expenses of classes that incur new or additional recordkeeping fees may increase over time.

 

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ADDITIONAL INFORMATION ABOUT THE TARGET FUND AND THE ACQUIRING FUND

Legg Mason and certain of the Acquiring Fund’s service providers, which include Legg Mason-affiliated service providers, have a financial interest in the Reorganization because their respective fees under agreements with the Acquiring Fund generally increase as the amount of the assets of the Acquiring Fund increases, and the amount of those assets will increase as a result of the Reorganization. However, the increase in assets of the Acquiring Fund is expected to be offset by the concomitant loss of the Target Fund’s assets, resulting in decreases of fees of certain Legg Mason-affiliated service providers to the Target Fund.

Information about the Target Fund and the Acquiring Fund is included in the Funds’ Prospectuses, Fund SAIs and annual reports filed with the SEC and dated as listed in Appendix A. Copies of all these documents, the Reorganization SAI and any subsequently released shareholder reports are available upon request and without charge by calling the Fund at 1-800-625-4554, by writing to Western Asset Money Market Funds, P.O. Box 55083, Boston, MA 02205-5083 or by visiting www.leggmason.com/moneymarketfundsliterature.

Both Funds are subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith file reports and other information including proxy materials, reports and the Trust’s Declaration of Trust and Bylaws with the SEC. These reports and other information can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, NE, Washington, DC 20549. Reports and other information about each Fund are available on the EDGAR Database on the SEC’s website at www.sec.gov. Copies of such material can also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, SEC, 100 F Street, NE, Washington, DC 20549 at prescribed rates.

Financial Highlights

The most recent fiscal year end of the Target Fund and the Acquiring Fund for which financial statements are available is August 31, 2016.

The financial highlights of the Acquiring Fund contained in Appendix B have been derived, in part, from financial statements audited by KPMG LLP, the Fund’s independent registered public accounting firm. The financial highlights of the Acquiring Fund contained in Appendix B for the six-month period ended February 28, 2017 are unaudited.

For financial statement purposes, the Acquiring Fund will be the accounting survivor of the Reorganization. As the accounting survivor, the Acquiring Fund’s operating history will be used for financial reporting purposes after consummation of the Reorganization.

Performance of the Funds

Historical performance of each Fund is detailed in Appendix D of this Information Statement/Prospectus.

Distribution Arrangements

Legg Mason Investor Services, LLC (“LMIS” or the “distributor”), a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 International Drive, Baltimore, Maryland 21202, serves as each Fund’s sole and exclusive distributor.

The distributor, the manager and/or their affiliates make payments for distribution, shareholder servicing, marketing and promotional activities and related expenses out of their profits and other available sources, including profits from their relationships with the Acquiring Fund. These payments are not reflected as additional expenses in the fee tables contained in this Information Statement/Prospectus. The recipients of these payments may include the Acquiring Fund’s distributor and affiliates of the manager, as well as non-affiliated broker/dealers, insurance companies, financial institutions and other financial intermediaries through which investors may purchase shares of the Acquiring Fund, including your financial intermediary. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for any fund related marketing or shareholder servicing activities. The payments described in this paragraph are often referred to as “revenue sharing payments.” Revenue sharing arrangements are separately negotiated between the distributor, the manager and/or their affiliates, and the recipients of these payments.

 

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Revenue sharing payments create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the Acquiring Fund to you. Contact your financial intermediary for details about revenue sharing payments it receives or may receive. Additional information about revenue sharing payments is available in the Fund SAI. Revenue sharing payments, as well as the payments under the shareholder services and distribution plan (where applicable), also benefit the manager, the distributor and their affiliates to the extent the payments result in more assets being invested in the Acquiring Fund on which fees are being charged.

Form and Date of Organization

Each Fund is a series of the Trust, a Maryland statutory trust. The certificate of trust to establish the Trust was filed with the State Department of Assessments and Taxation of Maryland on October 4, 2006.

Capitalization

The following table set forth the unaudited capitalization of the Target Fund and the Acquiring Fund as of the date set out below, and on a pro forma basis as of that date, giving effect to the acquisition of assets at net asset value. The pro forma capitalization information is for informational purposes only. No assurance can be given as to how many shares of the Acquiring Fund shareholders of the Target Fund will receive on the Closing Date, and the information below should not be relied upon to reflect the number of shares of the Acquiring Fund that actually will be received.

Pro Forma Combined Capitalization Table

Western Asset Institutional Cash Reserves and

Western Asset Institutional Liquid Reserves

As of April 25, 2017 (Unaudited)

 

      Western Asset
Institutional
Cash Reserves,
Target Fund
     Western Asset
Institutional
Liquid Reserves,
Acquiring Fund
     Pro Forma
Adjustments1
    Pro Forma
Western Asset
Institutional
Liquid Reserves
Combined Fund
 

Institutional Shares

          

Net Assets

   $ 1,959,476,638      $ 705,201,421        (152,114   $ 2,664,525,945  

Net Asset Value Per Share

   $ 1.0004      $ 1.0006        $ 1.0006  

Net Shares Outstanding

     1,958,670,149        704,750,693        (473,443     2,662,974,938  

Investor Shares2

          

Net Assets

     —        $ 35,504,692        (2,371   $ 35,502,321  

Net Asset Value Per Share

     —        $ 1.0005        $ 1.0005  

Net Shares Outstanding

     —          35,486,100          35,486,100  

Administrative Shares3

          

Net Assets

     —          —          —         —    

Net Asset Value Per Share

     —          —            —    

Net Shares Outstanding

     —          —            —    

 

1 

The costs and expenses of the Reorganization, which are estimated in aggregate to be approximately $155,000, will be allocated to the Acquiring Fund and the Target Fund pro rata based on the aggregate net assets of each Fund.

 

2 

There were no Investor Shares of the Target Fund outstanding on April 25, 2017.

 

3 

There were no Administrative Shares of the Target Fund or the Acquiring Fund outstanding on April 25, 2017.

Dividends and Distributions

Each Fund calculates its net income each business day when it makes its final net asset value calculation. Dividends are distributed once a month, on or before the last business day of the month, and are reinvested in additional Fund shares of the same class you hold. Alternatively, you can instruct your Service Agent or the Fund to have your dividends paid in cash. You can change your choice at any time to be effective as of the next dividend.

 

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Outstanding Shares

To the knowledge of the Funds, as of April 30, 2017, except as set forth in Appendix E, no person owned beneficially or of record 5% or more of such Fund’s outstanding shares.

To the knowledge of the Funds, as of April 30, 2017, less than 1% of the outstanding shares of each of the Target Fund and the Acquiring Fund were owned directly or beneficially in the aggregate by the Board members and officers of the Target Fund and the Acquiring Fund.

 

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INDEX OF APPENDICES

 

Appendix A:    Dates of Prospectuses, Fund SAIs and Shareholder Reports    A-1
Appendix B:    Financial Highlights of the Acquiring Fund    B-1
Appendix C:    Form of Agreement and Plan of Reorganization    C-1
Appendix D:    Historical Performance for Each Fund    D-1
Appendix E:    5% Shareholders of the Target Fund and Acquiring Fund    E-1

 

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APPENDIX A

Dates of Prospectuses, Fund Statements of

Additional Information and Shareholder Reports

 

Fund

 

Prospectuses and
Fund SAI Dated

 

Annual Reports

 

Semi-Annual Reports

Western Asset Institutional Cash Reserves

  December 28, 2016   August 31, 2016   February 28, 2017

Western Asset Institutional Liquid Reserves

  December 28, 2016   August 31, 2016   February 28, 2017

 

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APPENDIX B

Financial Highlights of Western Asset Institutional Liquid Reserves (Acquiring Fund)

The financial highlights table is intended to help you understand the performance of Institutional Shares of the Acquiring Fund for the past five years and for the semi-annual period ended February 28, 2017. The information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables, except with respect to the six-month period ended February 28, 2017, has been derived from the fund’s financial statements, which have been audited by KPMG LLP, independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the annual report (available upon request). The financial highlights for the six-month period ended February 28, 2017 are unaudited.

For a share of each class of beneficial interest outstanding throughout each year ended August 31, unless otherwise noted:

 

Institutional Shares    20171,2     20161     20151     20141     20131     2012  

Net asset value, beginning of period

     $1.000       $1.000       $1.000       $1.000       $1.000       $1.000  

Income from operations:

            

Net investment income

     0.003       0.004       0.001       0.001       0.001       0.002  

Net realized and unrealized gain3

     0.000       0.000       0.000       0.000       0.000       0.000  

Total income from operations

     0.003       0.004       0.001       0.001       0.001       0.002  

Less distributions from:

            

Net investment income

     (0.003     (0.004     (0.001     (0.001     (0.001     (0.002

Total distributions

     (0.003     (0.004     (0.001     (0.001     (0.001     (0.002

Net asset value, end of period

     $1.000       $1.000       $1.000       $1.000       $1.000       $1.000  

Total return4

     0.40     0.36     0.10     0.07     0.13     0.18

Net assets, end of period (millions)

     $945       $5,953       $4,988       $3,729       $4,696       $5,362  

Ratios to average net assets:

            

Gross expenses5

     0.35 %6,7      0.33 %7      0.33 %7      0.33 %7      0.33 %7      0.23

Net expenses5,8,9

     0.146       0.13       0.13       0.13       0.14       0.15  

Net investment income

     0.556       0.35       0.10       0.07       0.13       0.18  

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the six months ended February 28, 2017 (unaudited).

 

3 

Amount represents less than $0.0005 per share.

 

4 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

5 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

 

6 

Annualized.

 

7 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio.

 

8 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

9 

Reflects fee waivers and/or expense reimbursements.

 

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APPENDIX C

Form of Agreement and Plan of Reorganization

This AGREEMENT AND PLAN OF REORGANIZATION (“Agreement”) is made as of this [            ] day of [                    ], 2017, by and between Legg Mason Partners Institutional Trust, a Maryland statutory trust (the “Trust”), with its principal place of business at 100 International Drive, Baltimore, Maryland 21202, on behalf of its series Western Asset Institutional Liquid Reserves (the “Acquiring Fund”), and the Trust on behalf of its series Western Asset Institutional Cash Reserves (the “Target Fund”).

WHEREAS, each of the Target Fund and the Acquiring Fund is a series of the Trust, an open-end management investment company registered pursuant to the Investment Company Act of 1940, as amended (the “1940 Act”);

WHEREAS, it is intended that, for United States federal income tax purposes (i) the transactions contemplated by this Agreement constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) this Agreement constitutes a plan of reorganization within the meaning of Section 368 of the Code and Treasury Regulations Section 1.368-2(g);

WHEREAS, the reorganization will consist of (1) the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Target Fund to the Acquiring Fund in exchange solely for shares of beneficial interest of the Acquiring Fund (the “Acquiring Fund Shares”) of the classes corresponding to the classes of outstanding shares of beneficial interest of the Target Fund (the “Target Fund Shares”), as described herein, and the assumption by the Acquiring Fund of all liabilities of the Target Fund, and (2) the distribution of the Acquiring Fund Shares to the shareholders of the Target Fund and the termination and complete liquidation of the Target Fund as a series of the Trust, as provided herein (the “Reorganization”), all upon the terms and conditions hereinafter set forth in this Agreement;

WHEREAS, the Board of Trustees of the Trust (the “Board”), including a majority of its members who are not “interested persons” (as that term is defined in the 1940 Act) of the Trust, has determined, with respect to the Acquiring Fund, that the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Target Fund for Acquiring Fund Shares and the assumption of all liabilities of the Target Fund by the Acquiring Fund is in the best interests of the Acquiring Fund and that the interests of the existing shareholders of the Acquiring Fund will not be diluted as a result of the Reorganization;

WHEREAS, the Board, including a majority of its members who are not “interested persons” (as that term is defined in the 1940 Act) of the Trust, has determined, with respect to the Target Fund, that the sale, assignment, conveyance, transfer and delivery of all of the property and assets of the Target Fund for Acquiring Fund Shares and the assumption of all liabilities of the Target Fund by the Acquiring Fund is in the best interests of the Target Fund and that the interests of the existing shareholders of the Target Fund will not be diluted as a result of the Reorganization; and

WHEREAS, in this Agreement, any references to a Fund taking action shall mean and include all necessary actions of the Trust, as applicable, on behalf of a Fund, unless the context of this Agreement or the 1940 Act requires otherwise;

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:

 

  1. TRANSFER OF ASSETS OF THE TARGET FUND TO THE ACQUIRING FUND IN EXCHANGE FOR ACQUIRING FUND SHARES, ASSUMPTION OF ALL TARGET FUND LIABILITIES AND TERMINATION OF THE TARGET FUND

1.1 Subject to requisite approvals and the other terms and conditions herein set forth and on the basis of the representations and warranties contained herein, the Trust, on behalf of the Target Fund, agrees to sell, assign, convey, transfer and deliver all of its property and assets, as set forth in paragraph 1.2, to the Acquiring Fund, and the Trust, on behalf of the Acquiring Fund, agrees in exchange therefor: (a) to deliver to the Target Fund the number of full and fractional Acquiring Fund Shares of each class corresponding to a class of the Target Fund Shares, determined by dividing the value of

 

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the Target Fund’s net assets (computed in the manner and as of the time and date set forth in paragraph 2.1) attributable to such class of Target Fund Shares by the net asset value of one share of the corresponding class of Acquiring Fund Shares (computed in the manner and as of the time and date set forth in paragraph 2.2); and (b) to assume all liabilities of the Target Fund. Such transactions shall take place on a closing date as provided for in paragraph 3.1 (the “Closing Date”). For the avoidance of doubt, Institutional Shares of the Target Fund correspond to the Institutional Shares of the Acquiring Fund.

1.2 The property and assets of the Trust attributable to the Target Fund to be sold, assigned, conveyed, transferred and delivered to and acquired by the Trust, on behalf of the Acquiring Fund, shall consist of all assets and property of every kind and nature of the Target Fund, including, without limitation, all rights, receivables (including dividend, interest and other receivables), cash, cash equivalents, claims (whether absolute or contingent, known or unknown), securities, commodities and futures interests, goodwill and other intangible property, any deferred or prepaid expenses and all interests, rights, privileges and powers, the Target Fund owns at the Valuation Date (as defined in paragraph 2.1) (collectively, “Assets”). The Trust, on behalf of the Acquiring Fund, shall assume all of the liabilities and obligations of the Target Fund, including, without limitation, all indemnification obligations of the Target Fund with respect to the current and former members of the Board and officers of the Trust, whether accrued or contingent, known or unknown, existing at the Valuation Date except for (a) obligations of the Target Fund arising under this Agreement and (b) all expenses that are solely and directly related to the Reorganization (determined in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187) borne equally by each of the Acquiring Fund and the Target Fund (collectively, “Liabilities”). The Target Fund will sell, assign, convey, transfer and deliver to the Trust, on behalf of the Acquiring Fund, any rights, stock dividends, or other securities received by the Target Fund after the Closing Date as stock dividends or other distributions on or with respect to the property and assets transferred, which rights, stock dividends, and other securities shall be deemed included in the property and assets transferred to the Trust, on behalf of the Acquiring Fund, at the Closing Date and shall not be separately valued, in which case any such distribution that remains unpaid as of the Closing Date shall be included in the determination of the value of the assets of the Target Fund acquired by the Trust on behalf of the Acquiring Fund.

1.3 The Target Fund will make reasonable efforts to discharge all of its known Liabilities prior to the Valuation Date.

1.4 Prior to the Closing, the Target Fund will declare and pay to its shareholders of record one or more dividends and/or other distributions qualifying for the dividends paid deduction under Section 562 of the Code so that it will have distributed substantially all of (a) the sum of (i) its investment company taxable income as defined in the Code (computed without regard to any deduction for dividends paid), (ii) the excess of its investment income excludible from gross income under Section 103 of the Code, if any, over its deductions disallowed under Sections 265 and 171 of the Code (“net tax-exempt income”) and (iii) its realized net capital gain as defined in the Code (after deduction of any available capital loss carryover), if any, and (b) any other amounts as necessary, in each case for all tax periods ending on or before the Closing Date (and treating the current taxable year as ending on the Closing Date), such that the Target Fund will have no tax liability under Section 852 or Section 4982 of the Code for the current and any prior tax periods.

1.5 Immediately following the actions contemplated by paragraph 1.1, the Trust shall take such actions as may be necessary or appropriate to complete the liquidation of the Target Fund. To complete the liquidation, the Trust, on behalf of the Target Fund, shall (a) distribute to the shareholders of record with respect to each class of the Target Fund Shares as of the Closing Date (“Target Fund Shareholders”), on a pro rata basis within that share class, the Acquiring Fund Shares of the corresponding class received by the Trust, on behalf of the Target Fund, pursuant to paragraph 1.1, in complete redemption of the Target Fund Shares and (b) terminate the Target Fund as a series of the Trust in accordance with Maryland law. Such distribution and redemption shall be accomplished, with respect to each class of the Target Fund Shares, by the transfer on the Closing Date of the corresponding class of the Acquiring Fund Shares then credited to the account of the Target Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the applicable Target Fund Shareholders. The aggregate net asset value of the Acquiring Fund Shares of each class to be so credited to each Target Fund Shareholder holding Target Fund Shares of the corresponding class shall be equal to the aggregate net asset value of the Target Fund Shares of that class owned by that Target Fund Shareholder on the Closing Date. All issued and outstanding Target Fund Shares will be cancelled on the books of the Target Fund. The Acquiring Fund shall not issue certificates representing any class of Acquiring Fund Shares in connection with such exchange.

1.6 Ownership of Acquiring Fund Shares will be shown on the books of the Acquiring Fund’s transfer agent for the credit of the respective accounts of the Target Fund Shareholders.

 

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1.7 Any reporting responsibility of the Target Fund, including, but not limited to, the responsibility for filing regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (“Commission”), any state securities commission, and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Trust, on behalf of the Target Fund. The Trust shall fully cooperate to the extent necessary or desirable for these responsibilities to be discharged.

 

  2. VALUATION

2.1 The value of the Assets and the amount of the Liabilities shall be determined as of the time for calculation of net asset value as set forth in the then-current prospectus for the Target Fund, and after the declaration of any dividends by the Target Fund, on the Closing Date (such time and date being hereinafter called the “Valuation Date”), computed using the valuation procedures established by the Board. All computations of value and amounts shall be made by (a) State Street Bank and Trust Company, in its capacity as accounting agent for the Target Fund, or (b) in the case of securities subject to fair valuation, in accordance with the valuation procedures of the Trust adopted in good faith by the Board. All computations of value and amounts pursuant to this paragraph 2.1 shall be subject to confirmation by the Acquiring Fund’s independent registered public accounting firm.

2.2. The net asset value per share of each class of Acquiring Fund Shares shall be determined on the Valuation Date, using the valuation procedures established by the Board. All computations of value shall be made by (a) State Street Bank and Trust Company, in its capacity as accounting agent for the Acquiring Fund, or (b) in the case of securities subject to fair valuation, in accordance with the valuation procedures of the Trust adopted in good faith by the Board. All computations of value and amounts pursuant to this paragraph 2.2 shall be subject to confirmation by the Target Fund’s independent registered public accounting firm.

 

  3. CLOSING AND CLOSING DATE

3.1 Subject to the terms and conditions set forth herein, the Closing Date shall be August 18, 2017, or such other date as the parties may agree. All acts taking place at the closing of the transactions provided for in this Agreement (“Closing”) shall be deemed to take place simultaneously as of the “close of business” on the Closing Date unless otherwise agreed to by the parties. The close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time or such later time on that date as the Target Fund’s net asset value is calculated in accordance with paragraph 2.1 and after the declaration of any dividends. The Closing shall be held at the offices of Morgan, Lewis & Bockius LLP, One Federal Street, Boston, Massachusetts or at such other time and/or place as the parties may agree.

3.2 The Trust shall direct State Street Bank and Trust Company (the “Custodian”) to transfer ownership of the Assets, at the time of the Closing, from the accounts of the Target Fund that the Custodian maintains as custodian for the Target Fund to the accounts of the Acquiring Fund that the Custodian maintains as custodian for the Acquiring Fund and to deliver to the Trust, at the Closing, a certificate of an authorized officer stating that the Assets of the Target Fund have been so transferred as of the Closing Date. The Trust, on behalf of the Target Fund, shall deliver to the Acquiring Fund, at the Closing, a certificate of an authorized officer stating that all necessary taxes in connection with the delivery of the Assets of the Target Fund, including all applicable federal and state stock transfer stamps, if any, have been paid or provision for payment has been made.

3.3 The Trust shall direct Boston Financial Data Services, Inc., in its capacity as transfer agent for the Target Fund (“Transfer Agent”), to deliver to the Trust at the Closing a certificate of an authorized officer stating that its records contain the name and address of each Target Fund Shareholder and the number of Target Fund Shares and percentage ownership of each outstanding class of Target Fund Shares owned by each such shareholder immediately prior to the Closing. The Acquiring Fund shall deliver to the Secretary of the Trust, on behalf of the Target Fund a confirmation evidencing that (a) the appropriate number of Acquiring Fund Shares have been credited to the Target Fund’s account on the books of the Acquiring Fund pursuant to paragraph 1.1 prior to the actions contemplated by paragraph 1.5 and (b) the appropriate number of Acquiring Fund Shares of each class have been credited to the accounts of the Target Fund Shareholders on the books of the Acquiring Fund pursuant to paragraph 1.5. At the Closing, each party shall deliver to the other party such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as the other party or its counsel may reasonably request.

 

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3.4 In the event that on the Valuation Date (a) the New York Stock Exchange or another primary trading market for portfolio securities of the Acquiring Fund or the Target Fund (each, an “Exchange”) shall be closed to trading or trading thereupon shall be restricted, or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Target Fund or the Acquiring Fund is impracticable (in the judgment of the Board), the Closing Date shall be postponed until the first Friday (that is also a business day) after the day when trading shall have been fully resumed and reporting shall have been restored.

 

  4. REPRESENTATIONS AND WARRANTIES

4.1 Except as has been fully disclosed in Schedule 4.1 of this Agreement, the Trust, on behalf of the Target Fund, represents and warrants to the Acquiring Fund as follows:

(a) The Target Fund is duly established as a series of the Trust, which is a statutory trust duly organized, validly existing and in good standing under the laws of the State of Maryland, with power under its Declaration of Trust, as amended or supplemented (the “Charter”), to own all of its assets and to carry on its business as it is being conducted as of the date hereof. The Trust is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), business, properties, net assets or results of operations of the Trust. The Trust has all necessary federal, state and local authorizations to carry on its business as now being conducted and to fulfill the terms of this Agreement, except as described in paragraph 4.1(c).

(b) The Trust is a registered open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of each class of Target Fund Shares under the Securities Act of 1933, as amended (“1933 Act”), is in full force and effect.

(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Target Fund of the transactions contemplated herein, except such as may be required under the 1933 Act, the Securities Exchange Act of 1934, as amended (“1934 Act”), the 1940 Act, state securities laws and the Hart-Scott-Rodino Act.

(d) The current prospectus and statement of additional information of the Target Fund (true and correct copies of which have been delivered to the Acquiring Fund) and each prospectus and statement of additional information of the Target Fund used during the three (3) years prior to the date of this Agreement conforms or conformed at the time of its use in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not or did not at the time of its use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(e) On the Closing Date, the Trust, on behalf of the Target Fund, will have good title to the Assets and full right, power and authority to sell, assign, convey, transfer and deliver such Assets hereunder free of any liens or other encumbrances, and upon delivery and payment for the Assets, the Trust, on behalf of the Acquiring Fund, will acquire good title thereto, subject to no restrictions on the full transfer thereof, excluding such restrictions as might arise under the 1933 Act.

(f) The Target Fund is not engaged currently, and the execution, delivery and performance of this Agreement by the Trust, on behalf of the Target Fund, will not result, in a material violation of Maryland law or of the Charter or the bylaws of the Trust, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust, on behalf of the Target Fund, is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Trust, on behalf of the Target Fund, will not result in the acceleration of any material obligation, or the imposition of any material penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Trust, on behalf of the Target Fund, is a party or by which it is bound.

(g) All material contracts or other commitments of the Target Fund (other than pursuant to this Agreement and contracts or other commitments entered into in order to effect the transactions contemplated by this Agreement, certain investment contracts, including options, futures, swaps and forward contracts, the indemnification agreements of the current and former

 

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members of the Board, and those contracts listed in Schedule 4.1) will terminate without liability to the Target Fund on or prior to the Closing Date. Each contract listed in Schedule 4.1 is a valid, binding and enforceable obligation of the Target Fund and, to the Target Fund’s knowledge, the other parties thereto (assuming due authorization, execution and delivery by the other parties thereto) and the assignment by the Target Fund to the Acquiring Fund of each such contract will not result in the termination of such contract, any breach or default thereunder by the Target Fund or the imposition of any penalty thereunder.

(h) No litigation or administrative proceeding or investigation of or before any court or governmental body is pending or, to the Trust’s knowledge, threatened against the Trust, with respect to the Target Fund or any of its properties or assets, that, if adversely determined, would materially and adversely affect its financial condition or the conduct of the Target Fund’s business. The Trust, on behalf of the Target Fund, is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Target Fund’s business or the Trust’s ability to consummate the transactions herein contemplated on behalf of the Target Fund.

(i) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments of the Target Fund as of the last day of and for the most recently completed fiscal year of the Target Fund prior to the date of this Agreement have been audited by KPMG LLP, an independent registered public accounting firm, and are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) consistently applied, and such statements (true and correct copies of which have been furnished to the Acquiring Fund) present fairly, in all material respects, the financial condition of the Target Fund as of such date and for such period in accordance with GAAP, and there are no known contingent, accrued or other liabilities of the Target Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date that are not disclosed therein. The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments (unaudited) of the Target Fund as at the last day of and for the most recently completed fiscal half year of the Target Fund following the date of the audited annual statements referenced above are in accordance with GAAP consistently applied, and such statements (true and correct copies of which have been furnished to the Acquiring Fund) present fairly, in all material respects, the financial condition of the Target Fund, and all known contingent, accrued or other liabilities of the Target Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date are disclosed therein.

(j) Since the last day of the most recently completed fiscal year of the Target Fund prior to the date of this Agreement, there has not been any material adverse change in the Target Fund’s financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Target Fund of indebtedness for money borrowed maturing more than one year from the date such indebtedness was incurred. For the purposes of this subparagraph (j), a decline in net asset value per share of Target Fund Shares due to declines in market values of securities held by the Target Fund, the discharge of Target Fund liabilities, or the redemption of Target Fund Shares by shareholders of the Target Fund shall not constitute a material adverse change.

(k) On the Closing Date, all federal and other tax returns, dividend reporting forms and other tax-related reports of the Target Fund required by law to have been filed by such date (taking into account any extensions) shall have been filed and shall be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and, to the best of the Trust’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns.

(l) The Target Fund is a separate series of the Trust and is treated as a corporation separate from any and all other series of the Trust under Section 851(g) of the Code. For each taxable year of its operation (including the taxable year ending on the Closing Date), the Target Fund has met (or will meet) the requirements of Subchapter M of Chapter 1 of the Code for qualification and treatment as a “regulated investment company,” has had in effect an election to be treated as such, has been (or will be) eligible to compute and has computed (or will compute) its federal income tax under Section 852 of the Code, and, on or before the Closing Date, will have distributed substantially all of (a) the sum of (i) its net tax-exempt income, (ii) its investment company taxable income (as defined in the Code) (computed without regard to any deduction for dividends paid) and (iii) its realized net capital gain (as defined in the Code) (after deduction of any available capital loss carryover), if any, and (b) any other amounts as necessary, in each case for all tax periods ending on or before the Closing Date (and treating the current taxable year as ending on the Closing Date), such that the Target Fund will have no tax liability under Section 852 or Section 4982 of the Code for the current and any prior tax periods. The Target Fund has no earnings and profits accumulated with respect to any taxable year in which the provisions of Subchapter M of the Code did not apply.

 

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(m) All issued and outstanding Target Fund Shares are, and on the Closing Date will be, duly authorized and validly and legally issued and outstanding, fully paid and non-assessable by the Trust and have been offered and sold in any state, territory or the District of Columbia in compliance in all material respects with applicable registration requirements of all applicable federal and state securities laws. All of the issued and outstanding Target Fund Shares will, at the time of Closing, be held by the persons and in the amounts set forth in the records of the Transfer Agent, on behalf of the Target Fund, as provided in paragraph 3.3. The Target Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the Target Fund Shares, nor is there outstanding any security convertible into any of the Target Fund Shares.

(n) The Target Fund will review its assets to ensure that prior to the Closing Date its assets do not include any assets that the Acquiring Fund is not permitted, or reasonably believes to be unsuitable for it, to acquire, including without limitation any security that, prior to its acquisition by the Target Fund, is unsuitable for the Acquiring Fund to acquire.

(o) The execution, delivery and performance of this Agreement, and the transactions contemplated herein, have been duly authorized by all necessary action on the part of the Board, on behalf of the Target Fund, and this Agreement constitutes a valid and binding obligation of the Trust, on behalf of the Target Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

(p) The combined information statement and prospectus (“Information Statement”) to be included in the Registration Statement (as defined in paragraph 5.5), insofar as it relates to the Target Fund, from the effective date of the Registration Statement through the Closing Date, will (i) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading (provided that this representation and warranty shall not apply to statements in or omissions from the Information Statement made in reliance upon and in conformity with information that was furnished by the Trust for use therein) and (ii) comply in all material respects with the provisions of the 1933 Act and the 1940 Act and the rules and regulations thereunder. The information to be furnished by the Target Fund for use in registration statements and other documents filed or to be filed with any federal, state or local regulatory authority, as may be prepared in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations thereunder applicable thereto.

(q) The Trust, on behalf of the Target Fund, has satisfied all applicable provisions of Rule 17a-8 under the 1940 Act with respect to the transactions contemplated hereby.

4.2 Except as has been fully disclosed in Schedule 4.2 to this Agreement, the Trust, on behalf of the Acquiring Fund, represents and warrants to the Target Fund as follows:

(a) The Acquiring Fund is duly established as a series of the Trust, which is a statutory trust duly organized, validly existing and in good standing under the laws of the State of Maryland, with the power under its Charter to own all of its assets and to carry on its business as it is being conducted as of the date hereof. The Trust is duly qualified to do business as a foreign trust in each jurisdiction in which the conduct of its business makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), business, properties, net assets or results of operations of the Trust. The Trust has all necessary federal, state and local authorizations to carry on its business as now being conducted and to fulfill the terms of this Agreement except as described in paragraph 4.2(c).

(b) The Trust is a registered open-end management investment company, and its registration with the Commission as an investment company under the 1940 Act, and the registration of each class of Acquiring Fund Shares under the 1933 Act, is in full force and effect or will be in full force and effect as of the Closing Date.

(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated herein, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, state securities laws and the Hart-Scott-Rodino Act.

 

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(d) The current prospectus and statement of additional information of the Acquiring Fund (true and correct copies of which have been delivered to the Target Fund) and each prospectus and statement of additional information of the Acquiring Fund used during the three (3) years prior to the date of this Agreement conforms or conformed at the time of its use in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not or did not at the time of its use include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.

(e) The Acquiring Fund is not engaged currently, and the execution, delivery and performance of this Agreement by the Trust, on behalf of the Acquiring Fund, will not result, in a material violation of Maryland law or the Charter or the bylaws of the Trust, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust, on behalf of the Acquiring Fund, is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Trust, on behalf of the Acquiring Fund, will not result in the acceleration of any material obligation, or the imposition of any material penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Trust, on behalf of the Acquiring Fund, is a party or by which it is bound.

(f) No litigation or administrative proceeding or investigation of or before any court or governmental body is pending or, to the Trust’s knowledge, threatened against the Trust, with respect to the Acquiring Fund, or any of its properties or assets, that, if adversely determined, would materially and adversely affect its financial condition or the conduct of the Acquiring Fund’s business. The Trust, on behalf of the Acquiring Fund, is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquiring Fund’s business or the Trust’s ability to consummate the transactions herein contemplated on behalf of the Acquiring Fund.

(g) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments of the Acquiring Fund as of the last day of and for the most recently completed fiscal year of the Acquiring Fund prior to the date of this Agreement have been audited by KPMG LLP, an independent registered public accounting firm, and are in accordance with GAAP consistently applied, and such statements (true and correct copies of which have been furnished to the Target Fund) present fairly, in all material respects, the financial condition of the Acquiring Fund as of such date and for such period in accordance with GAAP, and there are no known contingent, accrued or other liabilities of the Acquiring Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date that are not disclosed therein. The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and Schedule of Investments (unaudited) of the Acquiring Fund as at the last day of and for the most recently completed fiscal half year of the Acquiring Fund following the date of the audited annual statements referenced above are in accordance with GAAP consistently applied, and such statements (true and correct copies of which have been furnished to the Target Fund) present fairly, in all material respects, the financial condition of the Acquiring Fund, and all known contingent, accrued or other liabilities of the Acquiring Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date are disclosed therein.

(h) Since the last day of the most recently completed fiscal year of the Acquiring Fund prior to the date of this Agreement, there has not been any material adverse change in the Acquiring Fund’s financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Acquiring Fund of indebtedness for money borrowed maturing more than one year from the date such indebtedness was incurred. For the purposes of this subparagraph (h), a decline in net asset value per share of Acquiring Fund Shares due to declines in market values of securities held by the Acquiring Fund, the discharge of Acquiring Fund liabilities, or the redemption of Acquiring Fund Shares by shareholders of the Acquiring Fund shall not constitute a material adverse change.

(i) On the Closing Date, all federal and other tax returns, dividend reporting forms and other tax-related reports of the Acquiring Fund required by law to have been filed by such date (taking into account any extensions) shall have been filed and shall be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and, to the best of the Trust’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns.

(j) The Acquiring Fund is a separate series of the Trust and is treated as a corporation separate from any and all other series of the Trust under Section 851(g) of the Code. For each taxable year of its operation (including the taxable year that

 

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includes the Closing Date), the Acquiring Fund has met (or will meet) the requirements of Subchapter M of Chapter 1 of the Code for qualification and treatment as a “regulated investment company,” has had in effect an election to be treated as such, and has been (or will be) eligible to compute and has computed (or will compute) its federal income tax under Section 852 of the Code, and will have distributed (or will distribute) substantially all of (i) its net tax-exempt income, (ii) its investment company taxable income (as defined in the Code) (computed without regard to any deduction for dividends paid) and (iii) any net capital gain (as defined in the Code) (after reduction for any capital loss carryover) for taxable years ending prior to the Closing Date such that for all those years the Acquiring Fund will have no tax liability under Section 852 or Section 4982 of the Code. The Acquiring Fund has no earnings and profits accumulated with respect to any taxable year in which the provisions of Subchapter M of the Code did not apply.

(k) All issued and outstanding Acquiring Fund Shares are, and on the Closing Date will be, duly authorized and validly and legally issued and outstanding, fully paid and non-assessable by the Trust and will have been offered and sold in any state, territory or the District of Columbia in compliance in all material respects with applicable registration requirements of all applicable federal and state securities laws. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any Acquiring Fund Shares, nor is there outstanding any security convertible into any Acquiring Fund Shares. All of the Acquiring Fund Shares to be issued and delivered to the Trust, for the account of the Target Fund Shareholders, pursuant to this Agreement, will on the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly and legally issued Acquiring Fund Shares and be fully paid and non-assessable by the Trust.

(l) The execution, delivery and performance of this Agreement, and the transactions contemplated herein, have been duly authorized by all necessary action on the part of the Board, on behalf of the Acquiring Fund, and this Agreement constitutes a valid and binding obligation of the Trust, on behalf of the Acquiring Fund, enforceable in accordance with its terms, subject, as to enforcement, bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles.

(m) The Information Statement to be included in the Registration Statement, insofar as it relates to the Acquiring Fund and the Acquiring Fund Shares, from the effective date of the Registration Statement through the Closing Date, will (i) not contain any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary to make the statements therein not false or misleading (provided that this representation and warranty shall not apply to statements in or omissions from the Information Statement made in reliance upon and in conformity with information that was furnished by the Trust for use therein) and (ii) comply in all material respects with the provisions of the 1933 Act and the 1940 Act and the rules and regulations thereunder. The information to be furnished by the Acquiring Fund for use in registration statements and other documents filed or to be filed with any federal, state or local regulatory authority, as may be prepared in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations applicable thereto.

(n) The Trust, on behalf of the Acquiring Fund, has satisfied all applicable provisions of Rule 17a-8 under the 1940 Act with respect to the transactions contemplated hereby.

 

  5. COVENANTS

The Trust, on behalf of the Target Fund and the Acquiring Fund hereby further covenants as follows:

5.1 The Target Fund and the Acquiring Fund each will operate its business in the ordinary course and shall comply in all material respects with all applicable laws, rules and regulations between the date hereof and the Closing Date, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and other distributions, and any other distribution that may be advisable.

5.2 The Acquiring Fund Shares to be acquired by the Target Fund hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms of this Agreement.

5.3 The Trust, on behalf of the Target Fund, will assist in obtaining such information as the Acquiring Fund reasonably requests concerning the beneficial ownership of the Target Fund Shares.

 

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5.4 Subject to the provisions of this Agreement, the Trust, on behalf of the Acquiring Fund and the Target Fund, will take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.

5.5 The Trust, on behalf of the Acquiring Fund, shall prepare and file a Registration Statement on Form N-14 in compliance with the 1933 Act and the 1940 Act and the rules and regulations thereunder with respect to the Reorganization (the “Registration Statement”). The Trust, on behalf of the Target Fund, will provide to the Acquiring Fund such information regarding the Target Fund as may be reasonably necessary for the preparation of the Registration Statement.

5.6 The Trust, on behalf of each of the Acquiring Fund and the Target Fund will use all reasonable efforts to fulfill or obtain the fulfillment of the conditions precedent to effect the transactions contemplated by this Agreement as promptly as practicable.

5.7 The Trust, on behalf of the Target Fund, will, from time to time, as and when reasonably requested by the Acquiring Fund, execute and deliver or cause to be executed and delivered all such assignments and other instruments and will take or cause to be taken such further action as the Trust, on behalf of the Acquiring Fund, may reasonably deem necessary or desirable in order to vest in and confirm (a) the Trust’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Trust’s title to and possession of all the Assets, and to otherwise carry out the intent and purpose of this Agreement.

5.8 The Trust, on behalf of the Acquiring Fund, will use all reasonable efforts to obtain such approvals and authorizations required by the 1933 Act, the 1940 Act and such of the state blue sky or securities laws as may be necessary in order to continue its operations after the Closing Date.

5.9 The Trust shall not change the Charter, or the Acquiring Fund’s prospectus or statement of additional information so as to restrict permitted investments for the Acquiring Fund, except as required by the Commission prior to the Closing.

5.10 The Target Fund and the Acquiring Fund will each report the Reorganization as a reorganization within the meaning of Section 368(a) of the Code on its federal income tax return for its respective taxable year in which the Reorganization occurs, including filing any and all statements required by Treas. Reg. § 1.368-3.

 

  6. CONDITIONS PRECEDENT TO OBLIGATIONS OF TRUST, ON BEHALF OF THE TARGET FUND

The obligations of the Trust, on behalf of the Target Fund, to consummate the transactions provided for herein shall be subject, at the Trust’s election, to the following conditions:

6.1 All representations and warranties of the Trust, on behalf of the Acquiring Fund, contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date, with the same force and effect as if made on and as of the Closing Date.

6.2 The Trust, on behalf of the Acquiring Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Trust, on behalf of the Acquiring Fund, on or before the Closing Date.

6.3 The Trust, on behalf of the Acquiring Fund, shall have executed and delivered an assumption of the Liabilities and all such other agreements and instruments as the Trust may reasonably deem necessary or desirable in order to vest in and confirm (a) the Target Fund’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Trust’s assumption of all of the Liabilities, and to otherwise carry out the intent and purpose of this Agreement.

6.4 The Trust, on behalf of the Acquiring Fund, shall have delivered to the Target Fund a certificate executed in the name of the Trust, on behalf of the Acquiring Fund, by the Trust’s President, Vice President or other duly authorized officer and its Treasurer, Assistant Treasurer or other duly authorized officer, in a form reasonably satisfactory to the Target Fund and dated as of the Closing Date, as to the matters set forth in paragraphs 6.1 and 6.2 and as to such other matters as the Target Fund shall reasonably request.

 

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6.5 The Trust, on behalf of each of the Acquiring Fund and the Target Fund, shall have agreed on the number of full and fractional Acquiring Fund Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1.

 

  7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TRUST, ON BEHALF OF THE ACQUIRING FUND

The obligations of the Trust, on behalf of the Acquiring Fund, to consummate the transactions provided for herein shall be subject, at the Trust’s election, to the following conditions:

7.1 All representations and warranties of the Trust, on behalf of the Target Fund, contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date, with the same force and effect as if made on and as of the Closing Date.

7.2 The Trust, on behalf of the Target Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Trust, on behalf of the Target Fund, on or before the Closing Date.

7.3 The Trust, on behalf of the Target Fund, shall have delivered to the Acquiring Fund a Statement of Assets and Liabilities of the Target Fund as of the Closing Date, including a schedule of investments, certified by the Treasurer or other duly authorized officer of the Trust on behalf of the Target Fund. The Trust, on behalf of the Target Fund, shall have executed and delivered all such assignments and other instruments of transfer as the Acquiring Fund may reasonably deem necessary or desirable in order to vest in and confirm (a) the Target Fund’s title to and possession of the Acquiring Fund Shares to be delivered hereunder and (b) the Acquiring Fund’s title to and possession of all the Assets and to otherwise carry out the intent and purpose of this Agreement.

7.4 The Trust, on behalf of the Target Fund, shall have delivered to the Acquiring Fund a certificate executed in the name of the Trust, on behalf of the Target Fund, by the Trust’s President, Vice President or other duly authorized officer and its Treasurer, Assistant Treasurer or other duly authorized officer, in a form reasonably satisfactory to the Acquiring Fund and dated as of the Closing Date, as to the matters set forth in paragraphs 7.1 and 7.2 and as to such other matters as the Acquiring Fund shall reasonably request.

7.5 The Trust, on behalf of each of the Target Fund and the Acquiring Fund, shall have agreed on the number of full and fractional Acquiring Fund Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1.

 

  8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST

If any of the conditions set forth below have not been satisfied on or before the Closing Date with respect to each of the Target Fund and the Acquiring Fund, the Trust shall be entitled, at its option, to refuse to consummate the transactions contemplated by this Agreement:

8.1 On the Closing Date, no court or governmental agency of competent jurisdiction shall have issued any order that remains in effect and that restrains or enjoins the Trust, with respect to the Target Fund or the Acquiring Fund, from completing the transactions contemplated by this Agreement.

8.2 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities deemed necessary by the Trust to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Target Fund.

8.3 The Registration Statement shall have become effective under the 1933 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending.

 

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8.4 The parties (other than LMPFA) shall have received the opinion of Morgan, Lewis & Bockius LLP, dated the Closing Date, substantially to the effect that, based upon certain facts, assumptions and representations and upon certifications made by the Trust, on behalf of each of the Target Fund and the Acquiring Fund, for federal income tax purposes: (i) the Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Target Fund and the Acquiring Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by the Acquiring Fund upon receipt of the Assets solely in exchange for the Acquiring Fund Shares and the assumption by the Trust, on behalf of the Acquiring Fund, of the Liabilities as part of the Reorganization; (iii) the tax basis in the hands of the Acquiring Fund of the Assets transferred to the Acquiring Fund in the Reorganization will be the same as the tax basis of such Assets in the hands of the Target Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Target Fund upon the transfer; (iv) the holding periods in the hands of the Acquiring Fund of the Assets transferred to the Acquiring Fund in the Reorganization, other than any Asset with respect to which gain or loss is required to be recognized in the Reorganization, will include the periods during which the respective Assets were held by the Target Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an Asset); (v) no gain or loss will be recognized by the Target Fund upon the transfer of the Assets to the Acquiring Fund in the Reorganization solely in exchange for the Acquiring Fund Shares and the assumption by the Trust, on behalf of the Acquiring Fund, of the Liabilities, or upon the distribution of the Acquiring Fund Shares by the Target Fund to its shareholders in complete liquidation, except for (A) any gain or loss that may be recognized with respect to contracts subject to Section 1256 of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain or loss that may be required to be recognized as a result of the closing of the Target Fund’s taxable year or upon the transfer of an Asset regardless of whether such transfer would otherwise be a nonrecognition transaction under the Code; (vi) no gain or loss will be recognized by the Target Fund Shareholders upon the exchange of their Target Fund Shares solely for the Acquiring Fund Shares as part of the Reorganization; (vii) the aggregate tax basis of the Acquiring Fund Shares that each Target Fund Shareholder receives in the Reorganization will be the same as the aggregate tax basis of his or her Target Fund Shares exchanged therefor; and (viii) a Target Fund Shareholder’s holding period for his or her Acquiring Fund Shares received in the Reorganization will include the period for which he or she held the Target Fund Shares exchanged therefor, provided that he or she held the Target Fund Shares as capital assets on the date of the exchange. The delivery of such opinion is conditioned upon the receipt by Morgan, Lewis & Bockius LLP of representations it shall request of the Trust.

8.5 The Assets will include no assets which the Acquiring Fund, by reason of limitations contained in the Charter or in investment restrictions in effect on the Closing Date, may not properly acquire.

 

  9. INDEMNIFICATION

9.1 The Trust, out of the Acquiring Fund’s assets and property (including any amounts paid to the Acquiring Fund pursuant to any applicable liability insurance policies or indemnification agreements), agrees to indemnify and hold harmless the members of the Board and the Trust’s officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Trust and those members of the Board and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Trust, on behalf of the Acquiring Fund, of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Trust or the members of the Board or the Trust’s officers prior to the Closing Date, provided that such indemnification by the Trust is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction.

9.2 The Trust, out of the Target Fund’s assets and property (including any amounts paid to the Target Fund pursuant to any applicable liability insurance policies or indemnification agreements), agrees to indemnify and hold harmless the members of the Board and the Trust’s officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Trust and those members of the Board and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Trust, on behalf of the Target Fund, of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect,

 

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misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Trust or the members of the Board or its officers prior to the Closing Date, provided that such indemnification by the Trust is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction.

 

  10. BROKER FEES AND EXPENSES

10.1 The Trust, on behalf of each of the Acquiring Fund and the Target Fund, represents and warrants that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein.

10.2 The costs and expenses incurred in connection with the Reorganization will be allocated to the Acquiring Fund and the Target Fund pro rata based on the aggregate net assets of each Fund. Notwithstanding any of the foregoing, expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by another person of such expenses would result in such party’s failure to qualify for tax treatment as a “regulated investment company” within the meaning of Section 851 of the Code or would prevent the Reorganization from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code.

 

  11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

11.1 The Trust agrees that it has not, on behalf of either the Acquiring Fund or the Target Fund, made any representation, warranty or covenant not set forth herein and that this Agreement constitutes the entire agreement between the parties.

11.2 The covenants to be performed after the Closing by the Trust, and the obligations of the Trust, on behalf of the Acquiring Fund and the Target Fund, in Article 9, shall survive the Closing. All other representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall not survive the consummation of the transactions contemplated hereunder and shall terminate on the Closing.

 

  12. TERMINATION

This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date without penalty to either Fund by resolution of the Board, if circumstances should develop that, in the opinion of the Board, make proceeding with the Agreement inadvisable with respect to the Acquiring Fund or the Target Fund. Any such termination resolution will be effective when communicated to the other party.

 

  13. AMENDMENTS

This Agreement may be amended, modified or supplemented in such manner as may be deemed necessary or advisable by the authorized officers of the Trust.

 

  14. NOTICES

Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by facsimile, electronic delivery (i.e., e-mail), personal service or prepaid or certified mail addressed to the Trust at its address set forth in the preamble to this Agreement, to the attention of its President.

 

  15. HEADINGS; COUNTERPARTS; GOVERNING LAW; SEVERABILITY; ASSIGNMENT; LIMITATION OF LIABILITY

15.1 The Article headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

15.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original.

15.3 This Agreement shall be governed by and construed and interpreted in accordance with the internal laws of the State of Maryland.

 

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15.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other parties. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.

15.5 Consistent with the Charter, the obligations of the Trust with respect to each of the Acquiring Fund and the Target Fund, entered into in the name or on behalf of the Trust by any of its Trustees, officers, employees or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, officers, employees, agents or shareholders of the Trust, personally, but bind only the assets of the Trust belonging to the Acquiring Fund and the Target Fund, and all persons dealing with any series or funds of the Trust must look solely to the assets of the Trust belonging to such series or fund for the enforcement of any claims against the Trust.

[Remainder of page intentionally left blank.]

 

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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officer.

 

LEGG MASON PARTNERS INSTITUTIONAL TRUST,

on behalf of its series WESTERN ASSET INSTITUTIONAL CASH RESERVES

By:    
Name:  
Title:   President and Principal Executive Officer

LEGG MASON PARTNERS INSTITUTIONAL TRUST,

on behalf of its series WESTERN ASSET INSTITUTIONAL LIQUID RESERVES

By:    
Name:  
Title:   President and Principal Executive Officer

 

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SCHEDULE 4.1

None.

 

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SCHEDULE 4.2

None.

 

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APPENDIX D

Historical Performance for Each Fund

Western Asset Institutional Cash Reserves

The accompanying bar chart and table provide some indication of the risks of investing in the Fund. The bar chart shows changes in the Fund’s performance from year to year for Institutional Shares. The table shows the average annual total returns of Institutional Shares. The Fund makes updated performance information available at www.leggmason.com/moneymarketfunds (select Fund and share class), or by calling the Fund at 1-800-625-4554.

The Fund’s past performance is not necessarily an indication of how the Fund will perform in the future.

Institutional Shares

 

LOGO

During the periods shown in the bar chart:

 

    Quarter Ended     Total Return  
Best quarter:     09/30/2007       1.32 %
Worst quarter:     12/31/2014       0.02 %

Average annual total returns (For the periods ended December 31, 2016) (%):

 

       1 year        5 years        10 years  

Institutional Shares

       0.49          0.19          1.01  

 

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Western Asset Institutional Liquid Reserves

The accompanying bar chart and table provide some indication of the risks of investing in the Fund. The bar chart shows changes in the Fund’s performance from year to year for Institutional Shares. The table shows the average annual total returns of Institutional Shares. The Fund makes updated performance information available at www.leggmason.com/moneymarketfunds (select Fund and share class), or by calling the Fund at 1-877-721-1926 or 1-203-703-6002.

The Fund’s past performance is not necessarily an indication of how the Fund will perform in the future.

Institutional Shares

 

LOGO

During the periods shown in the bar chart:

 

    Quarter Ended     Total Return  
Best quarter:     09/30/2007       1.33
Worst quarter:     03/31/2014       0.02

Average annual total returns (For the periods ended December 31, 2016) (%):

 

       1 year        5 years        10 years  

Institutional Shares

       0.55          0.21          1.04  

 

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APPENDIX E

5% Shareholders of the Target Fund and Acquiring Fund

To the knowledge of the Funds, as of April 30, 2017 the following persons owned beneficially or of record 5% or more of such Fund’s outstanding shares:

Western Asset Institutional Cash Reserves

 

Class

  

Name and Address of Shareholder

  

Percent Ownership

 

Institutional

  

HARE & CO 2

111 SANDERS CREEK PKWY

EAST SYRACUSE NY 13057-1382

     31.99

Institutional

  

MERRILL LYNCH, PIERCE FENNER &SMITH

200 N COLLEGE ST FL 3

CHARLOTTE NC 28202-2191

     16.18

Institutional

  

STATE STREET GLOBAL MARKETS LLC

FBO L-BRANDS

1 LINCOLN ST # SFC-6

ATTN FUND CONNECT

BOSTON MA 02111-2901

     7.64

Institutional

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

     7.36

Institutional

  

GERLACH (NOMINEE) AND CO LLC

FBO ITS CLIENTS

ATTN SABRINA HARTZOG

388 GREENWICH ST FL 25

NEW YORK NY 10013-2375

     5.74

Institutional

  

WELLS FARGO BANK ACCOUNT

FOR THE EXCLUSIVE BENEFIT OF ITS CUSTOMERS

ATTN MONEY FUNDS

MAIL CODE D1109-010

1525 W WT HARRIS BLVD

CHARLOTTE NC 28262-8522

     5.35

 

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Western Asset Institutional Liquid Reserves

 

Class

  

Name and Address of Shareholder

  

Percent Ownership

Institutional

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

       22.17 %

Institutional

  

JPMS PROCESSING 28521

JPMS IB 352

INDIVIOR INC.

4 METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

       12.50 %

Institutional

  

PAN AMERICAN SANITARY BUREAU

525 23RD ST NW

WASHINGTON DC 20037-2825

       10.25 %

Institutional

  

GOLDMAN SACHS GLOBAL CASH SERVICES

OMNIBUS ACCT

FBO GOLDMAN SACHS & CO CUST

71 S WACKER DR STE 500

CHICAGO IL 60606-4673

       7.28 %

Institutional

  

UNITED STATES TRUST CO OF NY AS

CUST FOR MASS MUTUAL LIFE INS CO

US TRUST CO OF NY

ATTN SECURITIES ADMINISTRATION E215

1295 STATE ST

SPRINGFIELD MA 01111-0001

       7.28 %

Investor

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

       100.00 %

On April 30, 2017, to the Trust’s knowledge, the following persons owned of record or beneficially 25% or more of the outstanding shares of Institutional Liquid Reserves as set forth below. Shareholders who beneficially own 25% or more of the voting securities of a fund or who are otherwise deemed to “control” a fund may be able to determine or significantly influence the outcome of matters submitted to a vote of the fund’s shareholders.

 

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

         26.22%    

 

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LEGG MASON PARTNERS INSTITUTIONAL TRUST

Western Asset Institutional Liquid Reserves

STATEMENT OF ADDITIONAL INFORMATION

June 19, 2017

 

Acquisition of the Assets and Liabilities of:

  

By and in Exchange for Shares of:

Western Asset Institutional Cash Reserves

Trading Symbol: CARXX

  

Western Asset Institutional Liquid Reserves

Trading Symbol: CILXX

620 Eighth Avenue

New York, New York 10018

1-877-721-1926

  

620 Eighth Avenue

New York, New York 10018

1-877-721-1926

This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the Information Statement/Prospectus dated June 19, 2017, relating specifically to the transfer of all of the assets and the assumption of all of the liabilities of Western Asset Institutional Cash Reserves (the “Target Fund”), a series of Legg Mason Partners Institutional Trust (the “Trust”), in exchange for the assumption of all of the Target Fund’s liabilities by, and for shares of, Western Asset Institutional Liquid Reserves (the “Acquiring Fund”), also a series of the Trust, having an aggregate value equal to those of the Target Fund. To obtain a copy of the Information Statement/Prospectus, please write to the Acquiring Fund at 100 First Stamford Place, Attn: Shareholders Services – 5th Floor, Stamford, Connecticut 06902 or call 1-800-625-4554. The transfer is to occur pursuant to an Agreement and Plan of Reorganization. Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the same meanings as are given to them in the Information Statement/Prospectus.

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1. General Information

     S-2  

2. Financial Statements and Other Incorporated Documents

     S-2  

2. Pro Forma Financial Information

     S-3  

 

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GENERAL INFORMATION

The Target Fund’s Board has unanimously approved the Reorganization. The Reorganization does not require shareholder approval. For further information about the Reorganization, see the Information Statement/Prospectus.

FINANCIAL STATEMENTS AND OTHER INCORPORATED DOCUMENTS

The Statement of Additional Information related to the Information Statement/Prospectus dated June 19, 2017, consists of this cover page, the accompanying pro forma financial statements and the following documents, each of which was filed electronically with the Securities and Exchange Commission and is incorporated by reference herein:

The Statement of Additional Information of the Target Fund:

 

Fund

  

Date and Filing Date

    

Accession Number

Western Asset Institutional Cash Reserves

   December 31, 2016/December 15, 2016      0001193125-16-794006

The Statement of Additional Information of the Acquiring Fund:

 

Fund

  

Date and Filing Date

    

Accession Number

Western Asset Institutional Liquid Reserves

   December 31, 2016/December 15, 2016      0001193125-16-794006

The financial statements of the Target Fund and related independent registered public accounting firm’s report as included in the Fund’s Annual Report filed for the year ended August 31, 2016:

 

Fund

  

Year Ended/Filing Date

    

Accession Number

Western Asset Institutional Cash Reserves

   August 31, 2016/October 25, 2016      0001193125-16-746030

The financial statements of the Acquiring Fund and related independent registered public accounting firm’s report as included in the Fund’s Annual Report filed for the year ended August 31, 2016:

 

Fund

  

Year Ended/Filing Date

    

Accession Number

Western Asset Institutional Liquid Reserves

   August 31, 2016/October 25, 2016      0001193125-16-746024

The financial statements of the Target Fund as included in the Fund’s Semi-Annual Report filed for the period ended February 28, 2017:

 

Fund

  

Period Ended/Filing Date

    

Accession Number

Western Asset Institutional Cash Reserves

   February 28, 2017/April 25, 2017      0001193125-17-134972

The financial statements of the Acquiring Fund as included in the Fund’s Semi-Annual Report filed for the period ended February 28, 2017:

 

Fund

  

Period Ended/Filing Date

    

Accession Number

Western Asset Institutional Liquid Reserves

   February 28, 2017/April 25, 2017      0001193125-17-134922

 

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PRO FORMA FINANCIAL STATEMENTS

The unaudited pro forma information provided herein should be read in conjunction with the annual and semi-annual reports to shareholders, for the periods ended August 31, 2016 and February 28, 2017, respectively, for Western Asset Institutional Cash Reserves (the “Target Fund”) and Western Asset Institutional Liquid Reserves (the “Acquiring Fund”).

At a meeting held on May 8 and 9, 2017, the Board of Legg Mason Partners Institutional Trust (the “Trust”) approved an Agreement and Plan of Reorganization (the “Reorganization”) whereby the Acquiring Fund will acquire all the assets of, and assume of all of the liabilities of, the Target Fund and the Target Fund will receive shares of the Acquiring Fund, to be distributed to the shareholders of the Target Fund in redemption of all of the outstanding shares of the Target Fund, and thereafter terminate as a series of the Trust.

The unaudited pro forma information set forth below for the period ended March 31, 2017 is intended to present ratios and supplemental data as if the acquisition of the Target Fund by the Acquiring Fund had been consummated at April 1, 2016.

Legg Mason Partners Fund Advisor, LLC (the “manager”) is the investment manager of each of the Target Fund and the Acquiring Fund. Western Asset Management Company (“Western Asset”) is an investment subadviser of each of the Target Fund and the Acquiring Fund pursuant to separate contracts between Western Asset and the manager with respect to each fund.

The Target Fund and Acquiring Fund have the same distributor, transfer agent and custodian as one another. Each of these service providers has entered into an agreement with the Target Fund and the Acquiring Fund, which governs the provisions of services to such funds. Such agreements have the same terms with respect to each fund.

As of March 31, 2017, the net assets of: (i) the Target Fund were approximately $1,295,683,977 and (ii) the Acquiring Fund were approximately $941,056,096. The net assets of the combined fund as of March 31, 2017 would have been approximately $2,236,740,073.

On a pro forma basis for the twelve-month period ended March 31, 2017, the proposed reorganization would have resulted in the following approximate decreases to expenses charged:

 

Registration fees

   $ 135,664  

Audit and tax

   $ 29,866  

Legal fees

   $ 148,105  

Custody fees

   $  

Other expenses

   $ 190,397  

The Acquiring Fund will be the surviving fund for accounting purposes.

No significant accounting policies (including valuation of portfolio securities) will change as a result of the proposed reorganization. Based on the Funds’ current holdings, it is anticipated that no holdings will be sold in connection with the Reorganization.

The Reorganization is expected to be accounted for as a tax-free reorganization of investment companies. In a tax-free reorganization:

 

  1. No gain or loss is recognized by the Target Fund upon the transfer of its assets to the Acquiring Fund in exchange for shares of the Acquiring Fund and the assumption by the Acquiring Fund of all of the liabilities of the Target Fund, or upon the distribution of the shares of the Acquiring Fund by the Target Fund to its shareholders in termination of the Target Fund.

 

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  2. No gain or loss is recognized by the Target Fund shareholders upon the exchange of their shares of the Target Fund solely for shares of the Acquiring Fund pursuant to the Reorganization.

 

  3. The historical cost of investment securities generally is carried forward to the Acquiring Fund.

The results of operations of the Acquiring Fund for pre-combination periods will not be restated.

At August 31, 2016, the Target Fund had no capital loss carryover. At August 31, 2016, the Acquiring Fund had a capital loss carryover of $(2,624,485), all of which expires on August 31, 2017.

The Reorganization would impact the use of the Acquiring Fund’s capital loss carryover by benefiting the shareholders of the combined Fund, rather than only the shareholders of the Acquiring Fund.

The capital loss carryover described above may change significantly between now and the Closing Date, expected to be approximately August 18, 2017. Further, the ability of the Acquiring Fund to use loss carryovers (even in the absence of the Reorganization) depends on many factors, including the future realization of capital gains or losses. The combination of these factors on the use of loss carryovers may result in some or all of the loss carryover of the Acquiring Fund expiring unused.

The costs and expenses of the Reorganization, which are estimated in aggregate to be approximately $155,000, will be allocated to the Acquiring Fund and the Target Fund pro rata based on the aggregate net assets of each Fund, whether or not the Reorganization is consummated.

The following are significant accounting policies consistently followed by the Funds and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Trustees.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also

 

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consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Trustees quarterly.

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

   

Level 1  —  quoted prices in active markets for identical investments

 

   

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

   

Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of associated with investing in those securities.

(b) Federal and other taxes. It is the Funds’ policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Funds intend to distribute their taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Funds’ financial statements.

Management has analyzed the Funds’ tax positions taken on income tax returns for all open tax years and has concluded that no provision for income tax is required in the Funds’ financial statements. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Dividends paid by the Funds from net interest received on tax-exempt money market instruments are not includable by shareholders as gross income for federal income tax purposes because the Funds intend to meet certain requirements of the Internal Revenue Code applicable to regulated investment companies, including Subchapter M, which will enable the Funds to pay exempt-interest dividends. The portion of such interest, if any, earned on private activity bonds issued after August 7, 1986, may be considered a tax preference item to shareholders.

 

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PART C:

OTHER INFORMATION

Item 15. Indemnification

Provisions relating to indemnification of the Registrant’s Trustees and employees are included in Article IX of the Registrant’s Declaration of Trust, which is incorporated herein by reference.

Reference is hereby made to paragraph 10 of the Distribution Agreement between the Registrant and Legg Mason Investor Services, LLC (“LMIS”).

The Trustees and officers of the Registrant and the personnel of the Registrant’s manager are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940, as amended.

Item 16. Exhibits

Unless otherwise noted, all referenced are to the Registrant’s Registration Statement on Form N-1A (the “Registration Statement”) as filed with the Securities and Exchange Commission (the “SEC”) (File Nos. 33-49552 and 811-6740).

 

(1)   (a)   The Registrant’s Declaration of Trust dated as of October 2, 2006, as amended and restated as of November 8, 2016 (the “Declaration of Trust”) is incorporated herein by reference to Post-Effective Amendment No. 123 to the Registrant’s Registration Statement on Form N-1A as filed with the Securities and Exchange Commission (the “SEC”) on December 15, 2016 (“Post-Effective Amendment No. 123”).
(2)   The Registrant’s Bylaws as amended and restated as of August 18, 2011 are incorporated herein by reference to Post-Effective Amendment No. 69 to the Registrant’s Registration Statement on Form N-1A as filed with the Securities and Exchange Commission (the “SEC”) on September 21, 2011 (“Post-Effective Amendment No. 69”).
(3)   Not Applicable.
(4)   Form of Agreement and Plan of Reorganization is included in Part A to the Registration Statement on Form N-14.
(5)   Not Applicable.
(6)   (a)   Management Agreement between the Registrant, on behalf of Western Asset Institutional Liquid Reserves (formerly, Western Asset / Citi Institutional Liquid Reserves and before that, Citi Institutional Liquid Reserves), and LMPFA dated April 13, 2007 and amended August 29, 2016 is incorporated herein by reference to Post-Effective Amendment No. 115 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on September 19, 2016 (“Post-Effective Amendment No. 115”).
  (b)   Subadvisory Agreement between LMPFA and WAM, with respect to Western Asset Institutional Liquid Reserves (formerly, Western Asset / Citi Institutional Liquid Reserves and before that, Citi Institutional Cash Reserves), dated April 13, 2007 is incorporated herein by reference to Post-Effective Amendment No. 43.
(7)     Distribution Agreement between the Registrant and LMIS, on behalf of Western Asset Institutional Liquid Reserves, dated August 10, 2010, as amended as of November 5, 2012, is incorporated herein by reference to Post-Effective Amendment No. 81 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on December 13, 2012 (“Post-Effective Amendment No. 81”).
(8)   (a)   Retirement Plan of the Registrant is incorporated herein by reference to Post-Effective Amendment No. 30 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on October 31, 2005 (“Post-Effective Amendment No. 30”).
  (b)   Form of Amendment to the Amended and Restated Trustee Retirement Plan is incorporated herein by reference to Post-Effective Amendment No. 36 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on December 28, 2006 (“Post-Effective Amendment No. 36”).


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(9)   (a)   Custodian Services Agreement with State Street Bank and Trust Company (“State Street”) as custodian dated October 5, 2012 is incorporated herein by reference to Post-Effective Amendment No. 79 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on November 20, 2012 (“Post-Effective Amendment No. 79”).
  (b)   Fund Accounting Services Agreement with State Street dated October 5, 2012 is incorporated herein by reference to Post-Effective Amendment No. 79.
(10)   N/A  
(11)   Opinion and Consent of Venable LLP as to the legality of the securities is filed herewith.
(12)   Form of Opinion of Morgan, Lewis & Bockius LLP supporting the tax matters and consequences to shareholders discussed in the Prospectus/Information Statement is filed herewith.
(13)   Not Applicable.
(14)   Consent of Independent Registered Public Accounting Firm is filed herewith.
(15)   Not Applicable.
(16)   Powers of Attorney are filed herewith.
(17)   (a)   Prospectus of Institutional Shares of Western Asset Institutional Cash Reserves and Western Asset Institutional Liquid Reserves dated December 28, 2016 is filed herewith.
  (b)   SAI of Institutional Shares of Western Asset Institutional Cash Reserves and Western Asset Institutional Liquid Reserves dated December 28, 2016 is filed herewith.
  (c)   Audited Financial Statements of the Annual Report of Western Asset Institutional Cash Reserves for the fiscal year ended August 31, 2016 is filed herewith.
  (d)   Audited Financial Statements of the Annual Report of Western Asset Institutional Liquid Reserves for the fiscal year ended August 31, 2016 is filed herewith.
  (e)   Unaudited Financial Statements of the Semi-Annual Report of Western Asset Institutional Cash Reserves for the fiscal period ended February 28, 2017 is filed herewith.
  (f)   Unaudited Financial Statements of the Semi-Annual Report of Western Liquid Reserves for the fiscal period ended February 28, 2017 is filed herewith.
  (g)   Transfer Agency and Services Agreement with Boston Financial Data Services, Inc. (“BFDS”), dated as of September 1, 2014 is incorporated herein by reference to Post-Effective Amendment No. 95 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on November 19, 2014 (“Post-Effective Amendment No. 95”).
  (h)   Amendment to Transfer Agency and Services Agreement with BFDS, dated August 4, 2016, is incorporated herein incorporated herein by reference to Post-Effective Amendment No. 115 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on September 19, 2016 (“Post-Effective Amendment No. 115”).
  (i)   Schedule A to Transfer Agency and Services Agreement with BFDS, is incorporated herein by reference to Post-Effective Amendment No. 95.
  (j)   Service Mark Licensing Agreement between Citigroup, Inc. and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 31 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on December 30, 2005 (“Post-Effective Amendment No. 31”).
  (k)   Code of Ethics of Legg Mason & Co., LLC dated as of March 10, 2011 (adopted by LMPFA and LMIS) is incorporated herein by reference to Post-Effective Amendment No. 71 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on December 13, 2011 (“Post-Effective Amendment No. 71”).
  (l)   Code of Ethics of WAM dated November 1, 2013 is incorporated herein by reference to Pre-Effective Amendment No. 99 to the Registrant’s Registration Statement on Form N-1A as filed with the SEC on February 20, 2014 (“Pre-Effective Amendment No. 99”).

Item 17. Undertakings

(1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.


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(2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.

(3) The Registrant hereby undertakes to file, by post-effective amendment, the final opinion of Morgan, Lewis & Bockius LLP supporting the tax consequences of the proposed reorganization as soon as practicable after the closing of the reorganization.


Table of Contents

SIGNATURES

As required by the Securities Act of 1933, this registration statement has been signed on behalf of the registrant, in the City of New York, State of New York on this 17th day of May, 2017.

LEGG MASON PARTNERS INSTITUTIONAL TRUST, on behalf of its series:

Western Asset Institutional Liquid Reserves

 

By:  

/s/ Jane E. Trust

  Jane E. Trust
  President and Chief Executive Officer

As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

SIGNATURE

  

TITLE

 

DATE

/s/ Jane E. Trust

   President, Chief Executive Officer and Trustee   May 17, 2017
Jane E. Trust     

/s/ Richard F. Sennett

   Principal Financial Officer   May 17, 2017
Richard F. Sennett     

/s/ Elliott J. Berv*

   Trustee   May 17, 2017
Elliott J. Berv     

/s/ Jane F. Dasher*

   Trustee   May 17, 2017
Jane F. Dasher     

/s/ Mark T. Finn*

   Trustee   May 17, 2017
Mark T. Finn     

/s/ Stephen R. Gross*

   Trustee   May 17, 2017
Stephen R. Gross     

/s/ Richard E. Hanson, Jr.*

   Trustee   May 17, 2017
Richard E. Hanson, Jr.     

/s/ Diana R. Harrington*

   Trustee   May 17, 2017
Diana R. Harrington     

/s/ Susan M. Heilbron*

   Trustee   May 17, 2017
Susan M. Heilbron     

/s/ Susan B. Kerley*

   Trustee   May 17, 2017
Susan B. Kerley     

/s/ Alan G. Merten*

   Trustee   May 17, 2017
Alan G. Merten     


Table of Contents

/s/ R. Richardson Pettit*

   Trustee   May 17, 2017
R. Richardson Pettit     

 

*By:  

/s/ Jane E. Trust

  Jane E. Trust

 

 

* Attorney-in-Fact, pursuant to Power of Attorney.


Table of Contents

SIGNATURES

Master Portfolio Trust has duly caused this Registration Statement on Form N-14 of Legg Mason Partners Institutional Trust to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on this 17th day of May, 2017.

MASTER PORTFOLIO TRUST, on behalf of its series:

Liquid Reserves Portfolio

 

By:

 

/s/ Jane E. Trust

  Jane E. Trust
  President and Chief Executive Officer

As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

SIGNATURE

  

TITLE

  

DATE

/s/ Jane E. Trust

Jane E. Trust

   President, Chief Executive Officer and
Trustee
   May 17, 2017

/s/ Richard F. Sennett

Richard F. Sennett

   Principal Financial Officer    May 17, 2017

/s/ Elliott J. Berv*

Elliott J. Berv

   Trustee    May 17, 2017

/s/ Jane F. Dasher*

Jane F. Dasher

   Trustee    May 17, 2017

/s/ Mark T. Finn*

Mark T. Finn

   Trustee    May 17, 2015

/s/ Stephen R. Gross*

Stephen R. Gross

   Trustee    May 17, 2017

/s/ Richard E. Hanson, Jr.*

Richard E. Hanson, Jr.

   Trustee    May 17, 2017

/s/ Diana R. Harrington*

Diana R. Harrington

   Trustee    May 17, 2017

/s/ Susan M. Heilbron*

Susan M. Heilbron

   Trustee    May 17, 2017

/s/ Susan B. Kerley*

Susan B. Kerley

   Trustee    May 17, 2017

/s/ Alan G. Merten*

Alan G. Merten

   Trustee    May 17, 2017


Table of Contents

/s/ R. Richardson Pettit*

R. Richardson Pettit

   Trustee    May 17, 2017

 

*By:

 

/s/ Jane E. Trust

  Jane E. Trust

 

 

* Attorney-in-Fact, pursuant to Power of Attorney.


Table of Contents

EXHIBIT INDEX

 

EXHIBIT
NO.

 

EXHIBITS

(11)   Opinion and Consent of Venable LLP as to the legality of the securities
(12)   Form of Opinion of Morgan, Lewis & Bockius LLP supporting the tax matters and consequences to shareholders discussed in the Prospectus/Information Statement
(14)   Consent of Independent Registered Public Accounting Firm
(16)   Powers of Attorney
(17)(a)   Prospectus of Institutional Shares of Western Asset Institutional Cash Reserves and Western Asset Institutional Liquid Reserves dated December 28, 2016
(17)(b)   SAI of Western Asset Institutional Cash Reserves and Western Asset Institutional Liquid Reserves dated December 28, 2016
(17)(c)   Audited Financial Statements of the Annual Report of Western Asset Institutional Cash Reserves for the fiscal year ended August 31, 2016
(17)(d)   Audited Financial Statements of the Annual Report of Western Asset Institutional Liquid Reserves for the fiscal year ended August 31, 2016
(17)(e)   Unaudited Financial Statements of the Semi-Annual Report of Western Asset Institutional Cash Reserves for the fiscal period ended February 28, 2017
(17)(f)   Unaudited Financial Statements of the Semi-Annual Report of Western Asset Institutional Liquid Reserves for the fiscal period ended February 28, 2017
EX-99.(11) 2 d366715dex9911.htm OPINION AND CONSENT OF VENABLE LLP AS TO THE LEGALITY OF THE SECURITIES Opinion and Consent of Venable LLP as to the legality of the securities

Exhibit (11)

Venable LLP

Baltimore, MD

750 East Pratt Street

Suite 900

Baltimore, MD 21202

May 17, 2017

Legg Mason Partners Institutional Trust

620 Eighth Avenue

New York, New York 10018

 

  Re: Registration Statement on Form N-14

Ladies and Gentlemen:

We have served as Maryland counsel to Legg Mason Partners Institutional Trust, a Maryland statutory trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company (the “Trust”), in connection with the registration of shares (the “Shares”) of beneficial interest, par value $.00001 per share, classified and designated as Institutional Shares of Western Asset Institutional Liquid Reserves (the “Acquiring Fund”), a series of the Trust, to be issued pursuant to the Agreement and Plan of Reorganization (the “Plan”), by and among the Trust, on behalf of the Acquiring Fund and Western Asset Institutional Cash Reserves, a series of the Trust, covered by the above-referenced Registration Statement (the “Registration Statement”), filed by the Trust on or about the date hereof with the Securities and Exchange Commission (the “Commission”), under the Securities Act of 1933, as amended (the “1933 Act”).

In connection with our representation of the Trust, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the “Documents”):

1. The Registration Statement and the related form of prospectus included therein, substantially in the form transmitted to the Commission under the 1933 Act;

2. The Certificate of Trust of the Trust, as amended, certified by the State Department of Assessments and Taxation of Maryland (the “SDAT”);

3. The Amended and Restated Declaration of Trust of the Trust, certified as of the date hereof by an officer of the Trust;

4. The Amended and Restated Bylaws of the Trust, certified as of the date hereof by an officer of the Trust;


Legg Mason Partners Institutional Trust

May 17, 2017

Page 2

 

5. The form of the Plan, certified as of the date hereof by an officer of the Trust;

6. A certificate of the SDAT as to the good standing of the Trust, dated as of a recent date;

7. Resolutions adopted by the Board of Trustees of the Trust (the “Resolutions”) relating to the authorization of the registration, sale and issuance of the Shares and the approval of the Plan, certified as of the date hereof by an officer of the Trust;

8. A certificate executed by an officer of the Trust, dated as of the date hereof; and

9. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein.

In expressing the opinion set forth below, we have assumed the following:

1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so.

2. Each individual executing any of the Documents on behalf of a party (other than the Trust) is duly authorized to do so.

3. Each of the parties (other than the Trust) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party’s obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms.

4. All Documents submitted to us as originals are authentic. The form and content of all Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All representations, warranties, statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise.

 


Legg Mason Partners Institutional Trust

May 17, 2017

Page 3

 

5. The final Plan will not differ in any manner relevant to this opinion from the form of the Plan.

Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:

1. The Trust is a statutory trust duly formed and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT.

2. The issuance of the Shares has been duly authorized and, when and if issued and delivered against payment therefor in accordance with the Resolutions, the Plan and the Registration Statement, the Shares will be validly issued, fully paid and nonassessable.

The foregoing opinion is limited to the laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of federal or state securities laws, including the securities laws of the State of Maryland, or the 1940 Act. To the extent that any matter as to which our opinion is expressed herein would be governed by the laws of any jurisdiction other than the State of Maryland, we do not express any opinion on such matter.

The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof.

This opinion is being furnished to you for submission to the Commission as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act.

 

Very truly yours,
/s/ Venable LLP

 

EX-99.(12) 3 d366715dex9912.htm FORM OF OPINION OF MORGAN, LEWIS & BOCKIUS LLP Form of Opinion of Morgan, Lewis & Bockius LLP

Exhibit (12)

[            ] [    ], 2017

Legg Mason Partners Institutional Trust

100 International Drive

Baltimore, Maryland 21202

Ladies and Gentlemen:

This opinion is furnished to you pursuant to paragraph 8.4 of the Agreement and Plan of Reorganization (the “Agreement”), dated as of [            ] [    ], 2017, by and between Legg Mason Partners Institutional Trust, a Maryland statutory trust (the “Trust”), on behalf of Western Asset Institutional Liquid Reserves, a series thereof (the “Acquiring Fund”), and the Trust, on behalf of Western Asset Institutional Cash Reserves, another series thereof (the “Target Fund”). All capitalized terms not otherwise defined herein have the meanings ascribed to them in the Agreement. The Agreement contemplates the acquisition of all of the Assets of the Target Fund by the Acquiring Fund as of the time and date set forth in paragraph 3.1 of the Agreement in exchange solely for (a) the assumption by the Trust, on behalf of the Acquiring Fund, of the Liabilities of the Target Fund and (b) delivery by the Trust, on behalf of the Acquiring Fund, to the Target Fund, for distribution, in accordance with paragraph 1.5 of the Agreement, to the Target Fund Shareholders pro rata in complete redemption of the Target Fund Shares and in complete liquidation of the Target Fund, of the number of full and fractional Institutional Shares of the Acquiring Fund determined by dividing the value of the Target Fund’s net assets (computed in the manner and as of the time and date set forth in paragraph 2.1 of the Agreement) by the net asset value of one Institutional Share of the Acquiring Fund (computed in the manner and as of the time and date set forth in paragraph 2.2 of the Agreement) (the “Transaction”).

In connection with this opinion we have examined and relied upon the originals or copies, certified or otherwise identified to us to our satisfaction, of the Agreement, the Information Statement for the Target Fund and Prospectus for the Acquiring Fund, dated [            ] [    ], 2017, and related documents (collectively, the “Transaction Documents”). In that examination, we have assumed the genuineness of all signatures, the capacity and authority of each party executing a document to so execute the document, the authenticity and completeness of all documents purporting to be originals (whether reviewed by us in original or copy form) and the conformity to the originals of all documents purporting to be copies (including electronic copies). We have also assumed that each agreement and other instrument reviewed by us is valid and binding on the party or parties thereto and is enforceable in accordance with its terms, and that there are no contracts, agreements, arrangements, or understandings, either written or oral, that are inconsistent with or that would materially alter the terms of the Agreement or the other Transaction Documents.

As to certain factual matters, we have relied with your consent upon, and our opinion is limited by, the representations of the various parties set forth in the Transaction Documents and in certificates of the Trust, on behalf of the Acquiring Fund, and the Trust, on behalf of the Target Fund, each dated as of the date hereof (the “Certificates”). Our opinion assumes (i) that all representations set forth in the Transaction Documents and in the Certificates will be true and correct in all material respects as of the date of the


Legg Mason Partners Institutional Trust

[            ] [    ], 2017

Page Two

Transaction (and that any such representations made “to the best knowledge of,” “to the knowledge of,” “in the belief of,” or otherwise similarly qualified, are true and correct in all material respects without any such qualification), and (ii) that the Agreement is implemented in accordance with its terms and consistent with the representations set forth in the Transaction Documents and Certificates. Our opinion is limited solely to the provisions of the Internal Revenue Code of 1986, as amended and as presently in effect (the “Code”), existing case law, existing permanent and temporary treasury regulations promulgated under the Code, and existing published revenue rulings and procedures of the Internal Revenue Service that are in effect as of the date hereof, all of which are subject to change and new interpretation, both prospectively and retroactively. We assume no obligation to update our opinion to reflect other facts or any changes in law or in the interpretation thereof that may hereafter occur.

On the basis of and subject to the foregoing, we are of the opinion that, for United States federal income tax purposes:

 

  1. The Transaction will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and the Target Fund and the Acquiring Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code.

 

  2. No gain or loss will be recognized by the Acquiring Fund upon receipt of the Assets solely in exchange for the Acquiring Fund Shares and the assumption by the Trust, on behalf of the Acquiring Fund, of the Liabilities as part of the Transaction.

 

  3. The tax basis in the hands of the Acquiring Fund of the Assets transferred to the Acquiring Fund in the Transaction will be the same as the tax basis of such Assets in the hands of the Target Fund immediately prior to the transfer, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by the Target Fund upon the transfer.

 

  4. The holding periods in the hands of the Acquiring Fund of the Assets transferred to the Acquiring Fund in the Transaction, other than any Asset with respect to which gain or loss is required to be recognized in the Transaction, will include the periods during which the respective Assets were held by the Target Fund (except where investment activities of the Acquiring Fund have the effect of reducing or eliminating the holding period with respect to an Asset).

 

  5.

No gain or loss will be recognized by the Target Fund upon the transfer of the Assets to the Acquiring Fund in the Transaction solely in exchange for the Acquiring Fund Shares and the assumption by the Trust, on behalf of the Acquiring Fund, of the Liabilities, or upon the distribution of the Acquiring Fund Shares by the Target Fund to its shareholders in


Legg Mason Partners Institutional Trust

[            ] [    ], 2017

Page Three

 

  complete liquidation, except for (A) any gain or loss that may be recognized with respect to contracts subject to Section 1256 of the Code, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code and (C) any other gain or loss that may be required to be recognized as a result of the closing of the Target Fund’s taxable year or upon the transfer of an Asset regardless of whether such transfer would otherwise be a nonrecognition transaction under the Code.

 

  6. No gain or loss will be recognized by the Target Fund Shareholders upon the exchange of their Target Fund Shares solely for the Acquiring Fund Shares as part of the Transaction.

 

  7. The aggregate tax basis of the Acquiring Fund Shares that each Target Fund Shareholder receives in the Transaction will be the same as the aggregate tax basis of its Target Fund Shares exchanged therefor.

 

  8. A Target Fund Shareholder’s holding period for its Acquiring Fund Shares received in the Transaction will include the period for which it held the Target Fund Shares exchanged therefor, provided that it held the Target Fund Shares as capital assets on the date of the exchange.

This opinion is being delivered solely to you for your use in connection with the Transaction, and may not be relied upon by any other person or used for any other purpose.

Very truly yours,

MORGAN, LEWIS & BOCKIUS LLP

EX-99.(14) 4 d366715dex9914.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm

Exhibit (14)

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Western Asset Institutional Cash Reserves:

We consent to the use of our report dated October 20, 2016, with respect to the financial statements of Western Asset Institutional Cash Reserves as of August 31, 2016, incorporated herein by reference.

/s/ KPMG LLP

New York, New York

May 17, 2017


Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Western Asset Institutional Liquid Reserves:

We consent to the use of our report dated October 20, 2016, with respect to the financial statements of Western Asset Institutional Liquid Reserves as of August 31, 2016, incorporated herein by reference and to the reference to our firm under the heading “Financial Highlights” in the Information Statement/Prospectus on Form N-14.

/s/ KPMG LLP

New York, New York

May 17, 2017

EX-99.(16) 5 d366715dex9916.htm POWERS OF ATTORNEY Powers of Attorney

Exhibit (16)

POWER OF ATTORNEY

Each person whose signature appears below, as Trustee of each of Legg Mason Partners Institutional Trust (the “Institutional Trust”) and Master Portfolio Trust, hereby constitutes and appoints Jane E. Trust, Richard F. Sennett, Robert I. Frenkel, Thomas C. Mandia, Rosemary Emmens, Barbara Allen, Susan Lively, Robert M. Nelson and Angela Velez, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power and authority of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys-in-fact and agents, or any of them, may deem necessary or advisable or which may be required to enable the Institutional Trust to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (collectively, the “Acts”), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of the Institutional Trust’s Registration Statement on Form N-14 (the “Registration Statement”), with respect to Western Asset Institutional Liquid Reserves, a series of Institutional Trust, and any and all amendments (including post-effective amendments) to the Registration Statement, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a Trustee of Institutional Trust and/or Master Portfolio Trust, any and all such amendments to the Registration Statement filed with the Securities and Exchange Commission under said Acts, and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said attorneys-in-fact and agents, or any of them, shall do or cause to be done by virtue hereof.

All past acts of such attorneys-in-fact and agents in furtherance of the foregoing are hereby ratified and confirmed.

This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument.

As to each of the undersigned, this Power of Attorney shall be valid from the date hereof until revoked by such individual.

WITNESS our hands on the date(s) set forth below.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Power of Attorney has been signed below by the following persons in the capacities and as of the dates indicated.

 

/s/ Elliott J. Berv

   Trustee    May 9, 2017
Elliott J. Berv      

/s/ Jane F. Dasher

   Trustee    May 9, 2017
Jane F. Dasher      

/s/ Mark T. Finn

   Trustee    May 9, 2017
Mark T. Finn      

/s/ Stephen R. Gross

   Trustee    May 9, 2017
Stephen R. Gross      

/s/ Richard E. Hanson, Jr.

   Trustee    May 9, 2017
Richard E. Hanson, Jr.      

/s/ Diana R. Harrington

   Trustee    May 9, 2017
Diana R. Harrington      

/s/ Susan M. Heilbron

   Trustee    May 9, 2017
Susan M. Heilbron      

/s/ Susan B. Kerley

   Trustee    May 9, 2017
Susan B. Kerley      

/s/ Alan G. Merten

   Trustee    May 9, 2017
Alan G. Merten      

/s/ R. Richardson Pettit

   Trustee    May 9, 2017
R. Richardson Pettit      
EX-99.(17)(A) 6 d366715dex9917a.htm PRO FOR WA INSTIT. CASH RESERVES & WA INSTIT. LIQUID RESERVES DATED 12/28/16 PRO for WA Instit. Cash Reserves & WA Instit. Liquid Reserves dated 12/28/16

Exhibit 17(a)

 

LOGO

 

Prospectus   LOGO   December 28, 2016

 

WESTERN ASSET INSTITUTIONAL LIQUID RESERVES

Share class (Symbol): Institutional Shares (CILXX)

WESTERN ASSET INSTITUTIONAL CASH RESERVES

Share class (Symbol): Institutional Shares (CARXX)

 

LOGO

 

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.

 

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE


Contents     

 

Western Asset Institutional Liquid Reserves      3  

Investment objective

     3  

Fees and expenses of the fund

     3  

Principal investment strategies

     4  

Principal risks

     4  

Performance

     6  

Management

     7  

Purchase and sale of fund shares

     7  

Tax information

     7  

Payments to broker/dealers and other financial intermediaries

     7  
Western Asset Institutional Cash Reserves      8  

Investment objective

     8  

Fees and expenses of the fund

     8  

Principal investment strategies

     8  

Principal risks

     9  

Performance

     11  

Management

     12  

Purchase and sale of fund shares

     12  

Tax information

     12  

Payments to broker/dealers and other financial intermediaries

     12  
More on the funds’ investment strategies, investments and risks      13  
More on fund management      21  
Buying shares      23  
Exchanging shares      25  
Redeeming shares      26  
Other things to know about transactions      28  
Dividends, other distributions and taxes      31  
Share price/Fund business days      33  
Financial highlights      34  

 

2    Western Asset Money Market Funds


Western Asset Institutional Liquid Reserves

Investment objective

The fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the fund.

 

Shareholder fees (%)     
(fees paid directly from your investment)     
Maximum sales charge (load) imposed on purchases    None
Maximum deferred sales charge (load)    None
  
Annual fund operating expenses1 (%)     
(expenses that you pay each year as a percentage of the value of your investment)     
Management fees2    0.19
Distribution and/or service (12b-1) fees    None
Other expenses    0.02
Total annual fund operating expenses    0.21
Fees waived and/or expenses reimbursed3    (0.01)
Total annual fund operating expenses after waiving fees and/or reimbursing expenses    0.20

 

1 

The fund is a feeder fund that invests in securities through an underlying mutual fund, Liquid Reserves Portfolio. The information in this table and in the Example below reflects the direct fees and expenses of the fund and its allocated share of fees and expenses of Liquid Reserves Portfolio. The gross expenses in the financial highlights do not reflect the reduction in the fund’s management fee by the amount paid by the fund for its allocable share of the management fee paid to Liquid Reserves Portfolio.

2 

Restated to reflect current fees.

3 

The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses) so that total annual operating expenses will not exceed 0.20% for Institutional Shares. These arrangements cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time. The manager is permitted to recapture amounts waived and/or reimbursed to the class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the limits described above. In no case will the manager recapture any amount that would result, on any particular business day of the fund, in the class’ total annual operating expenses exceeding the applicable limits described above or any other lower limit then in effect.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

 

 

You invest $10,000 in the fund for the time periods indicated

 

 

Your investment has a 5% return each year and the fund’s operating expenses remain the same

 

 

You reinvest all distributions and dividends without a sales charge

Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

Number of years you own your shares ($)
       1 year      3 years      5 years      10 years
Institutional Shares      20      65      116      265

The fund is a feeder fund that invests in securities through an underlying mutual fund, Liquid Reserves Portfolio, which has the same investment objective and strategies as the fund. This structure is sometimes known as a “master/feeder” structure.

 

Western Asset Institutional Liquid Reserves   3


Principal investment strategies

 

The fund is a money market fund that invests in high quality, U.S. dollar-denominated short-term debt securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality.

The fund may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments. These securities may pay interest at fixed, floating or adjustable rates, or may be issued at a discount. The fund may invest without limit in bank obligations, such as certificates of deposit, fixed time deposits and bankers’ acceptances. The fund generally limits its investments in foreign securities to U.S. dollar denominated obligations of issuers, including banks and foreign governments, located in the major industrialized countries, although with respect to bank obligations, the branches of the banks issuing the obligations may be located in The Bahamas or the Cayman Islands.

Under Rule 2a-7 of the Investment Company Act of 1940, as amended, the fund must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Where required by these rules, the fund’s subadviser or Board of Trustees (the “Board”) will decide whether a security should be held or sold in the event of credit downgrades or certain other events occurring after purchase.

The fund sells and redeems its shares at prices based on the current market value of the securities it holds. Therefore, the share price of the fund will fluctuate along with changes in the market-based value of fund assets. Because the share price of the fund fluctuates, it has what is called a “floating net asset value” or “floating NAV”.

Principal risks

You could lose money by investing in the fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

If one or more money market funds were to incur a sizeable loss or impose fees on redemptions or suspend redemptions, there could be significant redemptions from money market funds in general, potentially driving the market prices of money market instruments down and adversely affecting market liquidity.

The fund could underperform other short-term debt instruments or money market funds, or you could lose money, as a result of risks such as:

Market and interest rate risk. The market prices of the fund’s securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. When market prices fall, the value of your investment will go down. The value of your investment will generally go down when interest rates rise. A rise in rates tends to have a greater impact on the prices of longer term securities. Interest rates have been historically low, so the fund faces a heightened risk that interest rates may rise. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale, which could adversely affect the price and liquidity of fixed income securities and could also result in increased redemptions from the fund.

Market events risk. In the past several years financial markets, such as those in the United States, Europe, Asia and elsewhere, have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Events that have contributed to these market conditions include, but are not limited to, major cybersecurity events; measures to address U.S. federal and state budget deficits; downgrading of U.S. long-term sovereign debt; declines in oil and commodity prices; dramatic changes in currency exchange rates; and public sentiment.

The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, have taken steps to support financial markets, including by keeping interest rates at historically low levels. This and other government intervention may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The Federal Reserve has reduced its market support activities and recently has begun raising interest rates. Certain foreign governments and central banks are implementing or discussing so-called negative interest rates (e.g., charging depositors who keep their cash at a bank) to spur economic growth. Further Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments, could negatively affect financial markets generally, increase market volatility and reduce the value and liquidity of securities in which the fund invests.

 

4    Western Asset Institutional Liquid Reserves


Policy and legislative changes in the United States and in other countries are affecting many aspects of financial regulation, and may in some instances contribute to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.

Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the fund’s investments may be negatively affected.

Credit risk. An issuer or other obligor (such as a party providing insurance or other credit enhancement) of a security held by the fund or a counterparty to a financial contract with the fund may default or its credit may be downgraded, or the value of assets underlying a security may decline.

Yield risk. The amount of income received by the fund will go up or down depending on variations in short-term interest rates, and when interest rates are very low the fund’s expenses could absorb all or a significant portion of the fund’s income. If interest rates increase, the fund’s yield may not increase proportionately. For example, the fund’s manager may discontinue any temporary voluntary fee limitation or recoup amounts previously waived and/or reimbursed. In addition, the implementation of the new requirements recently adopted for money market funds may have a negative effect on the fund’s yield.

Structured securities risk. The payment and credit qualities of structured securities derive from their underlying assets, and they may behave in ways not anticipated by the fund, or they may not receive tax, accounting or regulatory treatment anticipated by the fund.

Risks associated with concentration in the banking industry. The fund may invest a significant portion of its assets in obligations that are issued or backed by U.S. and non-U.S. banks and thus will be more susceptible to negative events affecting banks and the financial services sector worldwide.

Foreign investments risk. The fund’s investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which the fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of the fund’s investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable or unsuccessful government actions, reduction of government or central bank support and political or financial instability. Lack of information may also affect the value of these securities.

Portfolio management risk. The value of your investment may decrease if the subadviser’s judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates is incorrect, or if there are imperfections, errors or limitations in the tools and data used by the subadviser. In addition, the fund’s investment strategies or policies may change from time to time. Those changes may not lead to the results intended by the subadviser and could have an adverse effect on the value or performance of the fund.

Liquidity risk. The fund may make investments that are illiquid or that become illiquid after purchase. The liquidity and value of investments can deteriorate rapidly, and they may become difficult or impossible to sell, particularly during times of market turmoil. Illiquid investments may also be difficult to value. Markets may become illiquid when, for instance, there are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make markets for certain securities. If the fund is forced to sell an illiquid investment to meet redemption requests or other cash needs, the fund may be forced to sell at a loss. In addition, if the fund’s liquidity falls below certain levels, the fund may impose a fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period.

Valuation risk. The sales price the fund could receive for any particular portfolio investment may differ from the fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive fewer or more shares or lower or higher redemption proceeds than they would have received if the fund had not fair-valued securities or had used a different valuation methodology. The fund’s ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.

Redemption risk. The fund may experience heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, which could cause the value of your investment to decline. In addition, the fund may impose a fee or suspend redemptions under certain conditions.

Cybersecurity risk. Cybersecurity incidents may allow an unauthorized party to gain access to fund assets, customer data (including private shareholder information), or proprietary information, or cause the fund, the manager, the subadviser and/or its service providers (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

These risks are discussed in more detail later in this Prospectus or in the statement of additional information (“SAI”).

 

Western Asset Institutional Liquid Reserves   5


Performance

 

The accompanying bar chart and table provide some indication of the risks of investing in the fund. The bar chart shows changes in the fund’s performance from year to year for Institutional Shares. The table shows the average annual total returns of Institutional Shares. Performance for classes other than those shown may vary from the performance shown to the extent the expenses for those classes differ. The fund makes updated performance information available at www.leggmason.com/moneymarketfunds (select fund and share class), or by calling the fund at 1-877-721-1926 or 1-203-703-6002.

The fund’s past performance is not necessarily an indication of how the fund will perform in the future.

 

LOGO

Best Quarter (12/31/2006): 1.34    Worst Quarter (03/31/2014): 0.02

The year-to-date return as of the most recent calendar quarter, which ended 09/30/2016, was 0.33

 

Average annual total returns (%)
(for periods ended December 31, 2015)                   
     1 year      5 years      10 years
Institutional Shares    0.14      0.13      1.48

 

6    Western Asset Institutional Liquid Reserves


Management

 

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Purchase and sale of fund shares

In general, you may purchase or redeem shares of the fund during fund business hours on any day on which both the New York Stock Exchange and the Federal Reserve Bank of New York are open for business, subject to certain exceptions.

The fund’s initial and subsequent investment minimums for Institutional Shares generally are set forth in the accompanying table:

 

Investment minimum initial/additional investments ($)
General/Institutional Investors purchasing through the fund    1 million/50
Accounts managed/advised by an investment advisory subsidiary of Legg Mason    50,000/50

Your financial intermediary may impose different investment minimums.

The fund normally calculates its net asset value as of 8:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern time) on each fund business day. The fund may close early under certain circumstances. For more information, please contact your financial intermediary, or contact the fund by phone (1-877-721-1926 or 1-203-703-6002).

The fund may impose a fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period in the event that the fund’s weekly liquid assets fall below certain designated thresholds. Any announcement regarding the imposition of a liquidity fee or redemption gate, or the termination of a liquidity fee or a redemption gate, will be available at the fund’s website, http://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-liquid-reserves.html, and will be filed with the Securities and Exchange Commission.

Tax information

The fund’s distributions are generally taxable as ordinary income or capital gains.

Payments to broker/dealers and other financial intermediaries

The fund’s related companies may pay broker/dealers or other financial intermediaries (such as a bank or an insurance company) for the sale of fund shares, shareholder services and other purposes. These payments create a conflict of interest by influencing your broker/dealer or other intermediary or its employees or associated persons to recommend the fund over another investment. Ask your financial adviser or salesperson or visit your financial intermediary’s or salesperson’s website for more information.

 

Western Asset Institutional Liquid Reserves   7


Western Asset Institutional Cash Reserves

Investment objective

The fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

Fees and expenses of the fund

The accompanying table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the fund.

 

Shareholder fees (%)     
(fees paid directly from your investment)     
Maximum sales charge (load) imposed on purchases    None
Maximum deferred sales charge (load)    None
  
Annual fund operating expenses1 (%)     
(expenses that you pay each year as a percentage of the value of your investment)     
Management fees2    0.18
Distribution and/or service (12b-1) fees    None
Other expenses    0.02
Total annual fund operating expenses    0.20

 

1 

The fund is a feeder fund that invests in securities through an underlying mutual fund, Liquid Reserves Portfolio. The information in this table and in the Example below reflects the direct fees and expenses of the fund and its allocated share of fees and expenses of Liquid Reserves Portfolio. The gross expenses in the financial highlights do not reflect the reduction in the fund’s management fee by the amount paid by the fund for its allocable share of the management fee paid to Liquid Reserves Portfolio.

2 

Restated to reflect current fees.

Example

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes:

 

 

You invest $10,000 in the fund for the time periods indicated

 

 

Your investment has a 5% return each year and the fund’s operating expenses remain the same

 

 

You reinvest all distributions and dividends without a sales charge

Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

Number of years you own your shares ($)
       1 year      3 years      5 years      10 years
Institutional Shares      20      63      112      254

The fund is a feeder fund that invests in securities through an underlying mutual fund, Liquid Reserves Portfolio, which has the same investment objective and strategies as the fund. This structure is sometimes known as a “master/feeder” structure.

Principal investment strategies

The fund is a money market fund that invests in high quality, U.S. dollar-denominated short-term debt securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality.

The fund may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments.

 

8    Western Asset Institutional Cash Reserves


These securities may pay interest at fixed, floating or adjustable rates, or may be issued at a discount. The fund may invest without limit in bank obligations, such as certificates of deposit, fixed time deposits and bankers’ acceptances. The fund generally limits its investments in foreign securities to U.S. dollar denominated obligations of issuers, including banks and foreign governments, located in the major industrialized countries, although with respect to bank obligations, the branches of the banks issuing the obligations may be located in The Bahamas or the Cayman Islands.

Under Rule 2a-7 of the Investment Company Act of 1940, as amended, the fund must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Where required by these rules, the fund’s subadviser or Board of Trustees (the “Board”) will decide whether a security should be held or sold in the event of credit downgrades or certain other events occurring after purchase.

The fund sells and redeems its shares at prices based on the current market value of the securities it holds. Therefore, the share price of the fund will fluctuate along with changes in the market-based value of fund assets. Because the share price of the fund fluctuates, it has what is called a “floating net asset value” or “floating NAV”.

Principal risks

You could lose money by investing in the fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

If one or more money market funds were to incur a sizeable loss or impose fees on redemptions or suspend redemptions, there could be significant redemptions from money market funds in general, potentially driving the market prices of money market instruments down and adversely affecting market liquidity.

The fund could underperform other short-term debt instruments or money market funds, or you could lose money, as a result of risks such as:

Market and interest rate risk. The market prices of the fund’s securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. When market prices fall, the value of your investment will go down. The value of your investment will generally go down when interest rates rise. A rise in rates tends to have a greater impact on the prices of longer term securities. Interest rates have been historically low, so the fund faces a heightened risk that interest rates may rise. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale, which could adversely affect the price and liquidity of fixed income securities and could also result in increased redemptions from the fund.

Market events risk. In the past several years financial markets, such as those in the United States, Europe, Asia and elsewhere, have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Events that have contributed to these market conditions include, but are not limited to, major cybersecurity events; measures to address U.S. federal and state budget deficits; downgrading of U.S. long-term sovereign debt; declines in oil and commodity prices; dramatic changes in currency exchange rates; and public sentiment.

The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, have taken steps to support financial markets, including by keeping interest rates at historically low levels. This and other government intervention may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The Federal Reserve has reduced its market support activities and recently has begun raising interest rates. Certain foreign governments and central banks are implementing or discussing so-called negative interest rates (e.g., charging depositors who keep their cash at a bank) to spur economic growth. Further Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments, could negatively affect financial markets generally, increase market volatility and reduce the value and liquidity of securities in which the fund invests.

Policy and legislative changes in the United States and in other countries are affecting many aspects of financial regulation, and may in some instances contribute to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.

Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the fund’s investments may be negatively affected.

 

Western Asset Institutional Cash Reserves   9


Principal risks cont’d

 

Credit risk. An issuer or other obligor (such as a party providing insurance or other credit enhancement) of a security held by the fund or a counterparty to a financial contract with the fund may default or its credit may be downgraded, or the value of assets underlying a security may decline.

Yield risk. The amount of income received by the fund will go up or down depending on variations in short-term interest rates, and when interest rates are very low the fund’s expenses could absorb all or a significant portion of the fund’s income. If interest rates increase, the fund’s yield may not increase proportionately. For example, the fund’s manager may discontinue any temporary voluntary fee limitation or recoup amounts previously waived and/or reimbursed. In addition, the implementation of the new requirements recently adopted for money market funds may have a negative effect on the fund’s yield.

Structured securities risk. The payment and credit qualities of structured securities derive from their underlying assets, and they may behave in ways not anticipated by the fund, or they may not receive tax, accounting or regulatory treatment anticipated by the fund.

Risks associated with concentration in the banking industry. The fund may invest a significant portion of its assets in obligations that are issued or backed by U.S. and non-U.S. banks and thus will be more susceptible to negative events affecting banks and the financial services sector worldwide.

Foreign investments risk. The fund’s investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which the fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of the fund’s investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable or unsuccessful government actions, reduction of government or central bank support and political or financial instability. Lack of information may also affect the value of these securities.

Portfolio management risk. The value of your investment may decrease if the subadviser’s judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates is incorrect, or if there are imperfections, errors or limitations in the tools and data used by the subadviser. In addition, the fund’s investment strategies or policies may change from time to time. Those changes may not lead to the results intended by the subadviser and could have an adverse effect on the value or performance of the fund.

Liquidity risk. The fund may make investments that are illiquid or that become illiquid after purchase. The liquidity and value of investments can deteriorate rapidly, and they may become difficult or impossible to sell, particularly during times of market turmoil. Illiquid investments may also be difficult to value. Markets may become illiquid when, for instance, there are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make markets for certain securities. If the fund is forced to sell an illiquid investment to meet redemption requests or other cash needs, the fund may be forced to sell at a loss. In addition, if the fund’s liquidity falls below certain levels, the fund may impose a fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period.

Valuation risk. The sales price the fund could receive for any particular portfolio investment may differ from the fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive fewer or more shares or lower or higher redemption proceeds than they would have received if the fund had not fair-valued securities or had used a different valuation methodology. The fund’s ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.

Redemption risk. The fund may experience heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, which could cause the value of your investment to decline. In addition, the fund may impose a fee or suspend redemptions under certain conditions.

Cybersecurity risk. Cybersecurity incidents may allow an unauthorized party to gain access to fund assets, customer data (including private shareholder information), or proprietary information, or cause the fund, the manager, the subadviser and/or its service providers (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

These risks are discussed in more detail later in this Prospectus or in the statement of additional information (“SAI”).

 

10    Western Asset Institutional Cash Reserves


Performance

 

The accompanying bar chart and table provide some indication of the risks of investing in the fund. The bar chart shows changes in the fund’s performance from year to year for Institutional Shares. The table shows the average annual total returns of Institutional Shares. Performance for classes other than those shown may vary from the performance shown to the extent the expenses for those classes differ. The fund makes updated performance information available at www.leggmason.com/moneymarketfunds (select fund and share class), or by calling the fund at 1-877-721-1926 or 1-203-703-6002.

The fund’s past performance is not necessarily an indication of how the fund will perform in the future.

 

LOGO

Best Quarter (12/31/2006): 1.32    Worst Quarter (12/31/2014): 0.02

The year-to-date return as of the most recent calendar quarter, which ended 09/30/2016, was 0.32

 

Average annual total returns (%)                   
(for periods ended December 31, 2015)                   
     1 year      5 years      10 years
Institutional Shares    0.13      0.13      1.45

 

Western Asset Institutional Cash Reserves   11


Management

 

Investment manager: Legg Mason Partners Fund Advisor, LLC

Subadviser: Western Asset Management Company

Purchase and sale of fund shares

In general, you may purchase or redeem shares of the fund during fund business hours on any day on which both the New York Stock Exchange and the Federal Reserve Bank of New York are open for business, subject to certain exceptions.

The fund’s initial and subsequent investment minimums for Institutional Shares generally are set forth in the accompanying table:

 

Investment minimum initial/additional investments ($)
General/Institutional Investors purchasing through the fund    1 million/50
Accounts managed/advised by an investment advisory subsidiary of Legg Mason    50,000/50

Your financial intermediary may impose different investment minimums.

The fund normally calculates its net asset value as of 8:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern time) on each fund business day. The fund may close early under certain circumstances. For more information, please contact your financial intermediary, or contact the fund by phone (1-877-721-1926 or 1-203-703-6002).

The fund may impose a fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period in the event that the fund’s weekly liquid assets fall below certain designated thresholds. Any announcement regarding the imposition of a liquidity fee or redemption gate, or the termination of a liquidity fee or a redemption gate, will be available at the fund’s website, https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-cash-reserves.html, and will be filed with the Securities and Exchange Commission.

Tax information

The fund’s distributions are generally taxable as ordinary income or capital gains.

Payments to broker/dealers and other financial intermediaries

The fund’s related companies may pay broker/dealers or other financial intermediaries (such as a bank or an insurance company) for the sale of fund shares, shareholder services and other purposes. These payments create a conflict of interest by influencing your broker/dealer or other intermediary or its employees or associated persons to recommend the fund over another investment. Ask your financial adviser or salesperson or visit your financial intermediary’s or salesperson’s website for more information.

 

12    Western Asset Institutional Cash Reserves


More on the funds’ investment strategies, investments and risks

 

Important information

Each fund sells and redeems its shares at prices based on the current market value of the securities it holds. Because the share price of a fund will fluctuate along with changes in the market-based value of fund assets, it has what is called a “floating net asset value” or “floating NAV”. Money market funds must follow strict rules about the quality, liquidity, diversification, maturity and other features of securities they purchase.

The investment objective of each of Western Asset Institutional Liquid Reserves (“Institutional Liquid Reserves”) and Western Asset Institutional Cash Reserves (“Institutional Cash Reserves”) is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital. Each fund’s investment objective may be changed by the Board of Trustees (the “Board”) without shareholder approval and on notice to shareholders.

There is no assurance that a fund will meet its investment objective.

Each fund’s investment strategies and policies may be changed from time to time without shareholder approval, unless specifically stated otherwise in this Prospectus or in the SAI.

Credit quality

Each fund invests in securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality. In addition, each security, at the time of purchase by a fund, has been determined by the subadviser to present minimal credit risk. Where required by applicable rules, a fund’s subadviser or Board will decide whether a security should be held or sold in the event of certain credit events occurring after purchase.

Maturity

Each fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. For example, in determining the remaining maturity of a security for the purposes of these regulations, features such as a floating or variable rate of interest or a demand feature may be taken into account under some circumstances. Each fund maintains a weighted average maturity of not more than 60 days. In addition, each fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the fund’s subadviser or Board will decide whether the security should be held or sold.

Liquidity

Each fund must follow strict rules with respect to the liquidity of its portfolio securities including daily and weekly liquidity requirements. In addition, a fund may not purchase illiquid securities if, as a result of the acquisition, more than 5% of the fund’s total assets would be invested in illiquid securities. Illiquid securities are those that, as determined by the subadviser, may not be disposed of in the ordinary course of business within seven days at approximately the value ascribed to them by the fund. Securities that are deemed liquid at the time of purchase by a fund may become illiquid following purchase. If a fund’s weekly liquid assets fall below certain designated thresholds, the fund may impose a fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period.

Money market instruments

Money market instruments are short-term IOUs issued by banks or other non-governmental issuers, the U.S. or foreign governments, or state or local governments. Money market instruments generally have maturity dates of 13 months or less, and may pay interest at fixed, floating or adjustable rates, or may be issued at a discount. Money market instruments may include certificates of deposit, bankers’ acceptances, variable rate demand securities (where the interest rate is reset periodically and the holder may demand payment from the issuer or another obligor at any time), preferred shares, fixed-term obligations, commercial paper (short-term unsecured debt), asset-backed commercial paper, other asset-backed securities and repurchase agreements. Asset-backed commercial paper refers to a debt security with an original term to maturity of up to 270 days that may be backed by consumer loans or other types of receivables. Payments due on asset-backed commercial paper are supported by cash flows from underlying assets, or one or more liquidity or credit support providers, or both.

U.S. Treasury obligations

U.S. Treasury obligations are direct debt obligations issued by the U.S. government. Treasury bills, with maturities normally from 4 weeks to 52 weeks, are typically issued at a discount as they pay interest only upon maturity. Treasury bills are non-callable. Treasury notes have a maturity between two and ten years and typically pay interest semi-annually, while Treasury bonds have a maturity of over ten years and pay interest semi-annually. Treasuries also include STRIPS, TIPS and FRNs. STRIPS are Treasury obligations with separately traded principal and interest component parts that are transferable through the federal book-entry system. Because payments on STRIPS are made only at maturity, during periods of

 

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More on the funds’ investment strategies, investments and risks cont’d

 

changing interest rates, STRIPS may be more volatile than unstripped U.S. Treasury obligations with comparable maturities. TIPS are Treasury Inflation-Protected Securities, the principal of which increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, a TIPS holder is entitled to the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation. However, because the interest rate is fixed, TIPS may lose value when market interest rates increase, particularly during periods of low inflation. FRNs are newly introduced floating rate notes that are indexed to the most recent 13-week Treasury bill auction High Rate, and which pay interest quarterly. U.S. Treasury obligations typically offer lower interest rates than other obligations.

U.S. government obligations

U.S. government obligations include U.S. Treasury obligations and other obligations of, or guaranteed by, the U.S. government, its agencies or government-sponsored entities. Although the U.S. government guarantees principal and interest payments on securities issued by the U.S. government and some of its agencies, such as securities issued by the Government National Mortgage Association (“Ginnie Mae”), this guarantee does not apply to losses resulting from declines in the market value of these securities. U.S. government obligations include zero coupon securities that make payments of interest and principal only upon maturity and which therefore tend to be subject to greater volatility than interest bearing securities with comparable maturities. Some of the U.S. government securities that a fund may hold are not guaranteed or backed by the full faith and credit of the U.S. government, such as those issued by Fannie Mae (formally known as the Federal National Mortgage Association) and Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation). The maximum potential liability of the issuers of some U.S. government obligations may greatly exceed their current resources, including any legal right to support from the U.S. government.

Structured instruments

Structured instruments in which the funds invest are specifically structured so that they are eligible for purchase by money market funds, including securities that have demand, tender or put features, or interest rate reset features. Structured instruments may take the form of participation interests or receipts in underlying securities or other assets, and in some cases are backed by a financial institution serving as a liquidity provider. Some of these instruments may have a feature which substitutes a floating or variable interest rate for the fixed interest rate on an underlying security. The payment and credit qualities of these instruments derive from the underlying assets embedded in the structure.

Structured securities include variable rate demand instruments and participation interests that are backed by underlying municipal or other securities. Variable rate demand instruments require the issuer or a third party, such as a bank, insurer or broker/dealer, to repurchase the security for its face value upon demand and typically have interest rates that reset on a daily or weekly basis. In a participation interest, a bank or other financial institution sells undivided interests in a municipal or other security it owns. Participation interests may be supported by a bank letter of credit or guarantee. The interest rate generally is adjusted periodically, and the holder can sell the interests back to the issuer after a specified notice period.

Asset-backed securities

Asset-backed securities represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables.

Municipal securities

Municipal securities include debt obligations issued by any of the 50 states and their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the U.S. Virgin Islands and Guam) and other qualifying issuers, participation or other interests in these securities and other structured securities. Although municipal securities are issued by qualifying issuers, payments of principal and interest on municipal securities may be derived solely from revenues from certain facilities, mortgages or private industries, and may not be backed by the issuers themselves.

Municipal securities include general obligation bonds, revenue bonds, housing authority bonds, private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial receipts. General obligation bonds are backed by the full faith and credit of the issuing entity. Revenue bonds are typically used to fund public works projects, such as toll roads, airports and transportation facilities, that are expected to produce income to make the payments on the bonds, since they are not backed by the full taxing power of the municipality. Tax and revenue anticipation notes are generally issued in order to finance short-term cash needs or, occasionally, to finance construction. Tax and revenue anticipation notes are expected to be repaid from taxes or designated revenues in the related period, and they may or may not be general obligations of the issuing entity. Bond anticipation notes are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds and may be issued to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects. Some of these

 

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securities may have stated final maturities of more than 397 days but have demand features that entitle a fund to receive the principal amount of the securities either at any time or at specified intervals.

Municipal securities include municipal lease obligations, which are undivided interests issued by a state or municipality in a lease or installment purchase contract which generally relates to equipment or facilities. In some cases payments under municipal leases do not have to be made unless money is specifically approved for that purpose by an appropriate legislative body.

Banking industry concentration

Each fund may invest without limit in obligations of U.S. banks and up to 25% of its assets in U.S. dollar-denominated obligations of non-U.S. banks. Obligations of foreign branches of U.S. banks and U.S. branches of foreign banks may be considered obligations of U.S. banks if they meet certain requirements. Bank obligations include bank notes, certificates of deposit, time deposits, banker’s acceptances, commercial paper and other similar obligations. They also include Eurodollar and Yankee obligations, such as certificates of deposit issued in U.S. dollars by foreign banks and foreign branches of U.S. banks. Bank obligations also include participation interests in municipal securities issued and/or backed by banks and other obligations that have credit support or liquidity features provided by banks.

When-issued securities, delayed delivery, to be announced and forward commitment transactions

Each fund may purchase securities under arrangements (called when-issued, delayed delivery, to be announced or forward commitment basis) where the securities will not be delivered or paid for immediately. A fund will set aside assets to pay for these securities at the time of the agreement. Such transactions involve a risk of loss, for example, if the value of the securities declines prior to the settlement date or if the assets set aside to pay for these securities decline in value prior to the settlement date. Therefore, these transactions may have a leveraging effect on a fund, making the value of an investment in the fund more volatile and increasing the fund’s overall investment exposure. Typically, no income accrues on securities a fund has committed to purchase prior to the time delivery of the securities is made, although the fund may earn income on securities it has set aside to cover these positions.

Repurchase agreements

In a repurchase agreement, a fund purchases securities from a counterparty, upon the agreement of the counterparty to repurchase the securities from the fund at a later date, and at a specified price, which is typically higher than the purchase price paid by the fund. The securities purchased serve as the fund’s collateral for the obligation of the counterparty to repurchase the securities. If the counterparty does not repurchase the securities, the fund is entitled to sell the securities, but the fund may not be able to sell them for the price at which they were purchased, thus causing a loss. Additionally, if the counterparty becomes insolvent, there is some risk that the fund will not have a right to the securities, or the immediate right to sell the securities.

Reverse repurchase agreements and other borrowings

Each fund may borrow money as a means of raising money to satisfy redemption requests or for other temporary or emergency purposes by entering into reverse repurchase agreements or other borrowing transactions. In a reverse repurchase agreement, a fund sells securities to a counterparty, in return for cash, and the fund agrees to repurchase the securities at a later date and for a higher price, representing the cost to the fund for the money borrowed. Although the funds do not intend to use these transactions for leveraging purposes, reverse repurchase agreements and other borrowing transactions may make the value of an investment in a fund more volatile and increase the fund’s overall investment exposure.

Variable rate demand notes

Variable rate demand notes (VRDNs) and other similar obligations are typically long term instruments issued with a floating rate of interest by municipalities or other issuers. The interest rate usually resets every one to seven days, based on a published interest rate index. Investors typically may resell a VRDN to a third-party financial intermediary serving as a remarketing agent on up to seven days’ notice. A VRDN may be supported by a liquidity facility or a letter of credit. These features permit the VRDN to be treated by a fund as a short-term instrument. Investments in VRDNs involve credit risk with respect to the issuer as well as with respect to the financial institutions providing remarketing, liquidity or credit support. In addition, failures or defaults by one or more of those entities could result in a fund holding a long-term fixed rate illiquid investment.

Defensive investing

Each fund may, without limit, hold cash uninvested and, if so, the fund may be subject to risk with respect to the depository institution holding the cash. In addition, a fund will not earn income on those assets and it will be more difficult for a fund to achieve its investment objective. Although the subadviser has the ability to take defensive positions, it may choose not to do so for a variety of reasons, even during volatile market conditions.

 

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More on the funds’ investment strategies, investments and risks cont’d

 

Investments by other funds

A fund may be an investment option for other funds, including affiliated funds.

Other investments

Each fund may also use other strategies and invest in other investments that are described, along with their risks, in the SAI. However, a fund might not use all of the strategies and techniques or invest in all of the types of investments described in this Prospectus or in the SAI.

Selection process

In selecting individual securities, the subadviser:

 

 

Uses fundamental credit analysis to estimate the relative value and attractiveness of various securities and sectors

 

 

Measures the potential impact of supply/demand imbalances for fixed versus variable rate securities and for obligations of different issuers

 

 

Measures the yields available for securities with different maturities and a security’s maturity in light of the outlook for interest rates to identify individual securities that offer return advantages at similar risk levels

Because the funds are subject to maturity limitations on the investments they may purchase, many of their investments are held until maturity. The subadviser may sell a security before maturity when it is necessary to do so to meet redemption requests or regulatory requirements. The subadviser may also sell a security if the subadviser believes the issuer is no longer as creditworthy, or in order to adjust the average weighted maturity of a fund’s portfolio (for example, to reflect changes in the subadviser’s expectations concerning interest rates), or when the subadviser believes there is superior value in other market sectors or industries.

Investment structure

Each fund does not invest directly in securities but instead invests as a feeder fund through an underlying mutual fund having the same investment objectives and strategies under a master/feeder structure. Unless otherwise indicated, references to each fund in this Prospectus include the underlying master fund. Each fund may stop investing in its corresponding underlying fund at any time, and will do so if the fund’s Board believes it to be in the best interests of the fund’s shareholders. The fund could then invest in one or more other mutual funds or pooled investment vehicles, or could invest directly in securities. Investors should note that other feeder funds may invest in the same underlying mutual fund. Those other funds may have lower fees and/or expenses, and correspondingly higher performance, than your fund. In addition, large purchases or redemptions by one feeder fund could negatively affect the performance of other feeder funds that invest in the same master fund.

More on risks of investing in the funds

You could lose money by investing in a fund. Because the share price of a fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. A fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The funds’ sponsor has no legal obligation to provide financial support to a fund, and you should not expect that the sponsor will provide financial support to a fund at any time.

If one or more money market funds were to incur a sizeable loss or impose fees on redemptions or suspend redemptions, there could be significant redemptions from money market funds in general, potentially driving the market prices of money market instruments down and adversely affecting market liquidity.

There is no assurance that a fund will meet its investment objective.

A fund could underperform other short-term debt instruments or money market funds, or you could lose money, as a result of risks such as:

Market and interest rate risk. The market prices of a fund’s securities may go up or down, sometimes rapidly or unpredictably. If the market prices of the securities owned by a fund fall, the value of your investment in the fund will decline. The value of a security may fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. Changes in market conditions will not typically have the same impact on all types of securities. The value of a security may also fall due to specific conditions that affect a particular sector of the securities market or a particular issuer.

The market prices of securities may fluctuate significantly when interest rates change. When interest rates rise, the value of fixed income securities, and therefore the value of your investment in a fund generally goes down. Interest rates have been historically low, so the funds face a heightened risk that interest rates may rise. Generally, the longer the maturity of a fixed income security, the greater the impact of a rise in interest rates on the

 

16    Western Asset Money Market Funds


security’s value. Moreover, securities can change in value in response to other factors, such as credit risk. In addition, different interest rate measures (such as short- and long-term interest rates and U.S. and foreign interest rates), or interest rates on different types of securities or securities of different issuers, may not necessarily change in the same amount or in the same direction. When interest rates decline, investments made by a fund may pay a lower interest rate, which would reduce the income received by a fund. Also, when interest rates go down, the fund’s yield will decline. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale, which could adversely affect the price and liquidity of fixed income securities held by a fund and could also result in increased redemptions from a fund.

Market events risk. In the past several years financial markets, such as those in the United States, Europe, Asia and elsewhere, have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Events that have contributed to these market conditions include, but are not limited to, major cybersecurity events; measures to address U.S. federal and state budget deficits; downgrading of U.S. long-term sovereign debt; declines in oil and commodity prices; dramatic changes in currency exchange rates; and public sentiment.

The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, have taken steps to support financial markets, including by keeping interest rates at historically low levels. This and other government intervention may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The Federal Reserve has reduced its market support activities and recently has begun raising interest rates. Certain foreign governments and central banks are implementing or discussing so-called negative interest rates (e.g., charging depositors who keep their cash at a bank) to spur economic growth. Further Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments, could negatively affect financial markets generally, increase market volatility and reduce the value and liquidity of securities in which a fund invests.

Policy and legislative changes in the United States and in other countries are affecting many aspects of financial regulation, and may in some instances contribute to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.

Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not a fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of a fund’s investments may be negatively affected.

Credit risk. An issuer or other obligor (such as a party providing insurance or other credit enhancement) may fail to make the required payments on securities held by a fund. Debt securities also go up or down in value based on the perceived creditworthiness of issuers or other obligors. If an obligor for a security held by a fund fails to pay, otherwise defaults or is perceived to be less creditworthy, a security’s credit rating is downgraded, which could happen rapidly, or the credit quality or value of any underlying assets declines, the value of your investment in the fund could decline significantly, particularly in certain market environments. If a single entity provides credit enhancement to more than one of a fund’s investments, the adverse effects resulting from the downgrade or default will increase the adverse effects on the fund. If a fund enters into a financial contract (such as a repurchase agreement or reverse repurchase agreement) the fund will be subject to the credit risk presented by the counterparty. In addition, a fund may incur expenses in an effort to protect the fund’s interests or to enforce its rights.

Although a fund’s investments may be treated as short-term securities for the purposes of meeting regulatory maturity limitations, the actual maturity of a security may be longer, and the security’s value may decline on the basis of perceived longer term credit risk of the issuer.

Upon the occurrence of certain triggering events or defaults on a security held by a fund, or if the subadviser believes that an obligor of such a security may have difficulty meeting its obligations, the fund may obtain a new or restructured security or underlying assets. In that case, a fund may become the holder of securities or assets that it could not purchase or might not otherwise hold (for example, because they are of lower quality or are subordinated to other obligations of the issuer) at a time when those assets may be difficult to sell or can be sold only at a loss. Any of these events may cause you to lose money.

Yield risk. Each fund invests in short-term money market instruments. As a result, the amount of income received by a fund will go up or down depending on variations in short-term interest rates. Investing in high quality, short-term instruments may result in a lower yield (the income on your investment) than investing in lower quality or longer-term instruments. When interest rates are very low, a fund’s expenses could absorb all or a significant portion of the fund’s income, and, if a fund’s expenses exceed the fund’s income, the fund’s share price could decline. If interest rates increase, a fund’s yield may not increase proportionately. For example, each fund’s manager may discontinue any temporary voluntary fee limitation or recoup amounts previously waived and/or reimbursed.

 

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More on the funds’ investment strategies, investments and risks cont’d

 

A money market fund is also required to maintain liquidity levels based on the characteristics and anticipated liquidity needs of its shareholders. A fund with greater liquidity needs may have a lower yield than money market funds with a different shareholder base. The implementation of the new requirements recently adopted for money market funds may have a negative effect on the fund’s yield.

Risk of increase in expenses. Your actual costs of investing in a fund may be higher than the expenses shown in “Annual fund operating expenses” for a variety of reasons. For example, expense ratios may be higher than those shown if average net assets decrease, as a result of redemptions or otherwise, or if a fee limitation is changed or terminated.

Structured securities risk. The value of a structured security depends on the value of the underlying assets and the terms of the particular security. Investment by a fund in certain structured securities may have the effect of increasing the fund’s exposure to interest rate, market or credit risk, even if they are not primarily intended for these purposes. Structured securities may behave in ways not anticipated by the fund, and they raise certain tax, legal, regulatory and accounting issues that may not be presented by direct investments in the underlying assets. These issues could be resolved in a manner that could hurt the performance of the fund.

Risks associated with concentration in the banking industry. Each fund may invest a significant portion of its assets in obligations that are issued or backed by U.S. and non-U.S. banks. This means that an investment in a fund may be particularly susceptible to adverse events affecting banks and the financial services sector worldwide. Banks depend upon being able to obtain funds at reasonable costs and upon liquidity in the capital and credit markets to finance their lending and other operations. This makes them sensitive to changes in money market and general economic conditions. Banks are highly regulated. Decisions by regulators may limit the loans banks make and the interest rates and fees they charge, and may reduce bank profitability. The ongoing global financial crisis has severely affected many banks. When a bank’s borrowers get into financial trouble, their failure to repay the bank will adversely affect the bank’s financial situation. Banks have been particularly hard hit by problems in the real estate industry including defaults by borrowers and litigation relating to mortgage banking practices. Other bank activities such as investments in derivatives and foreign exchange practices also have caused losses. Governmental entities have in the past provided support to certain financial institutions, but there is no assurance they will continue to do so. Some of the entities backing fund investments may be non-U.S. institutions and, therefore, an investment in a fund may involve foreign investments risk.

Asset-backed securities risk. The value of asset-backed securities may be affected by changes in credit quality or value of the assets that support the securities as well as by changes in the credit risk of the servicing agent for the pool, the originator of the loans or receivables or the financial institution providing credit support, if any. In addition, the ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets or to otherwise recover from the underlying obligor in the event of default may be limited and the liquidation value of the underlying assets may be inadequate to pay any unpaid principal or interest. Asset-backed securities are also sensitive to changes in interest rates which may increase prepayments or extend the duration of the securities.

Risks relating to investments in municipal securities. Issuers of municipal securities tend to derive a significant portion of their revenue from taxes, particularly property and income taxes, and decreases in personal income levels and property values and other unfavorable economic factors, such as a general economic recession, adversely affect municipal securities. Municipal issuers may also be adversely affected by rising health care costs, increasing unfunded pension liabilities and by the phasing out of federal programs providing financial support. Where municipal securities are issued to finance particular projects, such as those relating to education, health care, transportation, and utilities, issuers often depend on revenues from those projects to make principal and interest payments. Adverse conditions and developments in those sectors can result in lower revenues to issuers of municipal securities, potentially resulting in defaults, and can also have an adverse effect on the broader municipal securities market.

There may be less public information available on municipal issuers or projects than other issuers, and valuing municipal securities may be more difficult. In addition, the secondary market for municipal securities is less well developed and liquid than other markets, and dealers may be less willing to offer and sell municipal securities in times of market turbulence. Changes in the financial condition of one or more individual municipal issuers (or one or more insurers of municipal issuers), or one or more defaults by municipal issuers or insurers, can adversely affect liquidity and valuations in the overall market for municipal securities. The value of municipal securities can also be adversely affected by regulatory and political developments affecting the ability of municipal issuers to pay interest or repay principal, actual or anticipated tax law changes or other legislative actions, and by uncertainties and public perceptions concerning these and other factors. In recent periods an increasing number of municipal issuers have defaulted on obligations, been downgraded or commenced insolvency proceedings. Financial difficulties of municipal issuers may continue or worsen.

Foreign investments risk. A fund’s investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which a fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of a fund’s investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable or unsuccessful government actions, reduction of government or central bank support and political or financial instability. Lack of information may also affect the value of these securities.

 

18    Western Asset Money Market Funds


The value of a fund’s foreign investments may also be affected by foreign tax laws, special U.S. tax considerations and restrictions on receiving the investment proceeds from a foreign country. Dividends or interest on, or proceeds from the sale or disposition of, foreign securities may be subject to non-U.S. withholding or other taxes.

In some foreign countries, less information is available about issuers and markets because of less rigorous accounting and regulatory standards than in the United States. It may be difficult for a fund to pursue claims against a foreign issuer in the courts of a foreign country. Some securities issued by non-U.S. governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of such governments. Even where a security is backed by the full faith and credit of a government, it may be difficult for a fund to pursue its rights against the government. Some non-U.S. governments have defaulted on principal and interest payments, and more may do so. In certain foreign markets, settlement and clearance procedures may result in delays in payment for or delivery of securities not typically associated with settlement and clearance of U.S. investments.

Prepayment or call risk. Many issuers have a right to prepay their securities. Issuers may be more likely to prepay the securities if interest rates fall. If this happens, a fund will be forced to reinvest prepayment proceeds at a time when yields on securities available in the market are lower than the yield on prepaid securities.

Extension risk. When interest rates rise, repayments of fixed income securities, particularly asset-backed securities, may occur more slowly than anticipated, extending the effective duration of these fixed income securities at below market interest rates and causing their market prices to decline more than they would have declined due to the rise in interest rates alone.

Portfolio management risk. The value of your investment may decrease if the subadviser’s judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates is incorrect, or if there are imperfections, errors or limitations in the tools and data used by the subadviser. In addition, a fund’s investment strategies or policies may change from time to time. Those changes may not lead to the results intended by the subadviser and could have an adverse effect on the value or performance of a fund.

Liquidity risk. Liquidity risk exists when particular investments are impossible or difficult to sell. Although most of the funds’ investments must be liquid at the time of investment, investments may become illiquid after purchase by a fund, particularly during periods of market turmoil. Markets may become illiquid when, for instance, there are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make a market for certain securities. As a general matter, dealers recently have been less willing to make markets for fixed income securities. When a fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if a fund is forced to sell these investments to meet redemption requests or for other cash needs, the fund may suffer a loss. A fund may experience heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, which could cause the value of your investment to decline. In addition, when there is illiquidity in the market for certain investments, a fund, due to limitations on illiquid investments, may be unable to achieve its desired level of exposure to a certain sector. Further, certain securities, once sold, may not settle for an extended period. A fund will not receive its sales proceeds until that time, which may constrain the fund’s ability to meet its obligations (including obligations to redeeming shareholders). If a fund’s weekly liquid assets fall below certain designated thresholds, such fund may impose a fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period.

Valuation risk. The sales price a fund could receive for any particular portfolio investment may differ from the fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities may receive fewer or more shares or lower or higher redemption proceeds than they would have received if the fund had not fair-valued securities or had used a different valuation methodology. A fund’s ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.

Redemption risk. A fund may experience periods of heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, particularly during periods of declining or illiquid markets. Redemption risk is greater to the extent that a fund has investors with large shareholdings, short investment horizons, or unpredictable cash flow needs. In addition, redemption risk is heightened during periods of overall market turmoil. The redemption by one or more large shareholders of their holdings in a fund could hurt performance and/or cause the remaining shareholders in the fund to lose money. Further, if one decision maker has control of fund shares owned by separate fund shareholders, including clients or affiliates of the fund’s investment manager, redemptions by these shareholders may further increase the fund’s redemption risk. If a fund is forced to liquidate its assets under unfavorable conditions or at inopportune times, the fund’s share price could decline. In addition, a fund may impose a fee or suspend redemptions under certain conditions.

Risk relating to investments by other funds. Other funds, including affiliated funds, may invest in a fund. From time to time, a fund may experience relatively large redemptions or investments from these funds as a result of their rebalancing their portfolios or for other reasons. In the event of such redemptions or investments, a fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so.

 

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More on the funds’ investment strategies, investments and risks cont’d

 

Operational risk. Your ability to transact with a fund or the valuation of your investment may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It is not possible to identify all of the operational risks that may affect a fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. A fund and its shareholders could be negatively impacted as a result.

Cybersecurity risk. Cybersecurity incidents may allow an unauthorized party to gain access to fund assets, customer data (including private shareholder information), or proprietary information, or cause a fund, the manager, the subadviser and/or its service providers (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

Please note that there are other factors that could adversely affect your investment and that could prevent a fund from achieving its investment objective. More information about risks appears in the SAI. Before investing, you should carefully consider the risks that you will assume.

Portfolio holdings

A description of the funds’ policies and procedures with respect to the disclosure of portfolio securities is available in the SAI. Each fund intends to make complete portfolio holdings information as of the last business day of each month available at www.leggmason.com/moneymarketfunds (click on the name of the fund) no later than five business days after month-end. Monthly portfolio holdings information will be available on the fund’s website for at least six months after posting.

For information about a fund, please visit the fund’s website, www.leggmason.com/moneymarketfunds, and click on the name of the fund.

 

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More on fund management

 

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is each fund’s investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the funds. As of September 30, 2016, LMPFA’s total assets under management were approximately $177.6 billion.

Western Asset Management Company (“Western Asset”) provides the day-to-day portfolio management of each fund as subadviser. Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101 and 620 Eighth Avenue, New York, New York 10018. Western Asset acts as investment adviser to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of September 30, 2016, the total assets under management of Western Asset and its supervised affiliates were approximately $437.5 billion.

LMPFA pays the subadviser a portion of the management fee that it receives from each fund. The funds do not pay any additional advisory or other fees for advisory services provided by Western Asset.

LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”). Legg Mason, whose principal executive offices are at 100 International Drive, Baltimore, Maryland 21202, is a global asset management company. As of September 30, 2016, Legg Mason’s asset management operations, including Western Asset and its supervised affiliates, had aggregate assets under management of approximately $732.9 billion.

Management fee

Each of Institutional Liquid Reserves and Institutional Cash Reserves pays a management fee at an annual rate that decreases as assets increase, as follows: 0.200% on assets up to $5 billion; 0.175% on assets over $5 billion, up to and including $10 billion; and 0.150% on assets over $10 billion.

For the fiscal year ended August 31, 2016, each fund paid LMPFA an effective management fee equal to the following percentages of the fund’s average daily net assets for management services:

 

Fund   Fee rate (%)
Institutional Liquid Reserves   0.11
Institutional Cash Reserves   0.10

A discussion regarding the basis for the Board’s approval of each fund’s management agreement and subadvisory agreement is available in that fund’s Semi-Annual Report for the period ended February 29, 2016.

Expense limitation

The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses) so that the total annual operating expenses for Institutional Shares will not exceed the following percentages of the class’ average daily net assets, subject to recapture as described below:

 

Fund   Limit (%)
Institutional Liquid Reserves   0.20
Institutional Cash Reserves   0.20

These arrangements are expected to continue until December 31, 2018, may be terminated prior to that date by agreement of the manager and the Board, and may be terminated at any time after that date by the manager. Additional amounts may be voluntarily waived and/or reimbursed from time to time. The manager is also permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the limit described above. In no case will the manager recapture any amount that would result, on any particular business day of a fund, in the class’ total annual operating expenses exceeding the applicable limit described above, or any other lower limit then in effect.

Additional information

Each fund enters into contractual arrangements with various parties, including, among others, the fund’s investment manager and subadviser, who provide services to the fund. Shareholders are not parties to, or intended (or “third-party”) beneficiaries of those contractual arrangements.

This Prospectus and the SAI provide information concerning each fund that you should consider in determining whether to purchase shares of a fund. A fund may make changes to this information from time to time. Neither this Prospectus nor the SAI is intended to give rise to any contract rights or other rights in any shareholder, other than any rights conferred explicitly by federal or state securities laws that may not be waived.

Recordkeeping fees

Each fund is authorized to pay fees for recordkeeping services to Service Agents. As a result, operating expenses of classes that incur new or additional recordkeeping fees may increase over time.

 

Western Asset Money Market Funds   21


More on fund management cont’d

 

Distribution

Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker/dealer subsidiary of Legg Mason, serves as each fund’s sole and exclusive distributor.

Additional payments

The distributor, the manager and/or their affiliates make payments for distribution, shareholder servicing, marketing and promotional activities and related expenses out of their profits and other available sources, including profits from their relationships with the funds. These payments are not reflected as additional expenses in the fee tables contained in this Prospectus. The recipients of these payments may include the funds’ distributor and affiliates of the manager, as well as non-affiliated broker/dealers, insurance companies, financial institutions and other financial intermediaries through which investors may purchase or hold shares of a fund, including your financial intermediary. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for any fund-related marketing or shareholder servicing activities. The payments described in this paragraph are often referred to as “revenue sharing payments.” Revenue sharing arrangements are separately negotiated between the distributor, the manager and/or their affiliates, and the recipients of these payments.

Revenue sharing payments create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of a fund to you. Contact your financial intermediary for details about revenue sharing payments it receives or may receive. Additional information about revenue sharing payments is available in the SAI. Revenue sharing payments, as well as payments under the shareholder services and distribution plan (where applicable), also benefit the manager, the distributor and their affiliates to the extent the payments result in more assets being invested in a fund on which fees are being charged.

 

22    Western Asset Money Market Funds


Buying shares

 

Shares of the funds are offered continuously and purchases may be made on any day the funds are open for business, as described under “Share price/Fund business days” below.

Each fund may offer one or more additional classes of shares. Only Institutional Shares are offered through this Prospectus.

You may buy shares:

 

 

Through banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the distributor to sell shares of the funds (each called a “Service Agent”)

 

 

Directly from a fund

Please note that Institutional Shares are not available to individual investors, except for individual investors buying directly from a fund.

Your Service Agent may provide shareholder services that differ from the services provided by other Service Agents. Services provided by your Service Agent may vary by class. You should ask your Service Agent to explain the shareholder services it provides for each class and the compensation it receives in connection with each class. Remember that your Service Agent may receive different compensation depending on the share class in which you invest.

Your Service Agent may not offer all classes of shares. You should contact your Service Agent for further information.

 

Generally   

You may buy shares of a fund on any day that a fund is open for business, as described under “Share price/Fund business days.” Shares are sold at their net asset value next determined after receipt by the transfer agent of your purchase request in good order. Shares of a fund may only be purchased by the wiring of federal funds.

 

A fund may not be available for sale in certain states. Prospective investors should inquire as to whether a fund is available for sale in their state of residence.

 

You must provide the following information for your order to be processed:

 

    Name of fund being bought

 

   Class of shares being bought

 

    Dollar amount or number of shares being bought

 

   Account number (if existing account)

Through a Service Agent   

You should contact your Service Agent to open an account and make arrangements to buy shares. You must contact your Service Agent to arrange for the wiring of federal funds.

 

Your Service Agent may charge an annual account maintenance fee.

 

All orders through a Service Agent are processed at the net asset value next calculated by the fund following receipt by the fund’s transfer agent of your purchase request in good order. It is your Service Agent’s responsibility to transmit orders to the fund’s transfer agent in a timely fashion.

Through a fund   

Investors should contact the funds at 1-877-721-1926 or 1-203-703-6002 to open an account and make arrangements to buy shares.

 

You must contact the funds at 1-877-721-1926 or 1-203-703-6002 to arrange for the wiring of federal funds.

 

For initial purchases, complete and send your account application to a fund as follows:

 

Regular Mail:

 

Western Asset Money Market Funds

P.O. Box 55083

Boston, MA 02205-5083

 

Express, Certified or Registered Mail:

 

Western Asset Money Market Funds

c/o Boston Financial Data Services

30 Dan Road

Canton, MA 02021-2809

 

 

Western Asset Money Market Funds   23


Buying shares cont’d

 

    

If a fund does not receive your purchase wire by the close of the Federal Reserve wire transfer system on the day you placed your order, your order will be canceled and you could be liable for any losses or fees incurred by the fund or its agents.

 

Purchase requests placed by telephone during the fund service desk’s hours of operation and received in good order will be accepted for processing at the net asset value next determined. The fund service desk’s normal hours of operations are between 7:30 a.m. and 5:30 p.m. (Eastern time) each fund business day.

When shares begin to earn dividends   

If your order for a purchase to be made in federal funds is received by a fund in good order prior to the fund’s close of business on a fund business day, shares purchased will normally be entitled to receive dividends declared on that day and orders received after the fund’s close of business on a fund business day will normally begin to earn dividends on the following business day.

 

If you are purchasing through a Service Agent, you should check with your Service Agent to determine when your purchase order will be effective.

Your account statement will have more information on who to contact if you want to buy or redeem shares, or you can contact your fund between 7:30 a.m. and 5:30 p.m. (Eastern time) at 1-877-721-1926 or 1-203-703-6002.

 

24    Western Asset Money Market Funds


Exchanging shares

 

Generally    There are currently no exchange privileges in effect with respect to either fund.

 

Western Asset Money Market Funds   25


Redeeming shares

 

Generally   

You may redeem shares of a fund on any day that the fund is open for business, as described under “Share price/Fund business days” below. Shares are redeemed at their net asset value next determined after receipt by the transfer agent of your redemption request in good order. However, each fund may impose a liquidity fee or temporarily restrict redemptions from the fund under certain circumstances, as set forth below under “Redemption Fees and Gates.”

 

If the shares are held by a fiduciary or corporation, partnership or similar entity, other documents may be required.

 

Contact your Service Agent or, if you hold shares directly with a fund, call the fund at 1-877-721-1926 or 1-203-703-6002 to redeem shares of the fund.

Redemption proceeds   

If your request is received in good order by the transfer agent prior to the time the fund makes its final net asset value calculation on any day the fund is open for business (normally 3:00 p.m. (Eastern time)), your redemption proceeds normally will be sent that day, but in any event within seven days.

 

You generally are entitled to receive dividends on fund shares through the day prior to the day on which your proceeds are sent to you.

 

Your redemption proceeds may be delayed, or your right to receive redemption proceeds suspended, if the New York Stock Exchange (“NYSE”) is closed (other than on weekends or holidays) or trading is restricted, if an emergency exists, or otherwise as permitted by the rules of or by the order of the Securities and Exchange Commission (“SEC”).

 

If you hold your shares through a Service Agent, your Service Agent may have its own earlier deadlines for the receipt of a redemption request. All orders through a Service Agent are processed at the net asset value next calculated by the fund following receipt by the fund’s transfer agent of your redemption request in good order. It is your Service Agent’s responsibility to transmit orders to the fund’s transfer agent in a timely fashion. Your sale or redemption proceeds will be sent by federal wire to your Service Agent. You should check with your Service Agent to determine when your proceeds will be available to you.

 

If you hold your shares through a fund, redemption proceeds will be sent by federal wire to the bank account you have designated on your application form or other written authorization. To change the bank account designated to receive wire transfers, you will be required to deliver a new written authorization and may be asked to provide other documents. You may be charged a fee on a wire transfer.

 

The funds reserve the right to pay redemption proceeds by giving you securities instead of cash. You may pay transaction costs to dispose of the securities, and you may receive less than the price at which they were valued for purposes of the redemption.

By mail   

Contact your Service Agent or, if you hold shares directly with a fund, write to the fund as follows:

 

Regular Mail:

 

Western Asset Money Market Funds

P.O. Box 55083

Boston, MA 02205-5083

 

Express, Certified or Registered Mail:

 

Western Asset Money Market Funds

c/o Boston Financial Data Services

30 Dan Road

Canton, MA 02021-2809

 

Your written request must provide the following:

 

    The fund name, the class of shares being redeemed and your account number

 

   The dollar amount or number of shares being redeemed

 

    Signature of each owner exactly as the account is registered

 

   Signature guarantees, as applicable (see “Other things to know about transactions”)

 

26    Western Asset Money Market Funds


By telephone   

If your account application permits, you may be eligible to redeem shares by telephone. Contact your Service Agent or, if you hold shares directly with a fund, call the fund at 1-877-721-1926 or 1-203-703-6002.

 

Please have the following information ready when you place your redemption request:

 

    Name of fund being redeemed

 

   Class of shares being redeemed

 

    Account number

 

If you hold your shares directly with a fund and your telephonic redemption request is placed with the fund service desk during the fund service desk’s hours of operation and received in good order, your request will be accepted for processing at the net asset value next determined. The fund service desk’s normal hours of operations are between 7:30 a.m. and 5:30 p.m. (Eastern time) each fund business day.

Redemption Fees and Gates   

Each fund may impose a liquidity fee of up to 2% on redemptions from the fund or temporarily restrict redemptions from the fund for up to 10 business days in any given 90 day period (a “redemption gate”) in the event that such fund’s weekly liquid assets fall below the following thresholds:

 

    30% weekly liquid assets1—if a fund’s weekly liquid assets fall below 30% of the fund’s total assets, and the Board of Trustees of the fund determines that it is in the best interests of the fund, the fund may, as early as the same day, impose a liquidity fee of not more than 2% of the amount redeemed or a redemption gate that temporarily suspends the right of redemption.

 

   10% weekly liquid assets—if a fund’s weekly liquid assets fall below 10% of the fund’s total assets, the fund will impose at the beginning of the next business day, a liquidity fee of 1% of the amount redeemed, unless the Board of Trustees of the fund determines that imposing such a fee would not be in the best interests of the fund or determines that a lower or higher fee (not to exceed 2%) would be in the best interests of the fund.

 

If a fund imposes a redemption gate, the fund and the fund’s authorized agent or intermediary will not accept redemption orders until the fund has notified shareholders that the redemption gate has been lifted. Any redemption orders submitted while a redemption gate is in effect will be cancelled without further notice. Pending redemption orders may be affected if a fund imposes a redemption gate. If you still wish to redeem shares once the redemption gate has been lifted, you will need to submit a new redemption request to the fund or the fund’s authorized agent or intermediary.

 

Liquidity fees and redemption gates may be terminated at any time at the judgment of the Board of Trustees. In addition, liquidity fees and redemption gates will terminate at the beginning of the next business day once the fund has invested 30% or more of its total assets in weekly liquid assets. A fund may only suspend redemptions for up to 10 business days in any 90-day period.

 

A liquidity fee imposed by a fund will reduce the amount you will receive upon the redemption of your shares, and could cause you to recognize a capital loss or could decrease the capital gain or increase the capital loss you would otherwise recognize. Liquidity fees would be retained by the fund. Pending redemption orders may be affected if a fund imposes a liquidity fee.

 

Any announcement regarding the imposition of a liquidity fee or redemption gate, or the termination of a liquidity fee or a redemption gate, will be available on the fund’s website below and will be filed with the Securities and Exchange Commission.

     Institutional Liquid Reserves   

https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-liquid-reserves.html

 

     Institutional Cash Reserves   

https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-cash-reserves.html

 

    

If a fund’s weekly liquid assets fall below 10% of the fund’s total assets, the fund reserves the right to permanently suspend redemptions and liquidate if the Board of Trustees of the fund determines that it is not in the best interests of the fund to continue operating.

 

Additional information regarding redemption fees and gates is included in the SAI.

Your account statement will have more information on who to contact if you want to buy or redeem shares, or you can contact your fund between 7:30 a.m. and 5:30 p.m. (Eastern time) at 1-877-721-1926 or 1-203-703-6002.

 

1 

“Weekly liquid assets” include (i) cash; (ii) direct obligations of the U.S. Government; (iii) Government securities issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States, that are issued at a discount to the principal amount to be repaid at maturity without the provision for the payment of interest and have a remaining maturity of 60 days or less; (iv) securities that will mature or are subject to a demand feature that is exercisable and payable within five business days; and (v) amounts receivable and due unconditionally within five business days on pending sales of portfolio securities.

 

Western Asset Money Market Funds   27


Other things to know about transactions

 

When you buy or redeem shares, your request must be in good order. This means you have provided the following information, without which your request may not be processed:

 

 

Name of the fund

 

 

Your account number

 

 

In the case of a purchase, the class of shares being bought

 

 

In the case of a redemption, the class of shares being redeemed (if you own more than one class)

 

 

Dollar amount or number of shares being bought or redeemed

 

 

In certain circumstances, the signature of each owner exactly as the account is registered (see “Redeeming shares”)

In certain circumstances, such as during periods of market volatility, severe weather and emergencies, shareholders may experience difficulties placing redemption orders by telephone. In that case, shareholders should consider using a fund’s other redemption procedures described under “Redeeming shares.”

The transfer agent or the funds will employ reasonable procedures to confirm that any telephone redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither a fund nor its agents will bear any liability for these transactions, subject to applicable law.

Each fund has the right to:

 

 

Suspend the offering of shares

 

 

Waive or change minimum initial and additional investment amounts

 

 

Reject any purchase order

 

 

Suspend telephone transactions

 

 

Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted or as otherwise permitted by the SEC

 

 

Impose fees or gates on redemptions as permitted or required by Rule 2a-7 under the 1940 Act

 

 

Close your account after a period of inactivity, as determined by state law, and transfer your shares to the appropriate state

For your protection, the funds or your Service Agent may request additional information in connection with large redemptions, unusual activity in your account, or otherwise to ensure your redemption request is in good order. Please contact your Service Agent or the funds for more information.

Medallion signature guarantees

To be in good order, your redemption request must include a Medallion signature guarantee if you:

 

 

Are redeeming shares and sending the proceeds to an address or bank not currently on file

 

 

Changed your account registration or your address within 30 days

 

 

Are transferring the redemption proceeds to an account with a different registration

A Medallion signature guarantee may also be required if you:

 

 

Are making changes to the account registration after the account has been opened; and

 

 

Are transferring shares to an account in another Legg Mason fund with a different account registration

When a Medallion signature guarantee is called for, the shareholder should have a Medallion signature guarantee stamped under his or her signature. You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, national securities exchanges, registered securities associations and clearing agencies (each an “Eligible Guarantor Institution”), but not from a notary public. The fund and its agents reserve the right to reject any Medallion signature guarantee pursuant to written signature guarantee standards or procedures, which may be revised in the future to permit them to reject Medallion signature guarantees from Eligible Guarantor Institutions. The fund may change the signature guarantee requirements from time to time without prior notice to shareholders.

Restrictions on the availability of the funds outside the United States

The distribution of this Prospectus and the offering of shares of the funds are restricted in certain jurisdictions. This Prospectus is not an offer or solicitation in any jurisdiction where such offer or solicitation is unlawful, where the person making an offer or solicitation is not authorized to make it or a person receiving an offer or solicitation may not lawfully receive it or may not lawfully invest in the funds. Investors should inform themselves as to the legal requirements within their own country before investing in the funds.

 

28    Western Asset Money Market Funds


This Prospectus, and the offer of shares hereunder, are not directed at persons outside the United States. In particular, a fund is not intended to be marketed to prospective investors in any member state of the European Union, Iceland, Liechtenstein or Norway (collectively, the “European Economic Area” or “EEA”). No notification or application has been made to the competent authority of any member state of the EEA under the Alternative Investment Fund Managers Directive (or any applicable legislation or regulations made thereunder) to market a fund to investors in the EEA and it is not intended that any such notification or application shall be made.

U.S. citizens with addresses in the United States, and non-U.S. citizens who reside in the United States and have U.S. addresses, are permitted to establish accounts with a fund. For these purposes, the “United States” and “U.S.” include U.S. territories.

A fund generally does not permit persons who do not reside in the United States or who do not have U.S. addresses to establish accounts. Therefore, U.S. citizens residing in foreign countries, as well as non-U.S. citizens residing in foreign countries, generally will not be permitted to establish accounts with a fund.

Please see “United Kingdom investors” below for information regarding United Kingdom investors in Institutional Cash Reserves.

For further information, you or your Service Agent may contact the fund at 877-721-1926 or 203-703-6002.

Anti-money laundering

Federal anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide additional information in order for a fund to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and other federal regulations.

Small account balances/Mandatory redemptions

Each fund reserves the right to ask you to bring your account up to a minimum investment amount determined by your Service Agent if the aggregate value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period). You will be notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption proceeds. If your share class is no longer offered, you may not be able to bring your account up to the minimum investment amount. Some shareholders who hold accounts in multiple classes of the same fund may have those accounts aggregated for the purposes of these calculations. If your account is closed, you will not be eligible to have your account reinstated without imposition of any sales charges that may apply to your new purchase. Please contact your Service Agent for more information. Any redemption of fund shares may result in tax consequences to you (see “Taxes” for more information). Each fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class, or implement fees for small accounts.

Subject to applicable law, a fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.

For more information, please contact your Service Agent or the funds, or consult the SAI.

Frequent trading of fund shares

Money market funds are often used by investors for short-term investments, in place of bank checking or saving accounts, or for cash management purposes. Investors value the ability to add and withdraw their funds quickly, without restriction. For this reason the funds’ Board has not adopted policies and procedures, or imposed restrictions such as minimum holding periods, in order to deter frequent purchases and redemptions of money market fund shares. The Board also believes that money market funds, such as the funds, are not typically targets of abusive trading practices. However, some investors may seek to take advantage of a short-term disparity between a fund’s yield and current market yields, which could have the effect of reducing the fund’s yield. In addition, frequent purchases and redemptions of fund shares could increase a fund’s portfolio transaction costs and may interfere with the efficient management of the fund’s portfolio, which could detract from the fund’s performance.

Record ownership

If you hold shares through a Service Agent, your Service Agent may establish and maintain your account and be the shareholder of record. In the event that a fund holds a shareholder meeting, your Service Agent, as record holder, will be entitled to vote your shares and may seek voting instructions from you. If you do not give your Service Agent voting instructions, your Service Agent, under certain circumstances, may nonetheless be entitled to vote your shares.

 

Western Asset Money Market Funds   29


Other things to know about transactions cont’d

 

United Kingdom investors (Institutional Cash Reserves only)

As noted elsewhere in this prospectus, the fund generally will not permit non-resident aliens with non-U.S. addresses to establish accounts with the fund. However, certain U.S. financial institutions that invest for the benefit of certain U.K. based institutional investors may be permitted to invest in the fund. The Facilities Agent for the fund is Western Asset Management Company Limited. The principal place of business of the Facilities Agent in the U.K. is 10 Exchange Square, Primrose Street, London EC2A 2EN.

The fund has received an order from the U.K. Financial Conduct Authority granting recognition under the U.K. Financial Services and Markets Act 2000. U.K. investors may obtain copies of the fund’s current Prospectus, Declaration of Trust (including amendments thereto), and Annual and Semi-Annual Reports to Shareholders from the Facilities Agent. U.K. investors may also obtain information about the price of shares in the fund and how a shareholder may arrange for the redemption of shares in the fund and for payment for these shares.

U.K. investors may submit complaints to the U.K. Facilities Agent at its address in the U.K. which will be forwarded to the manager of the fund or they may submit complaints about the operation of the fund to the U.K. Financial Conduct Authority. Investors in the fund are not covered by the U.K. Financial Services Compensation Scheme.

 

30    Western Asset Money Market Funds


Dividends, other distributions and taxes

 

Dividends and other distributions

Each fund calculates its net income and declares dividends each business day when it makes its final net asset value calculation. See “Buying shares” above for information about when recently purchased shares begin to earn dividends and “Redeeming shares” above for information about when shares redeemed cease to earn dividends. Dividends are distributed once a month, on or before the last business day of the month.

You can elect to receive dividends and/or other distributions in cash.

Unless you elect to receive dividends and/or other distributions in cash, your dividends and capital gain distributions will be automatically reinvested in shares of the same class you hold, at the net asset value determined on the reinvestment date.

If you hold shares directly with a fund and you elect to receive dividends and/or distributions in cash, you have the option to receive such dividends and/or distributions via a direct deposit to your bank account or, provided that the dividend and/or distribution is $10.00 or more, by check. If you choose to receive dividends and/or distributions via check, amounts less than $10.00 will automatically be reinvested in fund shares as described above.

If you do not want dividends and/or distributions in amounts less than $10.00 to be reinvested in fund shares, you must elect to receive dividends and distributions via a direct deposit to your bank account.

The Board reserves the right to revise the dividend policy or postpone the payment of dividends if warranted in the Board’s judgment due to unusual circumstances.

Taxes

The following discussion is very general, applies only to shareholders who are U.S. persons, and does not address shareholders subject to special rules, such as those who hold fund shares through an IRA, 401(k) plan or other tax-advantaged account. Except as specifically noted, the discussion is limited to federal income tax matters, and does not address state, local, foreign or non-income taxes. Further information regarding taxes, including certain federal income tax considerations relevant to non-U.S. persons, is included in the SAI. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about federal, state, local and/or foreign tax considerations that may be relevant to your particular situation.

You normally will have to pay federal income tax on any dividends and other distributions you receive from a fund, whether the distributions are paid in cash or additional shares. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) that are reported by a fund as capital gain dividends are taxable to you as long-term capital gain regardless of how long you have owned your shares. Other distributions are generally taxable as ordinary dividends. The funds do not expect any distributions to be treated as qualified dividend income, which for noncorporate shareholders may be taxed at reduced rates.

If you redeem shares, it is generally a taxable event.

You may elect the “NAV method” for computing gains and losses from redemptions. Under the NAV method, rather than computing gain or loss separately for each taxable disposition of fund shares, you would determine gain or loss on an aggregate basis for each “computation period” (which could be a taxable year or certain shorter periods within a taxable year). Gain or loss under the NAV method would be based on the change in the aggregate value of your shares during the applicable period (or, for the first period in which the NAV method applies, the difference between the aggregate value at the end of the period and the adjusted tax basis at the beginning of the period), reduced by your purchases of fund shares and increased by the proceeds of redemptions of fund shares during that period. Under the NAV method, if you hold your shares as a capital asset, any resulting net gain or loss would be treated as short-term capital gain or loss. If you hold shares in a fund through more than one account, you must treat your holdings in each such account as a separate fund for purposes of applying the NAV method. If you do not elect the NAV method, any capital gain or loss will generally be long-term capital gain or loss if you held your shares for more than one year and short-term capital gain or loss if you held the shares for one year or less. Any such loss will be disallowed to the extent your fund shares are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares you acquired will be increased to reflect the disallowed loss.

There is uncertainty with respect to the tax treatment of liquidity fees received by a fund. The tax treatment of liquidity fees may be the subject of future guidance issued by the Internal Revenue Service. The imposition of a liquidity fee on your redemption of fund shares could cause you to recognize a loss or could decrease the gain or increase the loss you would otherwise recognize. Although there is no definitive guidance, any liquidity fees received by a fund may result in distributions or gains that would be taxable to the fund’s shareholders.

A Medicare contribution tax is imposed at the rate of 3.8% on net investment income of U.S. individuals with income exceeding specified thresholds, and on undistributed net investment income of certain estates and trusts. Net investment income generally includes for this purpose dividends and capital gain distributions, if any, paid by a fund.

 

Western Asset Money Market Funds   31


Dividends, other distributions and taxes cont’d

 

A dividend declared by a fund in October, November or December and paid during January of the following year will, in certain circumstances, be treated as paid in December for tax purposes.

If a fund meets certain requirements with respect to its holdings, it may elect to “pass through” to shareholders foreign taxes that it pays, in which case each shareholder will include the amount of such taxes in computing gross income, but will be eligible to claim a credit or deduction for such taxes, subject to generally applicable limitations on such deductions and credits.

After the end of each year, your Service Agent or a fund will provide you with information about the distributions and dividends you received and any redemptions of shares during the previous year. Because each shareholder’s circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in a fund.

 

32    Western Asset Money Market Funds


Share price/Fund business days

 

You may buy or redeem shares at their net asset value (“NAV”) next determined after receipt of your request in good order.

Each fund’s NAV per share is the value of its assets minus its liabilities divided by the number of shares outstanding rounded to the fourth decimal place. NAV is calculated separately for each class of shares. Each fund is open for business and calculates its NAV every day on which both the NYSE and the Federal Reserve Bank of New York (“FRBNY”) are open for business. Therefore, the funds will be closed the days on which the following holidays are observed: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. Both the NYSE and FRBNY are also closed on weekends and may be closed because of an emergency or other unanticipated event. In the event the Federal Reserve wire payment system is open and the NYSE is open, the fund may close for purchase or redemption transactions if—due to an emergency or other unanticipated event—the bond markets are closed for business as recommended by the Securities Industry and Financial Markets Association (“SIFMA”).

Each fund typically values its securities and calculates its NAV as of 8:00 a.m., 12:00 p.m., and 3:00 p.m. (Eastern time) on each fund business day. However, a fund could, without advance notice, determine not to make one or more intraday calculations on a given day for a number of reasons such as unusual conditions in the bond, credit or other markets or unusual fund purchase or redemption activity. If a fund determined not to make an intraday calculation, purchases or redemptions would be effected at the next determined intraday or closing NAV, which may be greater or less than the price at which the purchase or redemption would otherwise have been effected.

On any day when the NYSE, the FRBNY or the bond markets (as recommended by SIFMA) close early due to an unanticipated event, or if trading on the NYSE is restricted, an emergency arises or as otherwise permitted by the SEC, each fund reserves the right to close early and make its final NAV calculation as of the time of its early close.

Each fund normally closes for business at 3:00 p.m. (Eastern time). When SIFMA recommends an early close to the bond markets on a business day before or after a day on which a holiday is celebrated, each fund reserves the right to close at or prior to the SIFMA recommended closing time. For calendar year 2017, SIFMA recommends an early close of the bond markets on April 13, 2017, May 26, 2017, July 3, 2017, November 24, 2017, December 22, 2017 and December 29, 2017. The schedule may be changed by SIFMA due to market conditions.

Valuation of each fund’s securities and other assets is performed in accordance with procedures approved by the Board. These procedures delegate most valuation functions to the manager, which generally uses independent third party pricing services approved by a fund’s Board. Under the procedures, assets are valued as follows:

 

 

The valuations for fixed income securities are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of fair valuation techniques and methodologies.

 

 

The valuations of securities traded on foreign markets and certain other fixed income securities will generally be based on prices determined as of the earlier closing time of the markets on which they primarily trade, unless a significant event has occurred. Foreign markets are open for trading on weekends and other days when the funds do not price their shares. Therefore, the value of a fund’s shares may change on days when you will not be able to purchase or redeem such fund’s shares.

 

 

If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. These procedures permit, among other things, the use of a formula or other method that takes into consideration market indices, yield curves and other specific adjustments to determine fair value. Fair value of a security is the amount, as determined by the manager in good faith, that a fund might reasonably expect to receive upon a current sale of the security. A fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which a fund’s net asset value is calculated.

Many factors may influence the price at which a fund could sell any particular portfolio investment. The sales price may well differ—higher or lower—from a fund’s last valuation, and such differences could be significant, particularly for securities that trade in relatively thin markets and/or markets that experience extreme volatility. Moreover, valuing securities using fair value methodologies involves greater reliance on judgment than valuing securities based on market quotations. A fund that uses fair value methodologies may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that a fund could obtain the value assigned to a security if it were to sell the security at approximately the time at which a fund determines its net asset value. Investors who purchase or redeem fund shares on days when a fund is holding fair-valued securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.

To determine whether a fund is open for business, please call the fund at 1-877-721-1926 or 1-203-703-6002. The fund service desk is generally open between 7:30 a.m. and 5:30 p.m. (Eastern time) but may close early under certain circumstances. You should contact your Service Agent to determine whether your Service Agent will be open for business.

It is the responsibility of the Service Agent to transmit all orders to buy or redeem shares to the transfer agent on a timely basis.

 

Western Asset Money Market Funds   33


Financial highlights

 

The financial highlights tables are intended to help you understand the performance of Institutional Shares for the past five years, unless otherwise noted. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on Institutional Shares assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from each fund’s financial statements, which have been audited by KPMG LLP, independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the annual report (available upon request).

Western Asset Institutional Liquid Reserves

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31:  
Institutional Shares      20161        20151        20141        20131        2012  
Net asset value, beginning of year        $1.000        $1.000        $1.000        $1.000        $1.000
Income from operations:                         

Net investment income

       0.004        0.001        0.001        0.001        0.002

Net realized gain2

       0.000        0.000        0.000        0.000        0.000

Total income from operations

       0.004        0.001        0.001        0.001        0.002
Less distributions from:                         

Net investment income

       (0.004)        (0.001)        (0.001)        (0.001)        (0.002)

Total distributions

       (0.004)        (0.001)        (0.001)        (0.001)        (0.002)
Net asset value, end of year        $1.000        $1.000        $1.000        $1.000        $1.000

Total return3

       0.36 %        0.10 %        0.07 %        0.13 %        0.18 %
Net assets, end of year (millions)        $5,953        $4,988        $3,729        $4,696        $5,362
Ratios to average net assets:                         

Gross expenses4

       0.33 %5        0.33 %5        0.33 %5        0.33 %5        0.23 %

Net expenses4,6,7

       0.13        0.13        0.13        0.14        0.15

Net investment income

       0.35        0.10        0.07        0.13        0.18

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

Amount represents less than $0.0005 per share.

 

3 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio.

 

6 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

7 

Reflects fee waivers and/or expense reimbursements.

 

34    Western Asset Money Market Funds


Western Asset Institutional Cash Reserves

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31:  
Institutional Shares      20161        20151        20141        20131        2012  
Net asset value, beginning of year        $1.000        $1.000        $1.000        $1.000        $1.000
Income (loss) from operations:                         

Net investment income

       0.003        0.001        0.001        0.001        0.002

Net realized gain (loss)2

       0.000        0.000        0.000        0.000        (0.000)

Total income from operations

       0.003        0.001        0.001        0.001        0.002
Less distributions from:                         

Net investment income

       (0.003)        (0.001)        (0.001)        (0.001)        (0.002)

Net realized gains

                         (0.000) 2        (0.000) 2        (0.000) 2

Total distributions

       (0.003)        (0.001)        (0.001)        (0.001)        (0.002)
Net asset value, end of year        $1.000        $1.000        $1.000        $1.000        $1.000

Total return3

       0.34 %        0.09 %        0.07 %        0.12 %        0.18 %
Net assets, end of year (millions)        $9,420        $10,950        $7,759        $7,747        $8,896
Ratios to average net assets:                         

Gross expenses4

       0.32 %5        0.32 %5        0.32 %5        0.32 %5        0.22 %

Net expenses4,6,7

       0.12        0.11        0.11        0.13        0.14

Net investment income

       0.33        0.09        0.07        0.12        0.18

 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio.

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

Amount represents less than $0.0005 per share.

 

3 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

6 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Prior to August 29, 2016, the expense limitation was 0.25%. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

7 

Reflects fee waivers and/or expense reimbursements.

 

 

Western Asset Money Market Funds   35


Legg Mason Funds Privacy and Security Notice

 

Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds

This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.

The Type of Nonpublic Personal Information the Funds Collect About You

The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:

 

 

Personal information included on applications or other forms;

 

 

Account balances, transactions, and mutual fund holdings and positions;

 

 

Online account access user IDs, passwords, security challenge question responses; and

 

 

Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.).

How the Funds Use Nonpublic Personal Information About You

The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:

 

 

Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators;

 

 

Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds;

 

 

The Funds’ representatives such as legal counsel, accountants and auditors; and

 

 

Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.

The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.

Keeping You Informed of the Funds’ Privacy and Security Practices

The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.

The Funds’ Security Practices

The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.

Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.

In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Funds at 1-877-721-1926 or 1-203-703-6002.

 

THIS PAGE IS NOT PART OF THE  PROSPECTUS


Western Asset

 

Institutional Liquid Reserves

Institutional Cash Reserves

Institutional Shares

You may visit the funds’ website, www.leggmason.com/moneymarketfundsliterature, for a free copy of a Prospectus, Statement of Additional Information (“SAI”) or an Annual or Semi-Annual Report.

Shareholder reports Additional information about a fund’s investments is available in the fund’s Annual and Semi-Annual Reports to shareholders. In the fund’s Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the fund’s performance during its last fiscal year. The independent registered public accounting firm’s report and financial statements in a fund’s Annual Report are incorporated by reference into (are legally a part of) this Prospectus.

The funds send only one report to a household if more than one account has the same last name and same address. Contact your Service Agent or the funds if you do not want this policy to apply to you.

Statement of additional information The SAI provides more detailed information about the funds and is incorporated by reference into (is legally a part of) this Prospectus.

You can make inquiries about the funds or obtain shareholder reports or the SAI (without charge) by contacting your Service Agent, by calling the funds at 1-877-721-1926 or 1-203-703-6002, or by writing to the funds at 100 First Stamford Place, Attn: Shareholders Services – 5th Floor, Stamford, Connecticut 06902.

Information about the funds (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s (the “SEC”) Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the funds are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may be obtained for a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Room, Washington, D.C. 20549-1520.

If someone makes a statement about the funds that is not in this Prospectus, you should not rely upon that information. Neither the funds nor the distributor is offering to sell shares of a fund to any person to whom the fund may not lawfully sell its shares.

(Investment Company Act

file no. 811-6740)

WASX266922ST 12/16

EX-99.(17)(B) 7 d366715dex9917b.htm SAI FOR WA INSTIT. CASH RESERVES & WA INSTIT. LIQUID RESERVES DATED 12/28/16 SAI for WA Instit. Cash Reserves & WA Instit. Liquid Reserves dated 12/28/16

Exhibit 17(b)

December 28, 2016

Legg Mason Partners Institutional Trust

Western Asset Institutional Liquid Reserves

Institutional Shares (CILXX), Investor Shares (LLRXX) and

Administrative Shares (LRAXX)

Western Asset Institutional Cash Reserves

Institutional Shares (CARXX), Class L (CFRXX),

Investor Shares (LCRXX) and Administrative Shares (LCAXX)

Western Asset Institutional U.S. Treasury Reserves

Institutional Shares (CIIXX), Investor Shares (LTRXX) and Administrative Shares (LTAXX)

Western Asset Institutional U.S. Treasury Obligations Money Market Fund

Institutional Shares (LUIXX), Investor Shares (LAIXX) and

Administrative Shares (LAOXX)

Western Asset Institutional Government Reserves

Institutional Shares (INGXX), Class L (LWPXX), Investor Shares (LGRXX) and

Administrative Shares (LGAXX)

Western Asset Select Tax Free Reserves

Select Shares (CIFXX), Investor Shares (LTFXX) and Administrative Shares (LFAXX)

620 Eighth Avenue

New York, New York 10018

1-877-721-1926

1-203-703-6002

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information (this “SAI”) is not a prospectus and is meant to be read in conjunction with the Prospectuses for Institutional Shares, Investor Shares and Administrative Shares of Western Asset Institutional Liquid Reserves (“Liquid Reserves”), Institutional Shares, Class L shares, Investor Shares and Administrative Shares of Western Asset Institutional Cash Reserves (“Cash Reserves”), Institutional Shares, Investor Shares and Administrative Shares of Western Asset Institutional U.S. Treasury Reserves (“U.S. Treasury Reserves”), Institutional Shares, Investor Shares and Administrative Shares of Western Asset Institutional U.S. Treasury Obligations Money Market Fund (“U.S. Treasury Obligations Fund”), Institutional Shares, Class L shares, Investor Shares and Administrative Shares of Western Asset Institutional Government Reserves (“Government Reserves”), and Select Shares, Investor Shares and Administrative Shares of Western Asset Select Tax Free Reserves (“Tax Free Reserves” and, collectively, the “funds”), each dated December 28, 2016, as amended or supplemented from time to time, and is incorporated by reference in its entirety into each of the Prospectuses.

Each fund is a series of Legg Mason Partners Institutional Trust (the “Trust”), a Maryland statutory trust. Prior to May 31, 2010, Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, Government Reserves and Tax Free Reserves were known as Western Asset / CitiSM Institutional Liquid Reserves, Western Asset / CitiSM Institutional Cash Reserves, Western Asset / CitiSM Institutional U.S. Treasury Reserves, Western Asset Institutional Government Money Market Fund and Western Asset / CitiSM Institutional Tax Free Reserves, respectively.


Additional information about each fund’s investments is available in the fund’s annual and semi-annual reports to shareholders. The annual reports contain financial statements that are incorporated herein by reference. The Prospectuses and copies of the annual and semi-annual reports for each fund may be obtained free of charge by contacting banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the funds’ distributor to sell shares of the applicable fund (each called a “Service Agent”), by writing the Trust at 100 First Stamford Place, Attn: Shareholder Services—5th Floor, Stamford, Connecticut 06902, by calling the numbers set forth above, by sending an e-mail request to prospectus@leggmason.com, or by visiting www.leggmason.com/moneymarketfundsliterature. Legg Mason Investor Services, LLC (“LMIS” or the “distributor”), a wholly-owned broker/dealer subsidiary of Legg Mason, Inc. (“Legg Mason”), serves as the sole and exclusive distributor for each fund.

FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.


TABLE OF CONTENTS

 

Master/Feeder Structure

     4  

Investment Objectives and Principal Investment Strategies

     5  

Supplemental Information Regarding Investment Practices and Risk Factors

     10  

Investment Policies

     33  

Management

     38  

Investment Management and Other Services

     54  

Purchase of Shares

     67  

Redemption of Shares

     67  

Exchange Privilege

     69  

Valuation of Shares

     70  

Portfolio Transactions

     72  

Disclosure of Portfolio Holdings

     74  

Taxes

     76  

The Trust

     82  

Financial Statements

     86  

Appendix A—Description of Ratings

     A-88  

Appendix B—Proxy Voting Policies and Procedures

     B-100  

THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.

No person has been authorized to give any information or to make any representations not contained in the Prospectuses or this SAI in connection with the offerings made by the Prospectuses and, if given or made, such information or representations must not be relied upon as having been authorized by the funds or their distributor. The Prospectuses and this SAI do not constitute offerings by the funds or by the distributor in any jurisdiction in which such offerings may not lawfully be made.


MASTER/FEEDER STRUCTURE

Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves utilize a master/feeder structure by investing all of their investable assets in another investment company. Liquid Reserves and Cash Reserves invest in Liquid Reserves Portfolio; U.S. Treasury Reserves invests in U.S. Treasury Reserves Portfolio; U.S. Treasury Obligations Fund invests in U.S. Treasury Obligations Portfolio; Government Reserves invests in Government Portfolio; and Tax Free Reserves invests in Tax Free Reserves Portfolio. Each of Liquid Reserves Portfolio, U.S. Treasury Reserves Portfolio, U.S. Treasury Obligations Portfolio and Government Portfolio (each, a “portfolio” and together, the “portfolios”) is a diversified, open-end management investment company. Tax Free Reserves Portfolio is a non-diversified, open-end management investment company. Each portfolio has the same investment objectives and substantially the same strategies and policies as its corresponding fund.

The Board of Trustees of the Trust (the “Board”) believes that the aggregate per share expenses of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves and their corresponding portfolios will be less than or approximately equal to the expenses that each fund would incur if the assets of the fund were invested directly in the types of securities held by its portfolio. Each fund may withdraw its investment in its portfolio at any time, and will do so if the fund’s Trustees believe it to be in the best interest of the fund’s shareholders. If a fund were to withdraw its investment in its portfolio, the fund could either invest directly in securities in accordance with the investment policies described below or invest in one or more other mutual funds or pooled investment vehicles having similar investment objectives and policies. If a fund were to withdraw, the fund could receive securities from its portfolio instead of cash, causing the fund to incur brokerage, tax and other charges or leaving it with securities that may or may not be readily marketable or widely diversified.

Each portfolio may change its investment objective, investment strategies and certain of its investment policies and restrictions without approval by its investors, but it will notify its corresponding fund and its other investors before implementing any change in its investment objective. A change in the portfolio’s investment objective, investment strategies, policies or restrictions may cause a fund to withdraw its investment in its portfolio.

The portfolios, as series of a Maryland statutory trust, are not required to hold and have no intention of holding annual meetings of investors. However, when a portfolio is required to do so by law or in the judgment of its Trustees it is necessary or desirable to do so, the portfolio will submit matters to its investors for a vote. When a fund is asked to vote on matters concerning its corresponding portfolio (other than a vote to continue the portfolio following the withdrawal of an investor), the fund will either hold a shareholder meeting and vote in accordance with shareholder instructions, or otherwise act in accordance with applicable law. Of course, the fund could be outvoted, or otherwise adversely affected, by other investors in the portfolio.

Each portfolio may sell interests to investors in addition to its corresponding fund. These investors may be funds which offer shares to their shareholders with different costs and expenses than the fund. Therefore, the investment returns for all investors in funds investing in a portfolio may not be the same. These differences in returns are also present in other mutual fund structures.

Each portfolio is open for business on each day that its corresponding fund is open for business as set forth in the funds’ Prospectuses. Each portfolio determines its net asset value at the same time or times on each fund business day as its corresponding fund. A portfolio may make additional net asset value calculations to accommodate the net asset value calculation times of other investors, such as other funds, that invest in the portfolio. A fund may add to or reduce its investment in its portfolio on each fund business day. For more information, see the funds’ Prospectuses.

Information about other holders of interests in the portfolios is available from LMIS.

Each fund may, in the future, convert to a fund of funds structure. In a fund of funds structure, a fund invests all or a portion of its assets in multiple investment companies.

 

4


INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES

Each of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, and Government Reserves is classified as diversified under the Investment Company Act of 1940, as amended (the “1940 Act”). Tax Free Reserves is classified as non-diversified under the 1940 Act. Each fund is a money market fund that intends to comply with the provisions of Rule 2a-7 under the 1940 Act.

Each fund’s Prospectuses discuss the fund’s investment objective and strategies. The following discussion supplements the description of each fund’s investment strategies in its Prospectuses.

Investment Objectives

Liquid Reserves. The fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

Cash Reserves. The fund’s investment objective is to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital.

U.S. Treasury Reserves. The fund’s investment objective is to provide shareholders with liquidity and as high a level of current income from U.S. government obligations as is consistent with preservation of capital.

U.S. Treasury Obligations Fund. The fund’s investment objective is to seek maximum current income to the extent consistent with preservation of capital and the maintenance of liquidity.

Government Reserves. The fund’s investment objective is to seek maximum current income to the extent consistent with preservation of capital and the maintenance of liquidity.

Tax Free Reserves. The fund’s investment objectives are to provide shareholders with high levels of current income exempt from federal income taxes, preservation of capital and liquidity.

The investment objectives of the funds are non-fundamental and may be changed without shareholder approval.

Principal Investment Strategies and Certain Limitations

Following is a summary of the principal investment strategies and certain investment limitations of each fund.

Each of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves seeks to achieve its investment objective by investing all of its investable assets in Liquid Reserves Portfolio, U.S. Treasury Reserves Portfolio, U.S. Treasury Obligations Portfolio, Government Portfolio and Tax Free Reserves Portfolio, respectively. Each portfolio has substantially the same investment objectives, strategies and policies as its corresponding fund.

Since the investment characteristics of each of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves correspond directly to those of the portfolios in which they invest, the following generally applies to both the funds and the portfolios, as applicable, and references to a “fund” include the portfolios, unless the context requires otherwise. A fund may withdraw its investment from its corresponding portfolio at any time, if the Trust’s Board determines that it is in the best interests of the fund to do so. If a fund were to then invest directly in securities, the fund’s assets would be invested in accordance with the applicable investment strategies and policies described below.

 

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Liquid Reserves

The fund invests in securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality. In addition, each security, at the time of purchase by the fund, has been determined by the subadviser to present minimal credit risk. Where required by applicable rules, the fund’s subadviser or Board will decide whether a security should be held or sold in the event of certain credit events occurring after purchase.

The fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. The fund maintains a weighted average maturity of not more than 60 days. In addition, the fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the fund’s subadviser or Board will decide whether the security should be held or sold.

The fund may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments. These securities may pay interest at fixed, floating or adjustable rates, or may be issued at a discount.

The fund may invest without limit in obligations of U.S. banks, and up to 25% of its assets in dollar-denominated obligations of non-U.S. banks, such as certificates of deposit, fixed time deposits and bankers’ acceptances. The fund generally limits its investments in foreign securities to U.S. dollar denominated obligations of issuers, including banks and foreign governments, located in the major industrialized countries, although with respect to bank obligations, the branches of the banks issuing the obligations may be located in The Bahamas or the Cayman Islands.

The fund limits its investments in U.S. bank obligations (including, for these purposes, their non-U.S. branches) to banks having more than $100 million of equity capital or total assets in excess of $1 billion and which are subject to regulation by an agency of the U.S. government, except that investments in certificates of deposit, time deposits and banker’s acceptances are limited to those issued by banks having total assets in excess of $1 billion. Notwithstanding the foregoing, the fund may also invest in certificates of deposit with principal amounts of no more than $100,000 per issuing bank with total assets of less than $1 billion, if those deposits are fully insured by the Federal Deposit Insurance Corporation (“FDIC”).

The fund limits its investments in “non-U.S. bank obligations” to U.S. dollar-denominated obligations of banks that at the time of investment are non-U.S. branches or subsidiaries of U.S. banks that meet the criteria in the preceding paragraphs or are U.S. or non-U.S. branches of non-U.S. banks, which banks (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest non-U.S. banks in the world; (iii) have branches or agencies in the United States; and (iv) in the opinion of the subadviser, are of an investment quality comparable with obligations of U.S. banks which may be purchased by the fund. These obligations may be general obligations of the parent bank, in addition to the issuing branch or subsidiary, but the parent bank’s obligations may be limited by the terms of the specific obligation or by governmental regulation.

The fund may not purchase or otherwise acquire any security if, as a result, more than 5% of its total assets would be invested in securities and other assets that are illiquid.

The approval of the fund’s shareholders would not be required to change the fund’s investment objective or any of its investment strategies. Likewise, the approval of the investors in the portfolio would not be required to change the portfolio’s investment objectives or any of its investment strategies.

 

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Cash Reserves

The fund invests in securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality. In addition, each security, at the time of purchase by the fund, has been determined by the subadviser to present minimal credit risk. Where required by applicable rules, the fund’s subadviser or Board will decide whether a security should be held or sold in the event of certain credit events occurring after purchase.

The fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. The fund maintains a weighted average maturity of not more than 60 days. In addition, the fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the fund’s subadviser or Board will decide whether the security should be held or sold.

The fund may invest in all types of money market instruments, including bank obligations, commercial paper and asset-backed securities, structured investments, repurchase agreements and other short-term debt securities. These instruments may be issued or guaranteed by all types of issuers, including U.S. and foreign banks and other private issuers, the U.S. government or any of its agencies or instrumentalities, U.S. states and municipalities, or foreign governments. These securities may pay interest at fixed, floating or adjustable rates, or may be issued at a discount.

The fund may invest without limit in obligations of U.S. banks, and up to 25% of its assets in dollar-denominated obligations of non-U.S. banks, such as certificates of deposit, fixed time deposits and bankers’ acceptances. The fund generally limits its investments in foreign securities to U.S. dollar denominated obligations of issuers, including banks and foreign governments, located in the major industrialized countries, although with respect to bank obligations, the branches of the banks issuing the obligations may be located in The Bahamas or the Cayman Islands.

The fund limits its investments in U.S. bank obligations (including, for these purposes, their non-U.S. branches) to banks having more than $100 million of equity capital or total assets in excess of $1 billion and which are subject to regulation by an agency of the U.S. government, except that investments in certificates of deposit, time deposits and banker’s acceptances are limited to those issued by banks having total assets in excess of $1 billion. Notwithstanding the foregoing, the fund may also invest in certificates of deposit with principal amounts of no more than $100,000 per issuing bank with total assets of less than $1 billion, if those deposits are fully insured by the FDIC.

The fund limits its investments in “non-U.S. bank obligations” to U.S. dollar-denominated obligations of banks that at the time of investment are non-U.S. branches or subsidiaries of U.S. banks that meet the criteria in the preceding paragraphs or are U.S. or non-U.S. branches of non-U.S. banks, which banks (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest non-U.S. banks in the world; (iii) have branches or agencies in the United States; and (iv) in the opinion of the subadviser, are of an investment quality comparable with obligations of U.S. banks which may be purchased by the fund. These obligations may be general obligations of the parent bank, in addition to the issuing branch or subsidiary, but the parent bank’s obligations may be limited by the terms of the specific obligation or by governmental regulation.

The fund may not purchase or otherwise acquire any security if, as a result, more than 5% of its total assets would be invested in securities and other assets that are illiquid.

The approval of the fund’s shareholders would not be required to change the fund’s investment objectives or any of its investment strategies. Likewise, the approval of the investors in the portfolio would not be required to change the portfolio’s investment objectives or any of its investment strategies.

 

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U.S. Treasury Reserves

The fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. The fund maintains a weighted average maturity of not more than 60 days. In addition, the fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the fund’s subadviser or Board will decide whether the security should be held or sold.

The fund is a money market fund that invests all of its assets in direct obligations of the U.S. Treasury. Direct obligations of the U.S. Treasury include U.S. Treasury bills, notes and bonds; STRIPS, which are individual interest and principal components of eligible Treasury notes and bonds that are traded as separate securities; and TIPS, which are inflation-protected securities issued by the U.S. Treasury, the principal of which increases with inflation and decreases with deflation, as measured by the Consumer Price Index. The fund will not enter into repurchase agreements, but may enter into reverse repurchase agreements to satisfy redemption requests or for other temporary or emergency purposes. Although the fund invests in U.S. government obligations, an investment in the fund is neither insured nor guaranteed by the U.S. government.

The fund may not purchase or otherwise acquire any security if, as a result, more than 5% of its total assets would be invested in securities and other assets that are illiquid.

The approval of the fund’s shareholders would not be required to change the fund’s investment objectives or any of its investment strategies. Likewise, the approval of the investors in the portfolio would not be required to change the portfolio’s investment objectives or any of its investment strategies. If, however, either the fund or the portfolio were to change its investment policies so that more than 20% of its assets, under normal market conditions, could be invested in securities other than those issued or backed by the U.S. Treasury, the fund or the portfolio, as applicable, would give written notice to its shareholders (or investors, as applicable) at least 60 days prior to implementing the change.

U.S. Treasury Obligations Fund

The fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. The fund maintains a weighted average maturity of not more than 60 days. In addition, the fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the fund’s subadviser or Board will decide whether the security should be held or sold.

The fund is a money market fund that invests all of its assets in direct obligations of the U.S. Treasury and in repurchase agreements secured by these obligations. Direct obligations of the U.S. Treasury include U.S. Treasury bills, notes and bonds; STRIPS, which are individual interest and principal components of eligible Treasury notes and bonds that are traded as separate securities; and TIPS, which are inflation-protected securities issued by the U.S. Treasury, the principal of which increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Although the fund invests in U.S. government obligations, an investment in the fund is neither insured nor guaranteed by the U.S. government.

The fund may not purchase or otherwise acquire any security if, as a result, more than 5% of its total assets would be invested in securities and other assets that are illiquid.

The approval of the fund’s shareholders would not be required to change the fund’s investment objectives or any of its investment strategies. Likewise, the approval of the investors in the portfolio would not be required to change the portfolio’s investment objectives or any of its investment strategies. If, however, either the fund or the portfolio were to change its investment policies so that more than 20% of its assets, under normal market conditions, could be invested in securities other than those issued or backed by the U.S. Treasury and repurchase

 

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agreements secured by such securities, the fund or the portfolio, as applicable, would give written notice to its shareholders (or investors, as applicable) at least 60 days prior to implementing the change.

Government Reserves

The fund invests in securities that, at the time of purchase, are rated in the highest short-term rating category or, if not rated, are determined by the subadviser to be of equivalent quality. In addition, each security, at the time of purchase by a fund, has been determined by the subadviser to present minimal credit risk. Where required by applicable rules, a fund’s subadviser or Board will decide whether a security should be held or sold in the event of certain credit events occurring after purchase.

The fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. The fund maintains a weighted average maturity of not more than 60 days. In addition, the fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, a fund’s subadviser or Board will decide whether the security should be held or sold.

The fund invests exclusively in short-term U.S. government obligations, including U.S. Treasuries and securities issued or guaranteed by the U.S. government or its agencies, authorities, instrumentalities or sponsored entities and in repurchase agreements collateralized by government obligations. These securities may pay interest at fixed, floating or adjustable rates or may be issued at a discount. U.S. government obligations are not necessarily backed by the full faith and credit of the United States. Although the fund invests in U.S. government obligations, an investment in the fund is neither insured nor guaranteed by the U.S. government.

The fund may not purchase or otherwise acquire any security if, as a result, more than 5% of its total assets would be invested in securities and other assets that are illiquid.

The approval of the fund’s shareholders would not be required to change the fund’s investment objective or any of its investment strategies. Likewise, the approval of the investors in the portfolio would not be required to change the portfolio’s investment objective or any of its investment strategies. If, however, either the fund or the portfolio were to change its investment policies so that more than 20% of its assets, under normal market conditions, could be invested in securities other than short-term U.S. government obligations and related investments, the fund or the portfolio, as applicable, would give written notice to its shareholders (or investors, as applicable) at least 60 days prior to implementing the change.

Tax Free Reserves

The fund invests in securities that, at the time of purchase, are rated by one or more rating agencies in the highest short-term rating category (or, with respect to not more than 3% of its total assets, in the second highest category) or, if not rated, are determined by the subadviser to be of equivalent quality. In addition, each security, at the time of purchase by the fund, has been determined by the subadviser to present minimal credit risk. Where required by applicable rules, the fund’s subadviser or Board will decide whether a security should be held or sold in the event of certain credit events occurring after purchase.

The fund invests in securities that, at the time of purchase, are treated under applicable regulations as having remaining maturities of 397 days or less. The fund maintains a weighted average maturity of not more than 60 days. In addition, the fund must comply with rules with respect to the fund’s weighted average life. Where required by applicable rules, if, after purchase, payment upon maturity does not occur or the maturity on a security is extended, the fund’s subadviser or Board will decide whether the security should be held or sold. The maturities of variable rate instruments held by the fund are deemed to be the longer of the notice period, or the period remaining until the next interest rate adjustment, although the stated maturities may be in excess of 397 days.

 

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The fund is a money market fund that, under normal market conditions, invests at least 80% of its assets in short-term high-quality municipal obligations and interests in municipal obligations (“municipal securities”) that pay interest that is exempt from federal income tax, including the federal alternative minimum tax (“AMT”). Municipal securities include debt obligations issued by any of the 50 states and their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the U.S. Virgin Islands and Guam) and other qualifying issuers. These securities include participation or other interests in municipal securities and other structured securities such as variable rate demand obligations, tender option bonds, partnership interests and swap-based securities, many of which may be issued or backed by U.S. or non-U.S. banks.

Some municipal securities, such as general obligation issues, are backed by the issuer’s taxing authority, while other municipal securities, such as revenue issues, are backed only by revenues from certain facilities or other sources and not by the issuer itself.

The fund may invest without limit in obligations of U.S. banks, and up to 25% of its assets in dollar-denominated obligations of non-U.S. banks. These include participation interests in municipal securities issued and/or backed by banks and other obligations that have credit support or liquidity features provided by banks.

Under normal circumstances, the fund may invest up to 20% of its assets in investments that pay interest that may be subject to regular federal income tax and/or the AMT, although for temporary or defensive purposes, the fund may invest an unlimited amount in such securities.

Circumstances in which the fund may invest in taxable securities include the following: (a) pending investment in the type of securities described above; (b) to maintain liquidity for the purpose of meeting anticipated withdrawals; and (c) when, in the opinion of the subadviser, it is advisable to do so because of adverse market conditions affecting the market for municipal securities. The kinds of taxable securities in which the fund’s assets may be invested are generally limited to the following short-term, fixed-income securities (maturing in 397 days or less from the time of purchase): (1) obligations of the U.S. government or its agencies, instrumentalities or authorities; (2) commercial paper; (3) certificates of deposit of U.S. banks with assets of $1billion or more; and (4) repurchase agreements with respect to any municipal securities or obligations of the U.S. government or its agencies, instrumentalities, or authorities. See “Supplemental Information Regarding Investment Practices and Risk Factors” below for a description of these types of investments. As described above, the fund’s assets may also be invested in municipal securities which are subject to the AMT.

The fund may not purchase or otherwise acquire any security if, as a result, more than 5% of its total assets would be invested in securities and other assets that are illiquid.

Each of the fund’s and portfolio’s policy to invest at least 80% of its assets, under normal market conditions, in certain municipal securities may not be changed without shareholder or investor approval.

SUPPLEMENTAL INFORMATION REGARDING INVESTMENT PRACTICES AND RISK FACTORS

The funds’ and the portfolios’ principal investment strategies are summarized above. The following provides additional information about these principal strategies and describes other investment strategies and practices that may be used by the funds and the portfolios. Throughout this section, references to a fund apply to and correspond to the fund’s corresponding portfolio. To the extent permitted by law and a fund’s investment policies, a fund may engage in the practices described below.

Asset-Backed Commercial Paper and Other Asset-Backed Securities (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

The funds may invest in asset-backed securities that represent fractional interests in pools of retail installment loans, both secured, such as certificates for automobile receivables (“CARS”), and unsecured, or

 

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leases or fractional interests in pools of revolving credit card receivables (“CARDS”), both secured and unsecured, as well as other asset-backed securities. These assets are generally held by a trust and payments of principal and interest or interest only are passed through monthly or quarterly to certificate holders and may be guaranteed up to certain amounts by letters of credit issued by a financial institution affiliated or unaffiliated with the trustee or originator of the trust. Underlying automobile sales contracts, leases or credit card receivables are subject to prepayment, which may reduce the overall return to certificate holders. Prepayment rates vary widely and may be affected by changes in market interest rates. It is not possible to accurately predict the average life of a particular pool of loans or receivables and reinvestment of principal may occur at higher or lower rates than the original yield. Therefore, the actual maturity and realized yield on asset-backed securities will vary based upon the prepayment experience of the underlying pool of loans or receivables. Prepayment of principal during periods of declining interest rates may reduce the yield of a fund, since the fund may be forced to reinvest any prepaid principal in lower yielding securities. Certificate holders may also experience delays in payment on the certificates or losses if the full amounts due on underlying loans, leases or receivables are not realized because of unanticipated legal or administrative costs of enforcing the contracts or because of depreciation or damage to the collateral (usually automobiles) securing certain contracts, or other factors.

Asset-backed commercial paper (“ABCP”) typically refers to a debt security with an original term to maturity of up to 270 days, the payment of which is supported by cash flows from underlying assets, or one or more liquidity or credit support providers, or both. Assets backing ABCP, which may be included in revolving pools of assets with large numbers of obligors, include credit card, car loan and other consumer receivables and home or commercial mortgages, including subprime mortgages. The repayment of ABCP issued by a conduit depends primarily on the cash collections received from the conduit’s underlying asset portfolio and the conduit’s ability to issue new ABCP. Therefore, there could be losses to a fund investing in ABCP in the event of credit or market value deterioration in the conduit’s underlying portfolio, mismatches in the timing of the cash flows of the underlying asset interests and the repayment obligations of maturing ABCP, or the conduit’s inability to issue new ABCP. To protect investors from these risks, ABCP programs may be structured with various protections, such as credit enhancement, liquidity support and commercial paper stop-issuance and wind-down triggers. However there can be no guarantee that these protections will be sufficient to prevent losses to investors in ABCP.

Some ABCP programs provide for an extension of the maturity date of the ABCP if, on the related maturity date, the conduit is unable to access sufficient liquidity by issuing additional ABCP. This may delay the sale of the underlying collateral and the fund may incur a loss if the value of the collateral deteriorates during the extension period. Alternatively, if collateral for ABCP deteriorates in value, the collateral may be required to be sold at inopportune times or at prices insufficient to repay the principal and interest on the ABCP. ABCP programs may provide for the issuance of subordinated notes as an additional form of credit enhancement. The subordinated notes typically are of a lower credit quality and have a higher risk of default. A fund purchasing these subordinated notes will therefore have a higher likelihood of loss than investors in the senior notes.

Consistent with each fund’s investment objective and policies the fund also may invest in other types of asset-backed and receivable-backed securities.

Banking Industry Concentration (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Up to 25% of a fund’s assets may be invested at any time in U.S. dollar-denominated obligations of foreign banks, and all of the fund’s assets may be invested at any time in obligations of domestic banks, as that term has been interpreted by the SEC. Under SEC interpretations, a U.S. branch of a foreign bank may be considered a domestic bank if the U.S. branch of the foreign bank is subject to the same regulation as a U.S. bank. Likewise, a non-U.S. branch of a U.S. bank may be considered a domestic bank if the investment risk associated with investing in instruments issued by the non-U.S. branch is the same, in the opinion of the subadviser, as that of investing in instruments issued by the branch’s domestic parent. A fund may also invest in Eurodollar and Yankee bank obligations.

 

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Certificates of deposit (“CDs”) are savings certificates generally issued by commercial banks that bear a maturity date and a specified interest rate, and can be issued in any denomination. Fixed time deposits (“Fixed TDs”) are obligations which are payable at a stated maturity date and bear a fixed rate of interest. Generally, Fixed TDs may be withdrawn on demand by a fund, but they may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. Although Fixed TDs do not have a market, there are no contractual restrictions on a fund’s right to transfer a beneficial interest in the deposit to a third party. A bankers’ acceptance is a draft drawn on and accepted by a bank that orders payment to a third party at a later date. Bankers’ acceptances generally act as a negotiable time draft for financing imports, exports, or other transactions in goods.

U.S. banks organized under federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to be insured by the FDIC. U.S. banks organized under state law are supervised and examined by state banking authorities and are members of the Federal Reserve System only if they elect to join. However, state banks which are insured by the FDIC are subject to federal examination and to a substantial body of federal law and regulation. As a result of federal and state laws and regulations, U.S. branches of U.S. banks, among other things, are generally required to maintain specified levels of reserves, and are subject to other supervision and regulation designed to promote financial soundness.

The provisions of federal law governing the establishment and operation of U.S. branches do not apply to non-U.S. branches of U.S. banks. However, a fund may purchase obligations only of those non-U.S. branches of U.S. banks which were established with the approval of the Board of Governors of the Federal Reserve System (the “Board of Governors”). As a result of such approval, these branches are subject to examination by the Board of Governors and the Comptroller of the Currency. In addition, such non-U.S. branches of U.S. banks are subject to the supervision of the U.S. bank and creditors of the non-U.S. branch are considered general creditors of the U.S. bank subject to whatever defenses may be available under the governing non-U.S. law and to the terms of the specific obligation. Nonetheless, a fund generally will be subject to whatever risk may exist that the non-U.S. country may impose restrictions on payment of certificates of deposit or time deposits.

U.S. branches of non-U.S. banks are subject to the laws of the state in which the branch is located or to the laws of the United States. Such branches are therefore subject to many of the regulations, including reserve requirements, to which U.S. banks are subject.

Obligations of foreign branches of domestic banks and of foreign branches of foreign banks, such as CDs and Fixed TDs, may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by governmental regulation. Such obligations are subject to many of the same risks as those of domestic banks or domestic branches of foreign banks. They are also subject to risks such as foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. Foreign branches of domestic banks and foreign branches of foreign banks are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank.

Since a fund may hold investments in non-U.S. bank obligations, an investment in a fund involves certain additional risks. Such investment risks include future political and economic developments, the possible imposition of non-U.S. withholding taxes on interest income payable on such obligations held by a fund, the possible seizure or nationalization of non-U.S. deposits and the possible establishment of exchange controls or other non-U.S. governmental laws or restrictions applicable to the payment of the principal of and interest on CDs or Fixed TDs that might affect adversely such payment on such obligations held by a fund. Additionally, there may be less public information available about non-U.S. entities. Non-U.S. issuers may be subject to less

 

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governmental regulation and supervision than U.S. issuers. Non-U.S. issuers also generally are not bound by uniform accounting, auditing and financial reporting requirements comparable to those applicable to U.S. issuers. See “Foreign Securities and Markets” below.

Borrowings (each fund)

A fund may engage in borrowing transactions as a means of raising cash to satisfy redemption requests, for other temporary or emergency purposes or, to the extent permitted by its investment policies, to raise additional cash to be invested by the fund’s subadviser in other securities or instruments in an effort to increase the fund’s investment returns. Reverse repurchase agreements may be considered to be a type of borrowing.

When a fund invests borrowing proceeds in other securities, the fund will be at risk for any fluctuations in the market value of the securities in which the proceeds are invested. Like other leveraging risks, this makes the value of an investment in a fund more volatile and increases the fund’s overall investment exposure. In addition, if a fund’s return on its investment of the borrowing proceeds does not equal or exceed the interest that a fund is obligated to pay under the terms of a borrowing, engaging in these transactions will lower the fund’s return.

A fund may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to its borrowing obligations. This could adversely affect the subadviser’s strategy and result in lower fund returns. Interest on any borrowings will be a fund expense and will reduce the value of a fund’s shares. A fund may borrow on a secured or on an unsecured basis. If a fund enters into a secured borrowing arrangement, a portion of the fund’s assets will be used as collateral. During the term of the borrowing, the fund will remain at risk for any fluctuations in the market value of these assets in addition to any securities purchased with the proceeds of the loan. In addition, a fund may be unable to sell the collateral at a time when it would be advantageous to do so, which could adversely affect the subadviser’s strategy and result in lower fund returns. The fund would also be subject to the risk that the lender may file for bankruptcy, become insolvent, or otherwise default on its obligations to return the collateral to the fund. In the event of a default by the lender, there may be delays, costs and risks of loss involved in a fund’s exercising its rights with respect to the collateral or those rights may be limited by other contractual agreements or obligations or by applicable law.

The 1940 Act requires a fund to maintain an “asset coverage” of at least 300% of the amount of its borrowings, provided that in the event that the fund’s asset coverage falls below 300%, the fund is required to reduce the amount of its borrowings so that it meets the 300% asset coverage threshold within three days (not including Sundays and holidays). Asset coverage means the ratio that the value of the fund’s total assets, minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Although complying with this guideline would have the effect of limiting the amount that a fund may borrow, it does not otherwise mitigate the risks of entering into borrowing transactions.

Commercial Paper (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Commercial paper (including variable amount master demand notes and funding agreements) consists of short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs.

Custodial Receipts (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Custodial receipts or certificates are underwritten by securities dealers or banks and evidence ownership of future interest payments, principal payments or both on certain U.S. government notes or bonds or on certain municipal obligations. The underwriter of these certificates or receipts typically purchases U.S. government securities or municipal obligations and deposits them in an irrevocable trust or custodial account with a custodian

 

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bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the obligations. Although under the terms of a custodial receipt, a fund typically would be authorized to assert its rights directly against the issuer of the underlying obligation, a fund could be required to assert through the custodian bank those rights as may exist against the underlying issuer. Thus, in the event the underlying issuer fails to pay principal and/or interest when due, a fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the fund had purchased a direct obligation of the issuer. In addition, in the event that the trust or custodial account in which the underlying security has been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would be reduced in recognition of any taxes paid.

Demand Instruments (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

A fund may invest in securities issued as floating- or variable-rate securities subject to demand features (“demand instruments”). Demand instruments usually have a stated maturity of more than one year but contain a demand feature (or “put”) that enables the holder to tender the investment at an exercise price equal to approximately the amortized cost of the instrument plus accrued interest on no more than 30 days’ notice. Variable-rate demand instruments provide for automatic establishment of a new interest rate on set dates. Floating-rate demand instruments provide for automatic adjustment of interest rates whenever a specified interest rate (e.g., the prime rate) changes. A fund currently is permitted to purchase floating rate and variable rate obligations with demand features in accordance with requirements established by the SEC, which, among other things, permit such instruments to be deemed to have remaining maturities of 13 months or less, notwithstanding that they may otherwise have a stated maturity in excess of 13 months. Securities with ultimate maturities of greater than 13 months may be purchased only pursuant to Rule 2a-7 of the 1940 Act. Frequently, floating rate and variable rate obligations are secured by letters of credit or other credit support arrangements provided by banks.

Securities with demand features may involve certain expenses and risks, including the inability of the issuer of the instrument to pay for the securities at the time the instrument is exercised, non-marketability of the instrument and differences between the maturity of the underlying security and the maturity of the instrument. Securities may cost more with demand features than without them. Demand features can serve three purposes: (i) to shorten the maturity of a variable or floating rate security, (ii) to enhance the instrument’s credit quality and (iii) to provide a source of liquidity. Demand features are often issued by third party financial institutions, generally domestic and foreign banks, and by brokerage firms or insurance companies. Accordingly, the credit quality and liquidity of a fund’s investments may be dependent in part on the credit quality of the institutions supporting the fund’s investments and changes in the credit quality of these institutions could cause losses to a fund and affect its share price.

Variable rate demand instruments include variable rate demand preferred shares or other forms of liquidity protected preferred shares that are issued by closed end investment companies that invest in municipal securities. These preferred shares have a liquidation preference and pay a dividend that is set weekly or at some other interval (typically 28 days) by a remarketing agent or through a similar process that is designed to approximate current prevailing interest rates. A fund, as a holder of one of these instruments, will have the right to tender the securities for remarketing or, if the securities cannot be remarketed, to tender the securities to a liquidity provider, in each case at a price equal to its liquidation preference plus accrued dividends. A fund would have no right to tender the shares to the issuer for payment or redemption, and the shares will be not freely transferable. A fund will be subject to the risk that the liquidity provider will not be able to honor its unconditional commitment to purchase the shares.

See also “Municipal Securities—Demand Instruments.”

 

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Floating Rate and Variable Rate Obligations (each fund)

Floating rate and variable rate obligations, including participation interests therein, are securities that pay interest at rates that are adjusted periodically according to a specified formula, usually with reference to some interest rate index or market interest rate. Variable rate obligations provide for a specified periodic adjustment in the interest rate, while floating rate obligations have an interest rate which changes whenever there is a change in the external interest rate. For purposes of determining the maturity of a variable rate or floating rate instrument held by a fund under applicable regulations, the fund may be permitted to take into account reset provisions. For the purposes of determining the weighted average life of a fund’s portfolio, the period remaining for each adjustable-rate security without a demand feature would have a maturity equal to its final legal maturity.

The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest rate adjustment index as provided in the respective instruments. Variable rate instruments include participation interests in variable or fixed-rate securities owned by a bank, insurance company or other financial institution or affiliated organizations. Although the rate of the underlying securities may be fixed, the terms of the participation interest may result in the fund receiving a variable rate on its investment.

Because of the variable rate nature of the instruments, when prevailing interest rates decline the yield on these instruments will generally decline. On the other hand, during periods when prevailing interest rates increase, the yield on these instruments will generally increase and the instruments will have less risk of capital depreciation than instruments bearing a fixed rate of return.

Foreign Securities and Markets (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Investments in securities issued by or provided with credit enhancements by foreign banks or other foreign issuers present certain additional risks. Also, whether or not a fund invests directly in such securities, the value and liquidity of a fund’s investments may be negatively impacted by events and conditions affecting foreign markets, due to the interconnected nature of the global economy and capital markets.

Economic, Political and Social Factors. Certain non-U.S. countries, including emerging markets, may be subject to a greater degree of economic, political and social instability. Such instability may result from, among other things: (i) authoritarian governments or military involvement in political and economic decision making; (ii) popular unrest associated with demands for improved economic, political and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection and conflict. Such economic, political and social instability could significantly disrupt the financial markets in such countries and the ability of the issuers in such countries to repay their obligations. In addition, it may be difficult for a fund to pursue claims against a foreign issuer in the courts of a foreign country. Investing in emerging countries also involves the risk of expropriation, nationalization, confiscation of assets and property or the imposition of restrictions on foreign investments and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation in any emerging country, a fund could lose its entire investment in that country. Certain emerging market countries restrict or control foreign investment in their securities markets to varying degrees. These restrictions may limit a fund’s investment in those markets and may increase the expenses of the fund. In addition, the repatriation of both investment income and capital from certain markets in the region is subject to restrictions such as the need for certain governmental consents. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of a fund’s operation. Economies in individual non-U.S. countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, currency valuation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many non-U.S. countries have experienced substantial, and in some cases extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, very negative effects on the economies and securities markets of certain emerging

 

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countries. Economies in emerging countries generally are dependent heavily upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, affected adversely and significantly by economic conditions in the countries with which they trade.

Sovereign Government and Supranational Debt. Sovereign debt securities may include: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions located in emerging market countries; debt securities issued by government owned, controlled or sponsored entities located in emerging market countries; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness; participations in loans between emerging market governments and financial institutions; or debt securities issued by supranational entities such as the World Bank. A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development.

Sovereign debt is subject to risks in addition to those relating to non-U.S. investments generally. As a sovereign entity, the issuing government may be immune from lawsuits in the event of its failure or refusal to pay the obligations when due. The 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 non-U.S. reserves, the availability of sufficient non-U.S. exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward principal international lenders and the political constraints to which the sovereign debtor may be subject. Sovereign debtors may also be dependent on disbursements or assistance from foreign governments or multinational agencies, the country’s access to trade and other international credits, and the country’s balance of trade. Assistance may be dependent on a country’s implementation of austerity measures and reforms, which measures may limit or be perceived to limit economic growth and recovery. Some sovereign debtors have rescheduled their debt payments, declared moratoria on payments or restructured their debt to effectively eliminate portions of it, and similar occurrences may happen in the future. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part.

Europe—Recent Events. A number of countries in Europe have experienced severe economic and financial difficulties. Many non-governmental issuers, and even certain governments, have defaulted on, or been forced to restructure, their debts; many other issuers have faced difficulties obtaining credit or refinancing existing obligations; financial institutions have in many cases required government or central bank support, have needed to raise capital, and/or have been impaired in their ability to extend credit; and financial markets in Europe and elsewhere have experienced extreme volatility and declines in asset values and liquidity. These difficulties may continue, worsen or spread within and without Europe. Responses to the financial problems by European governments, central banks and others, including austerity measures and reforms, may not work, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, voters in the United Kingdom have approved withdrawal from the European Union. Other countries may seek to withdraw from the European Union and/or abandon the euro, the common currency of the European Union. A number of countries in Europe have suffered terror attacks, and additional attacks may occur in the future. The Ukraine has experienced ongoing military conflict; this conflict may expand and military conflicts could potentially occur elsewhere in Europe. Europe has also been struggling with mass migration from the Middle East and Africa. The ultimate effects of these events and other socio-political or geopolitical issues are not known but could profoundly affect global economies and markets. Whether or not a fund invests in securities of issuers located in Europe or with significant exposure to European issuers or countries, these events could negatively affect the value and liquidity of a fund’s investments.

 

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High Quality Corporate Obligations (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

High quality corporate obligations include obligations of corporations that are originally issued with a maturity of greater than 397 days and are: (1) rated as long-term debt obligations in the highest rating category or (2) issued by an issuer that has a class of short-term debt obligations that are comparable in priority and security with the obligation and that have been rated in the highest rating category for short-term debt obligations, or are otherwise comparable to short-term debt obligations having such a rating.

Illiquid Assets (each fund)

Illiquid assets are assets that cannot be sold or disposed of in the ordinary course of business within seven calendar days at approximately the value ascribed to them by the fund. These assets include, among others, certain securities that are subject to legal or contractual restrictions on resale and any repurchase transactions that do not mature within seven days. The fund may not be able to sell illiquid securities and other assets in its portfolio at a time when the sale would be desirable or at a price the fund deems representative of their value. Disposing of illiquid investments may involve time-consuming negotiation and expenses.

Certain restricted securities can be traded freely among qualified purchasers in accordance with Rule 144A under the Securities Act of 1933 (the “1933 Act”). The SEC has stated that an investment company’s board of directors, or its investment adviser acting under authority delegated by the board, may determine that a security eligible for trading under this rule is “liquid.” The Board has delegated to the subadviser authority to determine whether particular securities eligible for trading under Rule 144A are and continue to be “liquid.” Investing in these restricted securities could have the effect of increasing the fund’s illiquidity, however, if qualified purchasers become uninterested in buying these securities.

Lending of Securities (each fund)

Consistent with applicable regulatory requirements and in order to generate income, a fund may lend its securities to broker/dealers and other institutional borrowers. Loans of securities would be secured continuously by collateral in cash, cash equivalents, or U.S. government obligations maintained on a current basis at an amount at least equal to the market value of the securities loaned. The cash collateral received by a fund would be invested in high quality short-term instruments, or in one or more funds maintained by the lending agent for this purpose. During the term of the loan, a fund will continue to have investment risk with respect to the security loaned, as well as risk with respect to the investment of the cash collateral. Either party has the right to terminate a loan at any time on customary industry settlement notice (which will not usually exceed three business days). During the existence of a loan, a fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and, with respect to cash collateral, would also receive any income generated by the fund’s investment of the collateral (subject to a rebate payable to the borrower and a percentage of the income payable to the lending agent). Where the borrower provides a fund with collateral other than cash, the borrower is also obligated to pay the fund a fee for use of the borrowed securities. A fund would not have the right to vote any securities having voting rights during the existence of the loan, but would call the loan in anticipation of an important vote to be taken among holders of the securities or of the giving or withholding of their consent on a material matter affecting the investment. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. However, the loans would be made only to entities deemed by the subadviser to be of good standing, and when, in the judgment of the subadviser, the consideration which can be earned currently from loans of this type justifies the attendant risk. In addition, a fund could suffer loss if the loan is terminated and the fund is forced to liquidate investments at a loss in order to return the cash collateral to the buyer. If a fund does lend securities, it is not intended that the value of the securities loaned by the fund would exceed 33 1/3% of the value of its net assets.

The funds do not currently intend to engage in securities lending although the funds may engage in transactions (such as reverse repurchase agreements) which have similar characteristics.

 

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Money Market Instruments Generally (each fund)

Money market instruments are short-term IOUs issued by banks or other non-governmental issuers, the U.S. or foreign governments, or state or local governments. Money market instruments generally have maturity dates of 13 months or less, and may pay interest at fixed, floating or adjustable rates, or may be issued at a discount. Money market instruments may include certificates of deposit, bankers’ acceptances, variable rate demand securities (where the interest rate is reset periodically and the holder may demand payment from the issuer or another obligor at any time), preferred shares, fixed-term obligations, commercial paper (short-term unsecured debt), asset-backed commercial paper, other mortgage-backed and asset-backed securities and repurchase agreements. Asset-backed commercial paper refers to a debt security with an original term to maturity of up to 270 days that may be backed by residential and commercial mortgage loans or mortgage-backed securities or other types of receivables. Payments due on asset-backed commercial paper are supported by cash flows from underlying assets, or one or more liquidity or credit support providers, or both.

Mortgage-Backed Securities (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Interest and principal payments on mortgage-backed securities (“MBS”) are typically made monthly, and principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if a fund purchases such a security 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 of increasing yield to maturity. Conversely, if a fund purchases these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. Prepayments on a pool of mortgage loans are influenced by a variety of economic, geographic, social and other factors, including changes in mortgagors’ housing needs, job transfers, unemployment, mortgagors’ net equity in the mortgaged properties and servicing decisions. Generally, however, prepayments on fixed rate mortgage loans will increase during a period of falling interest rates. Accordingly, amounts available for reinvestment by a fund are likely to be greater during a period of relatively low interest rates and, as a result, are likely to be reinvested at lower interest rates than during a period of relatively high interest rates. This prepayment effect has been particularly pronounced during recent years as borrowers have refinanced higher interest rate mortgages into lower interest rate mortgages available in the marketplace. MBS may decrease in value as a result of increases in interest rates and may benefit less than other fixed-income securities from declining interest rates because of the risk of prepayment.

Municipal Securities (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Shareholders should note that, although interest paid on municipal securities is generally exempt from regular federal income tax, Liquid Reserves and Cash Reserves do not anticipate holding municipal securities in sufficient quantities to qualify to pay exempt-interest dividends. As a result, distributions by Liquid Reserves or Cash Reserves to its shareholders are expected to be treated for federal income tax purposes as ordinary dividends without regard to the character in the hands of Liquid Reserves or Cash Reserves, as applicable, of any interest that it receives on municipal securities.

Municipal securities (which are also referred to herein as “municipal obligations” or “municipal bonds”) generally include debt obligations (including, but not limited to bonds, notes or commercial paper) issued by or on behalf of any of the 50 states and their political subdivisions, agencies and public authorities, certain other governmental issuers (such as Puerto Rico, the U.S. Virgin Islands and Guam) and other qualifying issuers, participations or other interests in these securities and other related investments. The interest paid on municipal securities is typically excluded from gross income for regular federal income tax purposes, although it may be subject to the AMT.

 

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Municipal securities are issued to obtain funds for various public purposes, including the construction of a wide range of public facilities, such as airports, bridges, highways, housing, hospitals, mass transportation, schools, streets, water and sewer works, gas, and electric utilities. They may also be issued to refund outstanding obligations, to obtain funds for general operating expenses, or to obtain funds to loan to other public institutions and facilities and in anticipation of the receipt of revenue or the issuance of other obligations.

The two principal classifications of municipal securities are “general obligation” securities and “limited obligation” or “revenue” securities. General obligation securities are secured by a municipal issuer’s pledge of its full faith, credit, and taxing power for the payment of principal and interest. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuer’s maintenance of its tax base. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue security is a function of the economic viability of the facility or revenue source. Revenue securities include private activity bonds (described below) which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. Municipal securities may also include “moral obligation” bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Private Activity Bonds

Private activity bonds are issued by or on behalf of public authorities to provide funds, usually through a loan or lease arrangement, to a private entity for the purpose of financing construction of privately operated industrial facilities, such as warehouse, office, plant and storage facilities and environmental and pollution control facilities. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity, which may or may not be guaranteed by a parent company or otherwise secured. Private activity bonds generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, repayment of such bonds generally depends on the revenue of a private entity. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors, including the size of the entity, its capital structure, demand for its products or services, competition, general economic conditions, government regulation and the entity’s dependence on revenues for the operation of the particular facility being financed.

Under current federal income tax law, interest on municipal bonds issued after August 7, 1986 which are specified private activity bonds and the proportionate share of any exempt-interest dividend paid by a regulated investment company that receives interest from such private activity bonds, will be treated as an item of tax preference for purposes of the AMT, which is imposed on individuals and corporations by the Internal Revenue Code of 1986, as amended (the “Code”). For regular federal income tax purposes such interest will remain fully tax-exempt. Bonds issued in 2009 and 2010 generally will not be treated as private activity bonds, and interest earned on such bonds generally will not be treated as a tax preference item. Although interest on all tax-exempt obligations (including private activity bonds) is generally included in “adjusted current earnings” of corporations for AMT purposes, interest on bonds issued in 2009 and 2010 generally is not included in adjusted current earnings.

Industrial Development Bonds

Industrial development bonds (“IDBs”) are issued by public authorities to obtain funds to provide financing for privately-operated facilities for business and manufacturing, housing, sports, convention or trade show facilities, airport, mass transit, port and parking facilities, air or water pollution control facilities, and certain

 

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facilities for water supply, gas, electricity or sewerage or solid waste disposal. Although IDBs are issued by municipal authorities, the payment of principal and interest on IDBs is dependent solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of the real and personal property being financed as security for such payments. IDBs are considered municipal securities if the interest paid is exempt from regular federal income tax. Interest earned on IDBs may be subject to the AMT.

Tender Option Bonds

A tender option bond is a municipal bond (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term tax-exempt rates, that has been coupled with the agreement of a third party, such as a financial institution, pursuant to which such institution grants the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option, the institution generally receives periodic fees equal to the difference between the municipal bond’s fixed coupon rate and the rate, as determined by a remarketing or similar agent, that would cause the securities, coupled with the tender option, to trade at par. Thus, after payment of this fee, the security holder would effectively hold a demand obligation that bears interest at the prevailing short-term tax-exempt rate. (See “Structured Instruments” below.)

Municipal Leases

Municipal leases or installment purchase contracts are issued by a state or local government to acquire equipment or facilities. Municipal leases frequently have special risks not normally associated with general obligation bonds or revenue bonds. Many leases include “non-appropriation” clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. Although the obligations are typically secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might, in some cases, prove difficult or, if sold, may not fully cover a fund’s exposure.

Participation Interests

Tax-exempt participation interests in municipal obligations (such as private activity bonds and municipal lease obligations) are typically issued by a financial institution. A participation interest gives a fund an undivided interest in the municipal obligation in the proportion that the fund’s participation interest bears to the total principal amount of the municipal obligation. Participation interests in municipal obligations may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank (which may be the bank issuing the participation interest, a bank issuing a confirming letter of credit to that of the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the participation interest) or insurance policy of an insurance company. A fund has the right to sell the participation interest back to the institution or draw on the letter of credit or insurance after a specified period of notice, for all or any part of the full principal amount of the fund’s participation in the security, plus accrued interest.

Issuers of participation interests will retain a service and letter of credit fee and a fee for providing the liquidity feature, in an amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased on behalf of a fund. The issuer of the participation interest may bear the cost of insurance backing the participation interest, although a fund may also purchase insurance, in which case the cost of insurance will be an expense of the fund. Participation interests may be sold prior to maturity.

Participation interests may include municipal lease obligations. Purchase of a participation interest may involve the risk that a fund will not be deemed to be the owner of the underlying municipal obligation for purposes of the ability to claim tax exemption of interest paid on that municipal obligation. (See “Banking Industry Concentration” above.)

 

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Municipal Notes

There are four major varieties of municipal notes: Tax and Revenue Anticipation Notes (“TRANs”); Tax Anticipation Notes (“TANs”); Revenue Anticipation Notes (“RANs”); and Bond Anticipation Notes (“BANs”). TRANs, TANs and RANs are issued by states, municipalities and other tax-exempt issuers to finance short-term cash needs or, occasionally, to finance construction. Many TRANs, TANs and RANs are general obligations of the issuing entity payable from taxes or designated revenues, respectively, expected to be received within the related fiscal period. BANs are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds to be issued prior to the maturity of the BANs. BANs are issued most frequently by both general obligation and revenue bond issuers usually to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects.

Tax-Exempt Commercial Paper

Tax-exempt commercial paper is a short-term obligation with a stated maturity of 270 days or less. It is issued by state and local governments or their agencies to finance seasonal working capital needs or as short-term financing in anticipation of longer term financing. While tax-exempt commercial paper is intended to be repaid from general revenues or refinanced, it frequently is backed by a letter of credit, lending arrangement, note repurchase agreement or other credit facility agreement offered by a bank or financial institution.

Demand Instruments

Municipal bonds may be issued as floating- or variable-rate securities subject to demand features (“demand instruments”). Demand instruments usually have a stated maturity of more than one year but contain a demand feature (or “put”) that enables the holder to redeem the investment. Variable-rate demand instruments provide for automatic establishment of a new interest rate on set dates. Floating-rate demand instruments provide for automatic adjustment of interest rates whenever a specified interest rate (e.g., the prime rate) changes.

These floating and variable rate instruments are payable upon a specified period of notice which may range from one day up to one year. The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest rate adjustment index as provided in the respective instruments. Variable rate instruments include participation interests in variable-or fixed-rate municipal obligations owned by a bank, insurance company or other financial institution or affiliated organizations. Although the rate of the underlying municipal obligations may be fixed, the terms of the participation interest may result in a fund receiving a variable rate on its investment.

Because of the variable nature of the instruments, when prevailing interest rates decline the yield on these instruments will generally decline. On the other hand, during periods when prevailing interest rates increase, the yield on these instruments will generally increase and the instruments will have less risk of capital depreciation than instruments bearing a fixed rate of return.

See also “Floating Rate and Variable Obligations” and “Demand Instruments.”

Stand-By Commitments

Under a stand-by commitment a dealer agrees to purchase, at a fund’s option, specified municipal obligations held by a fund at a specified price and, in this respect, stand-by commitments are comparable to put options. A stand-by commitment entitles the holder to achieve same day settlement and to receive an exercise price equal to the amortized cost of the underlying security plus accrued interest, if any, at the time of exercise. A fund will be subject to credit risk with respect to an institution providing a stand-by commitment and a decline in the credit quality of the institution could cause losses to the fund.

 

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A fund will generally acquire stand-by commitments to facilitate fund liquidity. The cost of entering into stand-by commitments will increase the cost of the underlying municipal obligation and similarly will decrease such security’s yield to investors. Gains, if any, realized in connection with stand-by commitments will be taxable.

Additional Risks Relating to Municipal Securities

Tax risk. The Code imposes certain continuing requirements on issuers of tax-exempt bonds regarding the use, expenditure and investment of bond proceeds and the payment of rebates to the U.S. government. Failure by the issuer to comply after the issuance of tax-exempt bonds with certain of these requirements could cause interest on the bonds to become includable in gross income retroactive to the date of issuance.

From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on municipal obligations, and similar proposals may be introduced in the future. In addition, the federal income tax exemption has been, and may in the future be, the subject of litigation. If one of these proposals were enacted, the availability of tax-exempt obligations for investment by a fund and the value of the fund’s investments would be affected.

Opinions relating to the validity of municipal obligations and to the exclusion of interest thereon from gross income for regular federal and/or state income tax purposes are rendered by bond counsel to the respective issuers at the time of issuance. A fund and its service providers will rely on such opinions and will not review the proceedings relating to the issuance of municipal obligations or the bases for such opinions.

Information risk. Information about the financial condition of issuers of municipal obligations may be less available than about corporations whose securities are publicly traded.

State and Federal law risk. Municipal obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the federal Bankruptcy Code, and laws, if any, that may be enacted by Congress or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. There is also the possibility that, as a result of litigation or other conditions, the power or ability of any one or more issuers to pay, when due, the principal of and interest on its or their municipal obligations may be materially affected.

Market and ratings risk. The yields on municipal obligations are dependent on a variety of factors, including economic and monetary conditions, general market conditions, supply and demand, general conditions of the municipal market, size of a particular offering, the maturity of the obligation and the rating of the issue. Adverse economic, business, legal or political developments might affect all or substantial portions of a fund’s municipal obligations in the same manner.

Unfavorable developments in any economic sector may have far-reaching ramifications for the overall or any state’s municipal market.

Although the ratings of tax-exempt securities by ratings agencies are relative and subjective, and are not absolute standards of quality, such ratings reflect the assessment of the ratings agency, at the time of issuance of the rating, of the economic viability of the issuer of a general obligation bond or, with respect to a revenue bond, the special revenue source, with respect to the timely payment of interest and the repayment of principal in accordance with the terms of the obligation, but do not reflect an assessment of the market value of the obligation. See Appendix A for additional information regarding ratings. Consequently, municipal obligations with the same maturity, coupon and rating may have different yields when purchased in the open market, while municipal obligations of the same maturity and coupon with different ratings may have the same yield.

 

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Liquidity risk. In general, the secondary market for tax-exempt securities may be less liquid than that for taxable fixed-income securities.

Taxable Municipal Obligations

The market for taxable municipal obligations is relatively small, which may result in a lack of liquidity and in price volatility of those securities. Interest on taxable municipal obligations is includable in gross income for regular federal income tax and AMT purposes. While interest on taxable municipal obligations may be exempt from personal taxes imposed by the state within which the obligation is issued, such interest will nevertheless generally be subject to all other state and local income and franchise taxes.

Risks Inherent in an Investment in Different Types of Municipal Securities

General Obligation Bonds. General obligation bonds are backed by the issuer’s pledge of its full faith, credit and taxing power for the payment of principal and interest. However, the taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entity’s credit will depend on many factors. Some such factors are the entity’s tax base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entity’s control.

Industrial Development Revenue Bonds (“IDRs”). IDRs are tax-exempt securities issued by states, municipalities, public authorities or similar entities to finance the cost of acquiring, constructing or improving various projects. These projects are usually operated by corporate entities. IDRs are not general obligations of governmental entities backed by their taxing power. Issuers are only obligated to pay amounts due on the IDRs to the extent that funds are available from the unexpended proceeds of the IDRs or receipts or revenues of the issuer. Payment of IDRs is solely dependent upon the creditworthiness of the corporate operator of the project or corporate guarantor. Such corporate operators or guarantors that are industrial companies may be affected by many factors, which may have an adverse impact on the credit quality of the particular company or industry.

Hospital and Health Care Facility Bonds. The ability of hospitals and other health care facilities to meet their obligations with respect to revenue bonds issued on their behalf is dependent on various factors. Some such factors are the level of payments received from private third-party payors and government programs and the cost of providing health care services. There can be no assurance that payments under governmental programs will be sufficient to cover the costs associated with their bonds. It may also be necessary for a hospital or other health care facility to incur substantial capital expenditures or increased operating expenses to effect changes in its facilities, equipment, personnel and services. Hospitals and other health care facilities are additionally subject to claims and legal actions by patients and others in the ordinary course of business. There can be no assurance that a claim will not exceed the insurance coverage of a health care facility or that insurance coverage will be available to a facility.

Single Family and Multi-Family Housing Bonds. Multi-family housing revenue bonds and single family mortgage revenue bonds are state and local housing issues that have been issued to provide financing for various housing projects. Multi-family housing revenue bonds are payable primarily from mortgage loans to housing projects for low to moderate income families. Single-family mortgage revenue bonds are issued for the purpose of acquiring notes secured by mortgages on residences. The ability of housing issuers to make debt service payments on their obligations may be affected by various economic and non-economic factors. Such factors include: occupancy levels, adequate rental income in multi-family projects, the rate of default on mortgage loans underlying single family issues and the ability of mortgage insurers to pay claims. All single-family mortgage revenue bonds and certain multi-family housing revenue bonds are prepayable over the life of the underlying mortgage or mortgage pool. Therefore, the average life of housing obligations cannot be determined. However, the average life of these obligations will ordinarily be less than their stated maturities. Mortgage loans are frequently partially or completely prepaid prior to their final stated maturities.

 

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Power Facility Bonds. The ability of utilities to meet their obligations with respect to bonds they issue is dependent on various factors. These factors include the rates that they may charge their customers, the demand for a utility’s services and the cost of providing those services. Utilities are also subject to extensive regulations relating to the rates which they may charge customers. Utilities can experience regulatory, political and consumer resistance to rate increases. Utilities engaged in long-term capital projects are especially sensitive to regulatory lags in granting rate increases. Utilities are additionally subject to increased costs due to governmental environmental regulation and decreased profits due to increasing competition. Any difficulty in obtaining timely and adequate rate increases could adversely affect a utility’s results of operations. The subadviser cannot predict the effect of such factors on the ability of issuers to meet their obligations with respect to bonds.

Water and Sewer Revenue Bonds. Water and sewer bonds are generally payable from user fees. The ability of state and local water and sewer authorities to meet their obligations may be affected by a number of factors. Some such factors are the failure of municipalities to utilize fully the facilities constructed by these authorities, declines in revenue from user charges, rising construction and maintenance costs, impact of environmental requirements, the difficulty of obtaining or discovering new supplies of fresh water, the effect of conservation programs, the impact of “no growth” zoning ordinances and the continued availability of federal and state financial assistance and of municipal bond insurance for future bond issues.

University and College Bonds. The ability of universities and colleges to meet their obligations is dependent upon various factors. Some of these factors of which an investor should be aware are the size and diversity of their sources of revenues, enrollment, reputation, management expertise, the availability and restrictions on the use of endowments and other funds and the quality and maintenance costs of campus facilities. Also, in the case of public institutions, the financial condition of the relevant state or other governmental entity and its policies with respect to education may affect an institution’s ability to make payments on its own.

Lease Rental Bonds. Lease rental bonds are predominantly issued by governmental authorities that have no taxing power or other means of directly raising revenues. Rather, the authorities are financing vehicles created solely for the construction of buildings or the purchase of equipment that will be used by a state or local government. Thus, the bonds are subject to the ability and willingness of the lessee government to meet its lease rental payments, which include debt service on the bonds. Lease rental bonds are subject to the risk that the lessee government is not legally obligated to budget and appropriate for the rental payments beyond the current fiscal year. These bonds are also subject to the risk of abatement in many states as rents cease in the event that damage, destruction or condemnation of the project prevents its use by the lessee. Also, in the event of default by the lessee government, there may be significant legal and/or practical difficulties involved in the reletting or sale of the project.

Capital Improvement Facility Bonds. Capital improvement bonds are bonds issued to provide funds to assist political subdivisions or agencies of a state through acquisition of the underlying debt of a state or local political subdivision or agency. The risks of an investment in such bonds include the risk of possible prepayment or failure of payment of proceeds on and default of the underlying debt.

Solid Waste Disposal Bonds. Bonds issued for solid waste disposal facilities are generally payable from tipping fees and from revenues that may be earned by the facility on the sale of electrical energy generated in the combustion of waste products. The ability of solid waste disposal facilities to meet their obligations depends upon the continued use of the facility, the successful and efficient operation of the facility and, in the case of waste-to-energy facilities, the continued ability of the facility to generate electricity on a commercial basis. Also, increasing environmental regulation on the federal, state and local level has a significant impact on waste disposal facilities. While regulation requires more waste producers to use waste disposal facilities, it also imposes significant costs on the facilities.

Moral Obligation Bonds. A moral obligation bond is a type of revenue bond issued by a state or municipality pursuant to legislation authorizing the establishment of a reserve fund to pay principal and interest

 

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payments if the issuer is unable to meet its obligations. The establishment of such a reserve fund generally requires appropriation by the state legislature, which is not legally required. Accordingly, the establishment of a reserve fund is generally considered a moral commitment but not a legal obligation of the state or municipality that created the issuer.

Pre-Refunded Bonds. Pre-refunded bonds are typically secured by direct obligations of the U.S. government, or in some cases obligations guaranteed by the U.S. government, placed in an escrow account maintained by an independent trustee until maturity or a predetermined redemption date. These obligations are generally non-callable prior to maturity or the predetermined redemption date. In a few isolated instances to date, however, bonds which were thought to be escrowed to maturity have been called for redemption prior to maturity.

Airport, Port and Highway Revenue Bonds. Certain facility revenue bonds are payable from and secured by the revenue from the ownership and operation of particular facilities, such as airports, highways and port authorities. Airport operating income may be affected by the ability of airlines to meet their obligations under the agreements with airports. Similarly, payment on bonds related to other facilities is dependent on revenues from the projects, such as use fees from ports, tolls on turnpikes and bridges and rents from buildings. Therefore, payment may be adversely affected by reduction in revenues due to such factors and increased cost of maintenance or decreased use of a facility. The subadviser cannot predict what effect conditions may have on revenues which are required for payment on these bonds.

Special Tax Bonds. Special tax bonds are payable from and secured by the revenues derived by a municipality from a particular tax. Examples of such special taxes are a tax on the rental of a hotel room, the purchase of food and beverages, the rental of automobiles or the consumption of liquor. Special tax bonds are not secured by the general tax revenues of the municipality, and they do not represent general obligations of the municipality. Therefore, payment on special tax bonds may be adversely affected by a reduction in revenues realized from the underlying special tax. Also, should spending on the particular goods or services that are subject to the special tax decline, the municipality may be under no obligation to increase the rate of the special tax to ensure that sufficient revenues are raised from the shrinking taxable base.

Tax Allocation Bonds. Tax allocation bonds are typically secured by incremental tax revenues collected on property within the areas where redevelopment projects financed by bond proceeds are located. Such payments are expected to be made from projected increases in tax revenues derived from higher assessed values of property resulting from development in the particular project area and not from an increase in tax rates. Special risk considerations include: reduction of, or a less than anticipated increase in, taxable values of property in the project area; successful appeals by property owners of assessed valuations; substantial delinquencies in the payment of property taxes; or imposition of any constitutional or legislative property tax rate decrease.

Tobacco Settlement Revenue Bonds. Tobacco settlement revenue bonds are secured by a state or local government’s proportionate share in the Master Settlement Agreement (“MSA”). The MSA is an agreement, reached out of court in November 1998 between the attorneys general of 46 states (Florida, Minnesota, Mississippi and Texas all settled independently) and six other U.S. jurisdictions (including the District of Columbia, Puerto Rico and Guam), and the four largest U.S. tobacco manufacturers at that time (Philip Morris, RJ Reynolds, Brown & Williamson, and Lorillard). Subsequently, smaller tobacco manufacturers signed on to the MSA. The MSA basically provides for payments annually by the manufacturers to the states and jurisdictions in perpetuity, in exchange for releasing all claims against the manufacturers and a pledge of no further litigation. The MSA established a base payment schedule and a formula for adjusting payments each year. Manufacturers pay into a master escrow trust based on their market share, and each state receives a fixed percentage of the payment as set forth in the MSA. Annual payments are highly dependent on annual domestic cigarette shipments and inflation, as well as several other factors. As a result, payments made by tobacco manufacturers could be negatively impacted by a decrease in tobacco consumption over time. A market share loss by the MSA companies to non-MSA participating manufacturers would also cause a downward adjustment in the payment amounts. A participating manufacturer filing for bankruptcy could cause delays or reductions in bond payments.

 

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Certain tobacco settlement revenue bonds are issued with “turbo” redemption features. Under this turbo structure, all available excess revenues are applied as an early redemption to the designated first turbo maturity until it is completely repaid, and then to the next turbo maturity until paid in full, and so on. The result is that the returned principal creates an average maturity that could be much shorter than the legal final maturity.

Transit Authority Bonds. Mass transit is generally not self-supporting from fare revenues. Therefore, additional financial resources must be made available to ensure operation of mass transit systems as well as the timely payment of debt service. Often such financial resources include federal and state subsidies, lease rentals paid by funds of the state or local government or a pledge of a special tax. If fare revenues or the additional financial resources do not increase appropriately to pay for rising operating expenses, the ability of the issuer to adequately service the debt may be adversely affected.

Convention Facility Bonds. Bonds in the convention facilities category include special limited obligation securities issued to finance convention and sports facilities payable from rental payments and annual governmental appropriations. The governmental agency is not obligated to make payments in any year in which the monies have not been appropriated to make such payments. In addition, these facilities are limited use facilities that may not be used for purposes other than as convention centers or sports facilities.

Correctional Facility Bonds. Bonds in the correctional facilities category include special limited obligation securities issued to construct, rehabilitate and purchase correctional facilities payable from governmental rental payments and/or appropriations.

Other U.S. Territories. Municipal securities include the obligations of the governments of Puerto Rico and other U.S. territories and their political subdivisions (such as the U.S. Virgin Islands and Guam). Payment of interest and preservation of principal is dependent upon the continuing ability of such issuers and/or obligors of territorial, municipal and public authority debt obligations to meet their obligations thereunder. The sources of payment for such obligations and the marketability thereof may be affected by financial and other difficulties experienced by such issuers.

The following is a brief summary of certain factors affecting the economies of the territories listed below and does not purport to be a complete description of such factors. Many complex political, social and economic forces influence each territory’s economy and finances, which may in turn affect the territory’s financial plan. These forces may affect a territory unpredictably from fiscal year to fiscal year and are influenced by governments, institutions and events that are not subject to the territory’s control.

Puerto Rico. Municipal securities of issuers located in the Commonwealth of Puerto Rico may be affected by political, social and economic conditions in Puerto Rico. Puerto Rico’s economy has been in a recession since late 2006, which has contributed to a steep increase in unemployment rates, funding shortfalls of state employees’ retirement systems, a budget deficit resulting from a structural imbalance, and reduced government revenues. Recently, Puerto Rico has defaulted on certain agency debt payments and the Governor has warned that Puerto Rico will be unable to meet additional pending obligations, including under general obligation bonds, if it is unable to restructure its debt. If issuers of Puerto Rico municipal securities held by a fund default on their obligations, the fund may lose the value of those investments.

The following is a brief summary of certain factors affecting Puerto Rico’s economy and does not purport to be a complete description of such factors.

The dominant sectors of the Puerto Rico economy are manufacturing and services. The manufacturing sector has undergone fundamental changes over the years as a result of increased emphasis on higher wage, high technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors, professional and scientific instruments, and certain high technology machinery and equipment. The services sector, including finance, insurance, real estate, wholesale and retail trade, transportation, communications and public utilities and

 

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other services, also plays a major role in the economy. It ranks second only to manufacturing in contribution to the gross domestic product and leads all sectors in providing employment.

Most external factors that affect the Puerto Rico economy are determined by the policies and performance of the United States. These external factors include exports, direct investment, the amount of federal transfer payments, the level of interest rates, the rate of inflation, and tourist expenditures.

Guam. General obligations and/or revenue bonds of issuers located in Guam may be affected by political, social and economic conditions in Guam. The following is a brief summary of factors affecting the economy of Guam and does not purport to be a complete description of such factors.

Guam, the westernmost territory of the U.S., is located 3,800 miles to the west-southwest of Honolulu, Hawaii and approximately 1,550 miles south-southeast of Tokyo, Japan. The population of Guam was estimated to be 161,785 in July 2015. Guam’s unemployment rate increased from 9.3% in September 2009 to 13.3% in March 2013, and more recently decreased to 7.7% in December 2014.

Guam’s economy depends in large measure on tourism and the U.S. military presence, each of which is subject to uncertainties as a result of global economic, social and political events. Tourism, particularly from Japan, which has been a source of a majority of visitors to Guam, represents the primary source of income for Guam’s economy. A weak economy, severe weather, war, epidemic outbreaks or the threat of terrorist activity, among other influences that are beyond Guam’s control, can adversely affect its tourism industry. Guam is also exposed to periodic typhoons, tropical storms, super typhoons and earthquakes such as the March 2011 earthquake and tsunami that occurred in Japan and caused a decline in tourism for a period of time. The U.S. military presence also affects economic activity on Guam in various ways. The number of U.S. military personnel in Guam declined in 2011. Economic, geopolitical, and other influences which are beyond Guam’s control could cause the U.S. military to reduce its existing presence on Guam or forgo any planned enhancements to its presence on Guam. Any reduction in tourism or the U.S. military presence could adversely affect Guam’s economy.

United States Virgin Islands. General obligations and/or revenue bonds of issuers located in the U.S. Virgin Islands may be affected by political, social and economic conditions in the U.S. Virgin Islands. The following is a brief summary of certain factors affecting the economy of the U.S. Virgin Islands and does not purport to be a complete description of such factors.

The U.S. Virgin Islands consists of four main islands: St. Croix, St. Thomas, St. John, and Water Island and approximately 70 smaller islands, islets and cays. The total land area is about twice the size of Washington, D.C. The U.S. Virgin Islands is located 60 miles east of Puerto Rico and 1,075 miles south of Miami, Florida in the Caribbean Sea and the Atlantic Ocean. The population of the U.S. Virgin Islands was estimated to be 103,574 in July 2015.

With tourist visits of approximately two million annually, tourism accounts for a substantial portion of the Gross Domestic Product (“GDP”). A weak economy, severe weather, war, epidemic outbreaks or the threat of terrorist activity, among other influences that are beyond the control of the territory, can adversely affect its tourism. Tourism-related services help increase private sector employment. Other private sector employment includes wholesale and retail trade, manufacturing (petroleum refining, rum distilling, textiles, electronics, pharmaceuticals and watch assembly), and construction and mining. International business and financial services are small but growing components of the economy. The agricultural sector is small, with most of the islands’ food being imported. The islands are vulnerable to substantial damage from storms. The global economic recession has affected all sectors of the economy and has had a negative effect on the employment rate.

 

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Repurchase Agreements (each fund other than U.S. Treasury Reserves)

Under the terms of a typical repurchase agreement, a fund would acquire one or more underlying debt obligations, frequently obligations issued by the U.S. government or its agencies or instrumentalities, for a relatively short period (typically overnight, although the term of an agreement may be many months), subject to an obligation of the seller to repurchase, and the fund to resell, the obligation at an agreed-upon time and price. The repurchase price is typically greater than the purchase price paid by the fund, thereby determining the fund’s yield. A repurchase agreement is similar to, and may be treated as, a secured loan, where the fund loans cash to the counterparty and the loan is secured by the purchased securities as collateral. All repurchase agreements entered into by a fund are required to be collateralized so that at all times during the term of a repurchase agreement, the value of the underlying securities is at least equal to the amount of the repurchase price. Also, a fund or its custodian is required to have control of the collateral, which the subadviser believes will give the applicable fund a valid, perfected security interest in the collateral.

Repurchase agreements could involve certain risks in the event of default or insolvency of the other party, including possible delays or restrictions upon a fund’s ability to dispose of the underlying securities, the risk of a possible decline in the value of the underlying securities during the period in which a fund seeks to assert its right to them, the risk of incurring expenses associated with asserting those rights and the risk of losing all or part of the income from the agreement. If a fund enters into a repurchase agreement involving securities the fund could not purchase directly, and the counterparty defaults, the fund may become the holder of securities that it could not purchase. Liquid Reserves and Cash Reserves may enter into repurchase agreements involving obligations other than U.S. government securities (such as commercial paper, corporate bonds, municipal securities and mortgage loans). These repurchase agreements may be subject to greater risks. In addition, these repurchase agreements may be more likely to have a term to maturity of longer than seven days. U.S. Treasury Obligations Fund may enter into repurchase agreements involving only U.S. Treasury obligations.

Repurchase agreements maturing in more than seven days are considered to be illiquid.

Repurchase agreements will give rise to income which will not qualify as tax-exempt income when distributed by the funds.

Pursuant to an exemptive order issued by the SEC, the funds, along with other affiliated entities managed by the manager, may transfer uninvested cash balances into one or more joint accounts for the purpose of entering into repurchase agreements secured by cash and U.S. government securities, subject to certain conditions.

Reverse Repurchase Agreements (each fund)

A reverse repurchase agreement has the characteristics of a secured borrowing by a fund and creates leverage in a fund’s portfolio. In a reverse repurchase transaction, a fund sells a portfolio instrument to another person, such as a financial institution or broker/dealer, in return for cash. At the same time, a fund agrees to repurchase the instrument at an agreed-upon time and at a price that is greater than the amount of cash that the fund received when it sold the instrument, representing the equivalent of an interest payment by the fund for the use of the cash. During the term of the transaction, a fund will continue to receive any principal and interest payments (or the equivalent thereof) on the underlying instruments.

The funds may engage in reverse repurchase agreements as a means of raising cash to satisfy redemption requests or for other temporary or emergency purposes. Unless otherwise limited in the Prospectuses or this SAI, a fund may also engage in reverse repurchase agreements to the extent permitted by its fundamental investment policies in order to raise additional cash to be invested by the subadviser in other securities or instruments in an effort to increase the fund’s investment returns.

During the term of the transaction, a fund will remain at risk for any fluctuations in the market value of the instruments subject to the reverse repurchase agreement as if it had not entered into the transaction. When a fund

 

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reinvests the proceeds of a reverse repurchase agreement in other securities, the fund will also be at risk for any fluctuations in the market value of the securities in which the proceeds are invested. Like other leveraging risks, this makes the value of an investment in a fund more volatile and increases the fund’s overall investment exposure. In addition, if a fund’s return on its investment of the proceeds of the reverse repurchase agreement does not equal or exceed the implied interest that it is obligated to pay under the reverse repurchase agreement, engaging in the transaction will lower the fund’s return.

When a fund enters into a reverse repurchase agreement, it is subject to the risk that the buyer under the agreement may file for bankruptcy, become insolvent, or otherwise default on its obligations to the fund. In the event of a default by the counterparty, there may be delays, costs and risks of loss involved in a fund’s exercising its rights under the agreement, or those rights may be limited by other contractual agreements or obligations or by applicable law.

In addition, a fund may be unable to sell the instruments subject to the reverse repurchase agreement at a time when it would be advantageous to do so, or may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to its obligations under a reverse repurchase agreement. This could adversely affect the subadviser’s strategy and result in lower fund returns. At the time a fund enters into a reverse repurchase agreement, the fund is required to set aside cash or other appropriate liquid securities in the amount of the fund’s obligation under the reverse repurchase agreement or take certain other actions in accordance with SEC guidelines, which may affect the fund’s liquidity and ability to manage its assets. Although complying with SEC guidelines would have the effect of limiting the amount of fund assets that may be committed to reverse repurchase agreements and other similar transactions at any time, it does not otherwise mitigate the risks of entering into reverse repurchase agreements.

Risks Associated with Sources of Liquidity or Credit Support (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Issuers of obligations may employ various forms of credit and liquidity enhancements, including letters of credit, guarantees, swaps, puts and demand features, and insurance, provided by domestic or foreign entities such as banks and other financial institutions. Changes in the credit quality of the entities providing the enhancement could affect the value of the securities or a fund’s share price. Banks and certain financial institutions are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of the banking industry is largely dependent upon the availability and cost of capital for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of the banking industry, and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank’s ability to meet its obligations under a letter of credit. See also “Banking Industry Concentration.”

Structured Instruments (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Structured instruments are money market instruments that have been structured to meet the regulatory requirements for investment by money market funds, typically by a bank, broker/dealer or other financial institution. They generally consist of a trust or partnership through which a fund holds an interest in one or more underlying bonds or other debt obligations coupled with a conditional right to sell (“put”) the fund’s interest in the underlying bonds at par plus accrued interest to a financial institution. With respect to tax-exempt instruments, the instrument is typically structured as a trust or partnership which provides for pass-through tax-exempt income. Structured instruments in which a fund may invest include: (1) tender option bonds (discussed above), (2) swap products, in which the trust or partnership swaps the payments due on an underlying bond with a swap counterparty who agrees to pay a floating money market interest rate; and (3) partnerships, which allocate

 

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to the partners income, expenses, capital gains and losses in accordance with a governing partnership agreement. Structured instruments may be more volatile, less liquid and more difficult to price accurately than less complex securities or more traditional debt securities.

These types of instruments raise certain tax, legal, regulatory and accounting issues which may not be presented by direct investments in debt obligations. There is some risk that certain of these issues could be resolved in a manner that could adversely impact the performance of a fund.

U.S. Government Obligations (each fund, U.S. Treasury Reserves and U.S. Treasury Obligations Fund with respect to U.S. Treasury obligations only)

U.S. government securities include (1) U.S. Treasury obligations (see “U.S. Treasury Obligations” below) and (2) other 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 Government National Mortgage Association (“Ginnie Mae”) certificates); (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. government (such as obligations of the Federal Home Loan Banks); (c) the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities (such as securities issued by Fannie Mae (formally known as the Federal National Mortgage Association)); or (d) only the credit of the instrumentality (such as securities issued by Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation)). The U.S. government has provided financial support to Fannie Mae and Freddie Mac, which are currently being operated under the conservatorship of the Federal Housing Finance Agency, but there can be no assurances that it will support these or other government-sponsored entities in the future. In the case of obligations not backed by the full faith and credit of the United States, a fund must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Neither the U.S. government nor any of its agencies or instrumentalities guarantees the market value of the securities it issues.

U.S. Treasury Obligations (each fund)

U.S. Treasury obligations are direct debt obligations issued by the U.S. government. Treasury bills, with maturities normally from 4 weeks to 52 weeks, are typically issued at a discount as they pay interest only upon maturity. Treasury bills are non-callable. Treasury notes have a maturity between two and ten years and typically pay interest semi-annually, while Treasury bonds have a maturity of over ten years and pay interest semi-annually. U.S. Treasury obligations also include STRIPS, TIPS and FRNs. STRIPS are Treasury obligations with separately traded principal and interest component parts of such obligations that are transferable through the federal book-entry system. The principal and interest components of U.S. Treasury bonds with remaining maturities of longer than ten years are eligible to be traded independently under the STRIPS program. Under the STRIPS program, the principal and interest components are separately issued through depository financial institutions, which then trade the component parts separately. Each interest payment and the principal payment becomes a separate zero-coupon security. STRIPS pay interest only at maturity. The interest component of STRIPS may be more volatile than that of U.S. Treasury bills with comparable maturities. TIPS are Treasury Inflation-Protected Securities, the principal of which increases with inflation and decreases with deflation. The inflation adjustment is based on a two month-lagged value of the non-seasonally adjusted Consumer Price Index for Urban Consumers (CPI-U). TIPS entitle the holder, upon maturity, to the adjusted principal or original principal, whichever is greater, thus providing a deflation floor. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation. However, because the interest rate is fixed, TIPS may lose value when market interest rates increase, particularly during periods of low inflation. FRNs are floating rate notes, the interest on which is indexed to the most recent 13-week Treasury bill auction High Rate, which is the highest accepted discount rate in a Treasury bill auction.

 

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When-Issued Securities and Forward Commitments (each fund)

A fund may purchase securities on a “when-issued” or “to be announced” or “forward delivery” basis. The payment obligation and the interest rate that will be received on the “when-issued” securities are fixed at the time the buyer enters into the commitment although settlement, i.e., delivery of and payment for the securities, takes place at a later date. In a “to be announced” transaction, a fund commits to purchase securities for which all specific information is not known at the time of the trade.

Securities purchased on a “when-issued” or “forward delivery” basis are subject to changes in value based upon the market’s perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. The value of these securities experiences appreciation when interest rates decline and depreciation when interest rates rise. Purchasing securities on a “when-issued” or “forward delivery” basis can involve a risk that the yields available in the market on the settlement date may actually be higher or lower than those obtained in the transaction itself. At the time a fund enters into a “when-issued” or “forward delivery” commitment, the fund will set aside cash or other appropriate liquid securities with a value at least equal to the fund’s obligation under the commitment. A fund’s liquidity and ability to manage its assets might be affected when it sets aside cash or portfolio securities to cover such commitments.

An increase in the percentage of a fund’s assets committed to the purchase of securities on a “when-issued” basis may increase the volatility of its net asset value.

Investments by Other Funds and by Other Significant Investors (each fund)

Certain investment companies, including those that are affiliated with a fund because they are managed by the manager or an affiliate of the manager, may invest in the fund and may at times have substantial investments in one or more funds. Other investors also may at times have substantial investments in one or more funds.

From time to time, a fund may experience relatively large redemptions or investments due to transactions in fund shares by a fund or other significant investor. The effects of these transactions could adversely affect the fund’s performance. In the event of such redemptions or investments, the fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so. Such transactions may increase brokerage and/or other transaction costs of the fund. A large redemption could cause the fund’s expenses to increase and could result in the fund becoming too small to be economically viable. Redemptions of fund shares could also accelerate the realization of taxable capital gains in the fund if sales of securities result in capital gains. The impact of these transactions is likely to be greater when a fund or other significant investor purchases, redeems, or owns a substantial portion of a fund’s shares.

The manager and the subadviser may be subject to potential conflicts of interest in connection with investments in the fund by an affiliated fund due to their affiliation. For example, the manager and the subadviser could have the incentive to permit an affiliated fund to become a more significant shareholder (with the potential to cause greater disruption) than would be permitted for an unaffiliated investor. Investments by an affiliated fund may also give rise to conflicts in connection with the voting of fund shares. The manager, the subadviser and/or its advisory affiliates intend to seek to address these potential conflicts of interest in the best interests of the funds’ shareholders, although there can be no assurance that such efforts will be successful. The manager and the subadviser will consider how to minimize potential adverse impacts of affiliated fund investments, and may take such actions as each deems appropriate to address potential adverse impacts, including redemption of shares in-kind, rather than in cash.

Money Market Fund Reform Risk (each fund)

In July 2014, the SEC adopted amendments to Rule 2a-7 under the 1940 Act. Rule 2a-7 imposes quality, liquidity and other requirements on any registered mutual fund that holds itself out to the public as a money market fund. Compliance with the various provisions of the amendments took effect over the course of 2015 and

 

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2016. The new regulations impact money market funds differently depending upon the types of investors that are permitted to invest in a fund, and the types of securities in which a fund may invest.

The new regulations require money market funds to comply with the following requirements:

 

   

“Retail” money market funds must have policies and procedures reasonably designed to limit their beneficial owners to natural persons. All other money market funds are considered to be “institutional” money market funds. Retail and institutional money market funds are further classified by their investments. “Prime” money market funds will be permitted to invest primarily in corporate or other non-government securities, “U.S. government” money market funds are required to invest a very high percentage of their assets in U.S. government securities and “municipal” money market funds are required to invest significantly in municipal securities.

 

   

Institutional prime money market funds and institutional municipal money market funds are required to value their portfolio securities using market-based factors, and sell and redeem shares at prices based on a floating net asset value. A floating net asset value is calculated by rounding to the fourth decimal place in the case of a money market fund with a $1.0000 share price. Retail money market funds and U.S. government money market funds are not subject to the floating net asset value requirement.

 

   

Any type of money market fund is permitted to impose a discretionary liquidity fee of up to 2% on redemptions or temporarily suspend redemptions (also known as “gate”) if the money market fund’s weekly liquid assets (as defined in Rule 2a-7) fall below 30% of the fund’s total assets and the money market fund’s board of trustees determines that the fee or gate is in the fund’s best interests. Once imposed, a discretionary liquidity fee or redemption gate will remain in effect until the fund’s board of trustees determines that the fee or gate is no longer in the fund’s best interests or the next business day after the fund’s weekly liquid assets return to 30% of the fund’s total assets, whichever occurs first. Regardless, the redemption gate will be required to be lifted no later than the 10th business day after the gate is imposed, and a money market fund may not impose a redemption gate for more than 10 business days in any rolling 90-calendar day period.

 

   

Any type of money market fund (except for U.S. government money market funds) will be required to impose a liquidity fee of 1% on all redemptions if the money market fund’s weekly liquid assets (as defined in Rule 2a-7) fall below 10% of the fund’s total assets, unless the fund’s board of trustees determines that the fee is not in the fund’s best interests, or that a lower or higher (up to 2%) liquidity fee is in the fund’s best interests. None of U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves currently intends to avail itself of the ability to impose liquidity fees and/or gates on fund redemptions, as permitted under the new regulations. However, the Board reserves the right, with notice to shareholders, to change this policy, thereby permitting either fund to impose such fees and gates in the future.

Other requirements of the revised rule include enhanced website disclosure obligations, the adoption of a new form for disclosure of certain material events (such as the imposition of liquidity fees or redemption gates), stronger diversification requirements and enhanced stress testing.

As a result of the revised rule, money market funds have implemented changes that will impact and may adversely affect the funds and their investors.

Commodity Exchange Act Registration (each fund)

Each fund and portfolio is operated by persons who have claimed an exclusion, granted to operators of registered investment companies like the funds, from registration as a “commodity pool operator” with respect to each fund and portfolio under the Commodity Exchange Act (the “CEA”), and, therefore, are not subject to registration or regulation with respect to each fund and portfolio under the CEA.

 

32


Cybersecurity Risk (each fund)

With the increased use of technologies such as mobile devices and Web-based or “cloud” applications, and the dependence on the Internet and computer systems to conduct business, the funds are susceptible to operational, information security and related risks. In general, cybersecurity incidents can result from deliberate attacks or unintentional events (arising from external or internal sources) that may cause a fund to lose proprietary information, suffer data corruption, physical damage to a computer or network system or lose operational capacity. Cybersecurity attacks include, but are not limited to, infection by malicious software, such as malware or computer viruses or gaining unauthorized access to digital systems, networks or devices that are used to service a fund’s operations (e.g., through “hacking,” “phishing” or malicious software coding) or other means for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cybersecurity attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on the fund’s websites (i.e., efforts to make network services unavailable to intended users). In addition, authorized persons could inadvertently or intentionally release confidential or proprietary information stored on a fund’s systems.

Cybersecurity incidents affecting a fund’s manager, subadviser, other service providers to a fund or its shareholders (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) have the ability to cause disruptions and impact business operations, potentially resulting in financial losses to both the fund and shareholder, interference with a fund’s ability to calculate its NAV, impediments to trading, the inability of fund shareholders to transact business and the fund to process transactions (including fulfillment of fund share purchases and redemptions), violations of applicable privacy and other laws (including the release of private shareholder information) and attendant breach notification and credit monitoring costs, regulatory fines, penalties, litigation costs, reputational damage, reimbursement or other compensation costs, forensic investigation and remediation costs, and/or additional compliance costs. Similar adverse consequences could result from cybersecurity incidents affecting issuers of securities in which a fund invests, counterparties with which a fund engages in transactions, governmental and other regulatory authorities, exchange and other financial market operators, banks, brokers, dealers, insurance companies and other financial institutions (including financial intermediaries and other service providers) and other parties. In addition, substantial costs may be incurred in order to safeguard against and reduce the risk of any cybersecurity incidents in the future. In addition to administrative, technological and procedural safeguards, a fund’s manager and subadviser have established business continuity plans in the event of, and risk management systems to prevent or reduce the impact of, such cybersecurity incidents. However, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified, as well as the rapid development of new threats. Furthermore, a fund cannot control the cybersecurity plans and systems put in place by its service providers or any other third parties whose operations may affect a fund or its shareholders. A fund and its shareholders could be negatively impacted as a result.

INVESTMENT POLICIES

Each fund and portfolio has adopted the fundamental investment policies below for the protection of shareholders. References to “fund” in this section include the portfolios, unless the context requires otherwise. Fundamental investment policies of a fund may not be changed without the vote of a majority of the outstanding voting securities of the fund, defined under the 1940 Act as the lesser of (a) 67% or more of the voting securities of the fund present at a shareholder meeting, if the holders of more than 50% of the voting securities of the fund are present in person or represented by proxy, or (b) more than 50% of the voting securities of the fund.

Whenever a fund is requested to vote on a change in the fundamental investment policies of its corresponding portfolio, the fund will either call a meeting of its shareholders and will vote its beneficial interests in the portfolio in accordance with instructions it receives from its shareholders, or vote its beneficial interests in its corresponding portfolio in the same proportion as the vote of all other investors in the portfolio.

 

33


If any percentage restriction described below is complied with at the time of an investment, a later increase or decrease in the percentage resulting from a change in asset values or characteristics will not constitute a violation of such restriction, unless otherwise noted below.

Fundamental Investment Policies

Each fund’s fundamental investment policies are as follows:

1. The fund may not borrow money except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

2. The fund may not engage in the business of underwriting the securities of other issuers except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

3. The fund may lend money or other assets to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

4. The fund may not issue senior securities except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

5. The fund may not purchase or sell real estate except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

6. The fund may purchase or sell commodities or contracts related to commodities to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority.

7. With respect to Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Tax Free Reserves, the fund may not purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, except that each fund, other than U.S. Treasury Reserves and U.S. Treasury Obligations Fund, may invest at least 25% of its assets in bank obligations issued by domestic banks, including, with respect to Tax Free Reserves, bank participation interests in municipal obligations. With respect to Government Reserves, except as permitted by exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction, the fund may not make any investment if, as a result, the fund’s investments will be concentrated in any one industry except each fund may invest without limit in obligations issued by banks.

For purposes of the investment restrictions described above, the issuer of a tax-exempt security is deemed to be the entity (public or private) ultimately responsible for the payment of principal of and interest on the security. If, however, the creating government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a letter of credit, such a guarantee or letter of credit may, in accordance with applicable SEC rules, be considered a separate security and treated as an issue of such government, other entity or bank.

With respect to the fundamental policy relating to borrowing money set forth in (1) above, the 1940 Act permits a fund to borrow money in amounts of up to one-third of the fund’s total assets from banks for any

 

34


purpose, and to borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes. (The fund’s total assets include the amounts being borrowed.) To limit the risks attendant to borrowing, the 1940 Act requires a fund to maintain an “asset coverage” of at least 300% of the amount of its borrowings, provided that in the event that the fund’s asset coverage falls below 300%, the fund is required to reduce the amount of its borrowings so that it meets the 300% asset coverage threshold within three days (not including Sundays and holidays). Asset coverage means the ratio that the value of a fund’s total assets (including amounts borrowed), minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Certain trading practices and investments, such as reverse repurchase agreements, may be considered to be borrowing, and thus, subject to the 1940 Act restrictions. Borrowing money to increase portfolio holdings is known as “leveraging.” Borrowing, especially when used for leverage, may cause the value of a fund’s shares to be more volatile than if the fund did not borrow. This is because borrowing tends to magnify the effect of any increase or decrease in the value of the fund’s portfolio holdings. Borrowed money thus creates an opportunity for greater gains, but also greater losses. To repay borrowings, a fund may have to sell securities at a time and at a price that is unfavorable to the fund. There also are costs associated with borrowing money, and these costs would offset and could eliminate a fund’s net investment income in any given period. Currently, no fund contemplates borrowing money for leverage, but if it does so, it will not likely do so to a substantial degree. The policy in (1) above will be interpreted to permit a fund to engage in trading practices and investments that may be considered to be borrowing to the extent permitted by the 1940 Act. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered to be borrowings under the policy. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the policy.

With respect to the fundamental policy relating to underwriting set forth in (2) above, the 1940 Act does not prohibit a fund from engaging in the underwriting business or from underwriting the securities of other issuers; in fact, the 1940 Act permits a fund to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently are that the amount of the fund’s underwriting commitments, when added to the value of the fund’s investments in issuers where the fund owns more than 10% of the outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the 1933 Act. Under the 1933 Act, an underwriter may be liable for material omissions or misstatements in an issuer’s registration statement or prospectus. Securities purchased from an issuer and not registered for sale under the 1933 Act are considered restricted securities. There may be a limited market for these securities. If these securities are registered under the 1933 Act, they may then be eligible for sale but participating in the sale may subject the seller to underwriter liability. These risks could apply to a fund investing in restricted securities. Although it is not believed that the application of the 1933 Act provisions described above would cause a fund to be engaged in the business of underwriting, the policy in (2) above will be interpreted not to prevent the funds from engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether the funds may be considered to be an underwriter under the 1933 Act.

With respect to the fundamental policy relating to lending set forth in (3) above, the 1940 Act does not prohibit a fund from making loans; however, SEC staff interpretations currently prohibit funds from lending more than one-third of their total assets, except through the purchase of debt obligations or the use of repurchase agreements. (A repurchase agreement is an agreement to purchase a security, coupled with an agreement to sell that security back to the original seller on an agreed-upon date at a price that reflects current interest rates. The SEC frequently treats repurchase agreements as loans.) While lending securities may be a source of income to a fund, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in the underlying securities should the borrower fail financially. However, loans would be made only when a fund’s manager or subadviser believes the income justifies the attendant risks. A fund also will be permitted by this policy to make loans of money, including to other funds. A fund would have to obtain exemptive relief from the SEC to make loans to other funds. The policy in (3) above will be interpreted not to prevent the funds from purchasing or investing in debt obligations and loans.

 

35


With respect to the fundamental policy relating to issuing senior securities set forth in (4) above, “senior securities” are defined as fund obligations that have a priority over the fund’s shares with respect to the payment of dividends or the distribution of fund assets. The 1940 Act prohibits a fund from issuing senior securities, except that the fund may borrow money in amounts of up to one-third of the fund’s total assets from banks for any purpose. A fund also may borrow up to 5% of the fund’s total assets from banks or other lenders for temporary purposes, and these borrowings are not considered senior securities. The issuance of senior securities by a fund can increase the speculative character of the fund’s outstanding shares through leveraging. Leveraging of a fund’s portfolio through the issuance of senior securities magnifies the potential for gain or loss on monies, because even though the fund’s net assets remain the same, the total risk to investors is increased to the extent of the fund’s gross assets.

With respect to the fundamental policy relating to real estate set forth in (5) above, the 1940 Act does not prohibit a fund from owning real estate; however, a fund is limited in the amount of illiquid assets it may purchase. Investing in real estate may involve risks, including that real estate is generally considered illiquid and may be difficult to value and sell. Owners of real estate may be subject to various liabilities, including environmental liabilities. To the extent that investments in real estate are considered illiquid, SEC rules limit a money market fund’s purchases of illiquid securities to 5% of total assets. The policy in (5) above will be interpreted not to prevent the funds from investing in real estate-related companies, companies whose businesses consist in whole or in part of investing in real estate, instruments (like mortgages) that are secured by real estate or interests therein, or real estate investment trust securities.

With respect to the fundamental policy relating to commodities set forth in (6) above, the 1940 Act does not prohibit a fund from owning commodities, whether physical commodities and contracts related to physical commodities (such as oil or grains and related futures contracts), or financial commodities and contracts related to financial commodities (such as currencies and, possibly, currency futures). However, a fund is limited in the amount of illiquid assets it may purchase. To the extent that investments in commodities are considered illiquid, SEC rules limit a money market fund’s purchases of illiquid securities to 5% of total assets. If a fund were to invest in a physical commodity or a physical commodity-related instrument, the fund would be subject to the additional risks of the particular physical commodity and its related market. The value of commodities and commodity-related instruments may be extremely volatile and may be affected either directly or indirectly by a variety of factors. There also may be storage charges and risks of loss associated with physical commodities. The policy in (6) above will be interpreted to permit investments in exchange traded funds that invest in physical and/or financial commodities.

With respect to the fundamental policy relating to concentration set forth in (7) above, the 1940 Act does not define what constitutes “concentration” in an industry. The SEC staff has taken the position that investment of 25% or more of a fund’s total assets in one or more issuers conducting their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations of concentration could change in the future. A fund that invests a significant percentage of its total assets in a single industry may be particularly susceptible to adverse events affecting that industry and may be more risky than a fund that does not concentrate in an industry. The policy in (7) above will be interpreted to refer to concentration as that term may be interpreted from time to time. In addition, the term industry will be interpreted to include related groups of industries. The SEC has taken the position that money market funds may reserve the right to invest without limit in obligations of domestic banks without being deemed to concentrate their investments. The policy in (7) above will be interpreted to permit investment without limit in domestic bank participation interests in municipal securities. Currently, Government Reserves does not intend to purchase or concentrate in banking obligations. The policy also will be interpreted to permit investment without limit in the following: securities of the U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; and repurchase agreements collateralized fully by any such obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry. There also will be no limit on investment in issuers domiciled in a single jurisdiction or country. The policy also will be interpreted to give broad authority to a fund as to how to

 

36


classify issuers within or among industries or groups of industries. The funds have been advised by the staff of the SEC that the staff currently views securities issued by a foreign government to be in a single industry for purposes of calculating applicable limits on concentration.

Each fund’s fundamental policies are written and will be interpreted broadly. For example, the policies will be interpreted to refer to the 1940 Act and the related rules as they are in effect from time to time, and to interpretations and modifications of or relating to the 1940 Act by the SEC and others as they are given from time to time. When a policy provides that an investment practice may be conducted as permitted by the 1940 Act, the policy will be interpreted to mean either that the 1940 Act expressly permits the practice or that the 1940 Act does not prohibit the practice.

Rule 2a-7 under the 1940 Act may limit a money market fund’s ability to engage in a strategy otherwise permitted under the 1940 Act.

Additional Fundamental Investment Policy

Tax Free Reserves

As a fundamental policy, under normal market conditions, the fund invests at least 80% of its assets in municipal obligations and interests in municipal obligations that pay interest that is exempt from federal income tax, including the federal alternative minimum tax.

Diversification

Each of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves is currently classified as a diversified fund under the 1940 Act. A fund may only change to non-diversified status with the approval of the fund’s shareholders. Under the 1940 Act, such approval requires the affirmative vote (a) of 67% or more of the voting securities present at an annual or special meeting, if the holders of more than 50% of the outstanding voting securities of the fund are present or represented by proxy, or (b) of more than 50% of the outstanding voting securities of the fund, whichever is less.

Tax Free Reserves is currently classified as a non-diversified fund under the 1940 Act. A non-diversified fund can invest a greater portion of its assets in a single issuer or a limited number of issuers than may a diversified fund. In this regard, a non-diversified fund is subject to greater risk than a diversified fund. However, Tax Free Reserves intends to comply with the diversification requirements applicable to money market funds, which limit a fund’s ability to invest in the obligations of a single issuer. Under the 1940 Act, a fund may change its classification from non-diversified to diversified without shareholder approval.

 

37


MANAGEMENT

The business and affairs of the funds are conducted by management under the supervision and subject to the direction of its Board. The business address of each Trustee (including each Trustee of the funds who is not an “interested person” of the funds (an “Independent Trustee”)) is c/o Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Trustees and officers of the funds is set forth below.

 

Name and Year of Birth

 

Position(s)
with Trust

 

Term of Office*
and Length of
Time Served**

 

Principal Occupation(s)
During Past 5 Years

  Number of
Funds
in Fund
Complex
Overseen
by Trustee
   

Other Board
Memberships
Held by
Trustee During
Past 5 Years

Independent Trustees#:

   

Elliott J. Berv

Born 1943

  Trustee and Chairman of the Board   Since 1989 (Chairman of the Board since 2016)   President and Chief Executive Officer, Catalyst (consulting) (since 1984); formerly, Chief Executive Officer, Rocket City Enterprises (media) (2000 to 2005)     52     None

Jane F. Dasher

Born 1949

  Trustee   Since 1999   Chief Financial Officer, Long Light Capital, LLC, formerly known as Korsant Partners, LLC (a family investment company) (since 1997)     52     None

Mark T. Finn

Born 1943

  Trustee   Since 1989   Adjunct Professor, College of William & Mary (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988); Principal/Member, Balvan Partners (investment management) (2002 to 2009)     52     None

 

38


Name and Year of Birth

 

Position(s)
with Trust

 

Term of Office*
and Length of
Time Served**

 

Principal Occupation(s)
During Past 5 Years

  Number of
Funds
in Fund
Complex
Overseen
by Trustee
   

Other Board
Memberships
Held by
Trustee During
Past 5 Years

Stephen Randolph Gross

Born 1947

  Trustee   Since 1986   Chairman Emeritus (since 2011) and formerly, Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (1974 to 2011); Executive Director of Business Builders Team, LLC (since 2005); Principal, Gross Consulting Group, LLC (since 2011); CEO, Gross Capital Advisors, LLC (since 2011); CEO, Trusted CFO Solutions, LLC (since 2011)     52     None

Richard E. Hanson, Jr.

Born 1941

  Trustee   Since 1985   Retired; formerly, Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000)     52     None

Diana R. Harrington

Born 1940

  Trustee   Since 1992  

Babson Distinguished Professor of Finance, Babson College (since

1992)

    52     None

Susan M. Heilbron

Born 1945

  Trustee   Since 1994  

Retired; formerly, President, Lacey & Heilbron (communications consulting) (1990 to

2002); formerly, General Counsel and Executive Vice President, The Trump Organization (1986 to 1990); formerly, Senior Vice President, New York State Urban Development

Corporation (1984 to

1986); formerly, Associate, Cravath, Swaine & Moore LLP (1980 to 1984) and (1977 to 1979)

    52     Formerly, Director, Lincoln Savings Bank, FSB (1991 to 1994); formerly, Director, Trump Shuttle, Inc. (air transportation) (1989 to 1990); formerly, Director, Alexander’s Inc. (department store) (1987 to 1990)

 

39


Name and Year of Birth

 

Position(s)
with Trust

 

Term of Office*
and Length of
Time Served**

 

Principal Occupation(s)
During Past 5 Years

  Number of
Funds
in Fund
Complex
Overseen
by Trustee
   

Other Board
Memberships
Held by
Trustee During
Past 5 Years

Susan B. Kerley

Born 1951

  Trustee   Since 1992   Investment Consulting Partner, Strategic Management Advisors, LLC (investment consulting) (since 1990)     52     Director and Trustee (since 1990) and formerly, Chairman (2005 to 2012) of various series of MainStay Family of Funds (66 funds); Investment Company Institute (ICI) Board of Governors (since 2006); ICI Executive Committee (since 2011); Chairman of the Independent Directors Council (since 2012)

Alan G. Merten

Born 1941

  Trustee   Since 1990   President Emeritus (since 2012) and formerly, President, George Mason University (1996 to 2012)     52    

Director Emeritus (since 2012) and formerly, Director, Cardinal Financial Corporation (2006 to 2012); Trustee, First Potomac Realty Trust (since 2005); Director, DeVry Inc. (educational services) (since 2012); formerly, Director, Xybernaut Corporation (information technology)

(2004 to 2006); formerly, Director, Digital Net Holdings, Inc. (2003 to 2004); formerly, Director, Comshare, Inc. (information technology)

(1985 to 2003)

 

40


Name and Year of Birth

 

Position(s)
with Trust

 

Term of Office*
and Length of
Time Served**

 

Principal Occupation(s)
During Past 5 Years

  Number of
Funds
in Fund
Complex
Overseen
by Trustee
   

Other Board
Memberships
Held by
Trustee During
Past 5 Years

R. Richardson Pettit

Born 1942

  Trustee   Since 1990   Retired; formerly, Duncan Professor of Finance, University of Houston (1977 to 2006); previous academic or management positions include: University of Washington, University of Pennsylvania and Purdue University     52     None

Interested Trustee and Officer:

   

Jane Trust, CFA

Born 1962

  Trustee, President and Chief Executive Officer   Since 2015   Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2016); Officer and/or Trustee/Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Vice President of LMPFA (2015); formerly, Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); formerly, Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007)     152     None

 

# Trustees who are not “interested persons” of the funds within the meaning of Section 2(a)(19) of the 1940 Act.
* Each Trustee serves until his or her respective successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal.
** Indicates the earliest year in which the Trustee became a board member for a fund in the Legg Mason fund complex.
Effective June 1, 2015, Ms. Trust became a Trustee. Ms. Trust is an “interested person” of the funds, as defined in the 1940 Act, because of her position with LMPFA and/or certain of its affiliates.

 

41


Name, Year
of Birth and Address

  

Position(s)
with Trust

  

Term of Office*
and Length of
Time Served**

  

Principal Occupation(s)
During Past 5 Years

Additional Officers:

        

Ted P. Becker

Born 1951

620 Eighth Avenue

49th Floor

New York, NY 10018

   Chief Compliance Officer    Since 2007    Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006)

Susan Kerr

Born 1949

620 Eighth Avenue

49th Floor

New York, NY 10018

   Chief Anti-Money Laundering Compliance Officer    Since 2013    Assistant Vice President of Legg Mason & Co. and LMIS (since 2010); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2013) and Anti-Money Laundering Compliance Officer of LMIS (since 2012); Senior Compliance Officer of LMIS (since 2011); formerly, AML Consultant, DTCC (2010); formerly, AML Consultant, Rabobank Netherlands, (2009); formerly, First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008)

Jenna Bailey

Born 1978

100 First Stamford Place

6th Floor

Stamford, CT 06902

  

Identity Theft

Prevention Officer

   Since 2015    Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011-2013); formerly, Risk Manager of U.S. Distribution of Legg Mason & Co. (2007 to 2011)

 

42


Name, Year
of Birth and Address

  

Position(s)
with Trust

  

Term of Office*
and Length of
Time Served**

  

Principal Occupation(s)
During Past 5 Years

Robert I. Frenkel

Born 1954

100 First Stamford Place

6th Floor

Stamford, CT 06902

   Secretary and Chief Legal Officer    Since 2007    Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel — U.S. Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)

Thomas C. Mandia

Born 1962

100 First Stamford Place

6th Floor

Stamford, CT 06902

   Assistant Secretary    Since 2007    Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (formerly registered investment advisers) (since 2013)

Richard F. Sennett

Born 1970

100 International Drive

7th Floor

Baltimore, MD 21202

   Principal Financial Officer    Since 2011    Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and since 2013); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007)

 

43


Name, Year
of Birth and Address

  

Position(s)
with Trust

  

Term of Office*
and Length of
Time Served**

  

Principal Occupation(s)
During Past 5 Years

Steven Frank

Born 1967

620 Eighth Avenue

49th Floor

New York, NY 10018

   Treasurer    Since 2014    Director of Legg Mason & Co. (since 2015); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Vice President of Legg Mason & Co. and Legg Mason & Co. predecessors (2002 to 2015); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010)

Jeanne M. Kelly

Born 1951

620 Eighth Avenue

49th Floor

New York, NY 10018

   Senior Vice President    Since 2007    Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, Senior Vice President of LMFAM (2013 to 2015)

 

* Each officer serves until his or her respective successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal.
** Indicates the earliest year in which the officer took such office.

Each Trustee, except for Ms. Trust, previously served as a trustee or director of certain predecessor funds in the Legg Mason-sponsored fund complex, and each Trustee, except for Ms. Trust, was thus initially selected by the board of the applicable predecessor funds. In connection with a restructuring of the fund complex completed in 2007, the Board was established to oversee mutual funds in the fund complex that invest primarily in fixed income securities, including the funds, with a view to ensuring continuity of representation by board members of predecessor funds on the Board and in order to establish a Board with experience in and focused on overseeing fixed income mutual funds, which experience would be further developed and enhanced over time.

The Independent Trustees were selected to join the Board based upon the following as to each Board Member: his or her contribution as a board member of predecessor funds; such person’s character and integrity; such person’s willingness to serve and willingness and ability to commit the time necessary to perform the duties of a Trustee; the fact that such person’s service would be consistent with the requirements of the retirement policies of the Trust; and his or her status as not being an “interested person” as defined in the 1940 Act. Ms. Trust was selected to join the Board based upon the following: her character and integrity; her willingness to serve and her willingness and ability to commit the time necessary to perform the duties of a Trustee; the fact that her service as a Trustee would be consistent with requirements of the Trust’s retirement policies, and her status as a representative of Legg Mason.

 

44


The Board believes that each Trustee’s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other Trustees lead to the conclusion that the Board possesses the requisite skills and attributes. The Board believes that the Trustees’ ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the manager, subadviser, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties, support this conclusion. The Board has also considered the contributions that each Trustee can make to the Board and the funds, as well as the perspectives gained from the Independent Trustees’ service on the board of the applicable predecessor funds. In addition, the following specific experience, qualifications, attributes and/or skills apply as to each Trustee: Mr. Berv, experience as a chief executive officer and board member of various businesses and organizations and organizational consulting experience; Ms. Dasher, experience as a chief financial officer of a private investment company; Mr. Finn, investment management experience as an executive, consultant and portfolio manager; Mr. Gross, accounting background and experience as an officer and board member of various organizations; Mr. Hanson, experience in academic leadership; Dr. Harrington, background in investment and finance; Ms. Heilbron, legal background and experience, business and consulting experience and experience as a board member of public companies; Ms. Kerley, investment consulting experience and background and mutual fund board experience; Dr. Merten, academic leadership experience, background in investments and finance, and board experience; Dr. Pettit, economic and finance background and academic management experience; and Ms. Trust, investment management and risk oversight experience as an executive and portfolio manager and leadership roles within Legg Mason and affiliated entities. References to the qualifications, attributes and skills of Trustees are pursuant to requirements of the Securities and Exchange Commission, do not constitute holding out of the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.

The Board is responsible for overseeing the management and operations of the funds. Ms. Trust is an interested person of the funds. Independent Trustees constitute more than 75% of the Board. Mr. Berv serves as Chair of the Board.

The Board has three standing committees: the Audit Committee, Nominating and Governance Committee (referred to as the Governance Committee), and Investment and Performance Committee (referred to as the Performance Committee). Each of the Audit, Governance and Performance Committees is chaired by an Independent Trustee and composed of all of the Independent Trustees. Where deemed appropriate, the Board constitutes ad hoc committees.

The Chair of the Board and the chairs of the Audit, Governance and Performance Committees work with the Chief Executive Officer of the Trust to set the agendas for Board and committee meetings. The Chair of the Board also serves as a key point person for dealings between management and the other Independent Trustees. As noted below, through the committees the Independent Trustees consider and address important matters involving the funds, including those presenting conflicts or potential conflicts of interest for management. The Independent Trustees also regularly meet outside the presence of management and are advised by independent legal counsel. The Board has determined that its committees help ensure that the funds have effective and independent governance and oversight. The Board also has determined that its leadership structure, in which the Chair of the Board is not affiliated with Legg Mason, is appropriate. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from management, including each fund’s subadviser.

The Audit Committee oversees, among other things, the scope of each fund’s audit, each fund’s accounting and financial reporting policies and practices and the internal controls over financial accounting and reporting. The primary purposes of the Board’s Audit Committee are to assist the Board in fulfilling its responsibility for oversight of the integrity of the accounting, auditing and financial reporting practices of each fund, and the qualifications and independence of each fund’s independent registered public accounting firm. The Audit Committee approves, and recommends to the Independent Trustees for their ratification, the selection,

 

45


appointment, retention or termination of each fund’s independent registered public accounting firm and approves the compensation of the independent registered public accounting firm. The Audit Committee also approves all audit and permissible non-audit services provided to each fund by the independent registered public accounting firm and all permissible non-audit services provided by each fund’s independent registered public accounting firm to its manager and any affiliated service providers if the engagement relates directly to each fund’s operations and financial reporting.

The Governance Committee is the forum for consideration of a number of issues required to be considered separately by independent trustees of mutual funds, including, among other things, recommending candidates to fill vacancies on the Board. The Governance Committee also considers issues that the Independent Trustees believe it is advisable for them to consider separately. When addressing vacancies, the Governance Committee may consider nominees recommended by a shareholder. Shareholders who wish to recommend a nominee should send recommendations to the Trust’s Secretary that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of Trustees. A recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders.

The Governance Committee also identifies potential nominees through its network of contacts and may also engage, if it deems appropriate, a professional search firm. The committee meets to discuss and consider such candidates’ qualifications and then chooses a candidate by majority vote. The committee does not have specific, minimum qualifications for nominees, nor has it established specific qualities or skills that it regards as necessary for one or more of the Trustees to possess (other than any qualities or skills that may be required by applicable law, regulation or listing standard). However, in evaluating a person as a potential nominee to serve as a Trustee, the Governance Committee may consider the following factors, among any others it may deem relevant:

 

   

whether or not the person is an “interested person,” as defined in the 1940 Act, and whether the person is otherwise qualified under applicable laws and regulations to serve as a Trustee;

 

   

whether or not the person has any relationships that might impair his or her independence, such as any business, financial or family relationships with fund management, the investment adviser, service providers or their affiliates;

 

   

whether or not the person serves on boards of, or is otherwise affiliated with, competing financial service organizations or their related mutual fund complexes;

 

   

the contribution which the person can make to the Board (or, if the person has previously served as a Trustee, the contribution which the person made to the Board during his or her previous term of service), with consideration being given to the person’s business and professional experience, education and such other factors as the committee may consider relevant;

 

   

whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of a Trustee;

 

   

the character and integrity of the person; and

 

   

whether or not the selection and nomination of the person would be consistent with the requirements of the retirement policies of the Trust, as applicable.

The Performance Committee is charged with, among other things, reviewing investment performance. The Performance Committee also assists the Board in fulfilling its responsibility for the review and negotiation of each fund’s investment management and subadvisory arrangements.

As an integral part of its responsibility for oversight of the funds in the interests of shareholders, the Board oversees risk management of each fund’s investment programs and business affairs. The Board has emphasized to each fund’s manager and subadviser the importance of maintaining vigorous risk management. The manager and the subadviser also have their own independent interest in risk management and in maintaining risk

 

46


management programs. Oversight of the risk management process is part of the Board’s general oversight of each fund and its service providers. The Board exercises oversight of the risk management process primarily through the Performance Committee and the Audit Committee, and through oversight by the Board itself.

The funds face a number of risks, such as investment risk, counterparty risk, valuation risk, reputational risk, risk of operational failure or lack of business continuity, and legal, compliance and regulatory risk. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. Under the overall oversight of the Board or the applicable committee, the funds, or the manager, each fund’s subadviser, and the affiliates of the manager and the subadviser, or other service providers to each fund employ a variety of processes, procedures and controls to identify various of those possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur.

Different processes, procedures and controls are employed with respect to different types of risks. Various personnel, including each fund’s and the manager’s CCO and the manager’s chief risk officer, as well as various personnel of the subadviser and other service providers such as each fund’s independent accountants, also make periodic reports to the Performance Committee or Audit Committee or to the Board, pursuant to the committee’s or Board’s request, with respect to various aspects of risk management, as well as events and circumstances that have arisen and responses thereto.

The Board recognizes that not all risks that may affect the funds can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve each fund’s goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. As a result of the foregoing and other factors, the Board’s risk management oversight is subject to substantial limitations.

The portfolios are also governed by a board, which has the same members, committees and compensation policies as the funds’ Board.

The Board met six times during the funds’ fiscal year ended August 31, 2016. Each of the Audit, Governance and Performance Committees met four times during the funds’ last fiscal year.

The following table shows the amount of equity securities owned by the Trustees in each fund and other investment companies in the fund complex overseen by the Trustees as of December 31, 2015.

 

Name of Trustee

  Dollar
Range
of Equity
Securities in
Liquid
Reserves ($)
    Dollar
Range
of Equity
Securities in
Cash
Reserves ($)
    Dollar Range
of Equity
Securities in
U.S. Treasury
Reserves ($)
    Dollar Range
of Equity
Securities in
U.S. Treasury
Obligations
Fund ($)
    Dollar
Range
of Equity
Securities in
Government
Reserves ($)
    Dollar
Range
of Equity
Securities in
Tax Free
Reserves ($)
    Aggregate Dollar Range
of Equity Securities
in Registered
Investment Companies
Overseen by Trustee ($)
 

Independent Trustees:

 

     

Elliott J. Berv

    None       None       None       None       None       None       None  

Jane F. Dasher

    None       None       None       None       None       None       50,001-100,000  

Mark T. Finn

    None       None       None       None       None       None       None  

Stephen Randolph Gross

    None       None       None       None       None       None       None  

Richard E. Hanson, Jr.

    None       None       None       None       None       None       Over 100,000  

Diana R. Harrington

    None       None       None       None       None       None       Over 100,000  

Susan M. Heilbron

    None       None       None       None       None       None       50,001-100,000  

Susan B. Kerley

    None       None       None       None       None       None       Over 100,000  

Alan G. Merten

    None       None       None       None       None       None       Over 100,000  

R. Richardson Pettit

    None       None       50,001-100,000       None       None       None       Over 100,000  

Interested Trustee:

             

Jane Trust

    None       None       None       None       None       None       Over 100,000  

 

47


As of December 31, 2015, none of the Independent Trustees or their immediate family members owned beneficially or of record any securities of the funds’ manager, subadviser or distributor, or of a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the manager, subadviser or distributor of the funds.

For serving as a trustee of the funds and other funds in the fund complex, each Independent Trustee receives an annual retainer plus fees for attending each regularly scheduled meeting and special Board meeting they attend in person or by telephone. They are also reimbursed for all out-of-pocket expenses relating to attendance at such meetings. Those Independent Trustees who serve in leadership positions of the Board or Board committees receive additional compensation. The Board reviews the level of trustee compensation periodically and trustee compensation may change from time to time. Ms. Trust, an “interested person” of the funds, as defined in the 1940 Act, does not receive compensation from the funds for her service as Trustee. Each fund pays its pro rata share of the Trustees’ fees and expenses based upon asset size.

Officers of the Trust receive no compensation from the funds.

Information regarding compensation paid to the Trustees is shown below:

 

     Aggregate Compensation(1) ($)     Total
Pension or
Retirement
Benefits Paid
as Part
of Fund
Expenses(1)
($)(2)
    Total
Compensation
from the Fund
Complex
Paid
to Trustee(3)
($)
    Number of
Portfolios in
Fund
Complex
Overseen by
Trustee(1)
 

Name of Trustee

  Liquid
Reserves
    Cash
Reserves
    U.S.
Treasury
Reserves
    U.S.
Treasury
Obligations
Fund
    Government
Reserves
    Tax
Free
Reserves
       

Independent Trustees:

 

           

Elliott J. Berv

    13,891       22,209       22,412       1,434       18,369       2,332       None       285,000       52  

Jane F. Dasher

    11,621       18,900       19,007       1,214       15,501       1,975       None       270,000       52  

Mark T. Finn

    11,621       18,900       19,007       1,214       15,501       1,975       None       270,000       52  

Stephen Randolph Gross

    12,283       19,874       20,009       1,279       16,328       2,079       None       270,000       52  

Richard E. Hanson, Jr

    11,621       18,900       19,007       1,214       15,501       1,975       None       270,000       52  

Diana R. Harrington

    13,037       21,427       21,510       1,372       17,326       2,220       None       345,000       52  

Susan M. Heilbron

    12,283       19,874       20,009       1,279       16,328       2,079       None       270,000       52  

Susan B. Kerley

    12,414       20,119       20,247       1,293       16,509       2,102       None       285,000       52  

Alan G. Merten

    11,621       18,900       19,007       1,214       15,501       1,975       None       270,000       52  

R. Richardson Pettit

    11,752       19,145       19,245       1,229       15,683       1,998       None       285,000       52  

Interested Trustee:

                 

Jane Trust(4)

    None       None       None       None       None       None       None       None       152  

 

(1) 

Information is for the fiscal year ended August 31, 2016.

(2) 

Pursuant to prior retirement plans, no fund made payments to former trustees for the fiscal year ended August 31, 2016.

(3) 

Information is for the calendar year ended December 31, 2015.

(4) 

Ms. Trust is not compensated for her services as a Trustee because of her affiliation with the manager.

Officers of the funds and portfolios receive no compensation from the funds or portfolios, although they may be reimbursed by the funds or portfolios for reasonable out-of-pocket travel expenses for attending Board meetings.

As of August 31, 2016, the Trustees and officers of the funds, as a group, owned less than 1% of the outstanding shares of each class of each fund.

 

48


To the knowledge of the funds, as of November 30, 2016, the following shareholders owned or held of record 5% or more, as indicated, of the outstanding shares of each class of each fund:

 

Institutional Liquid Reserves/Institutional

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   32.56%

Institutional Liquid Reserves/Institutional

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   11.65%

Institutional Liquid Reserves/Institutional

  

UNITED STATES TRUST CO OF NY AS

CUST FOR MASS MUTUAL LIFE INS CO

US TRUST CO OF NY

ATTN SECURITIES ADMINISTRATION

E2151295 STATE ST

SPRINGFIELD MA 01111-0001

   9.52%

Institutional Liquid Reserves/Institutional

  

CITIGROUP FOUNDATION

ATTN KAREN WRIGHT

1 COURT SQ FL 43

LONG IS CITY NY 11120-0001

   5.74%

Institutional Liquid Reserves/Institutional

  

HARE & CO 2

111 SANDERS CREEK PKWY

EAST SYRACUSE NY 13057-1382

   5.71%

Institutional Liquid Reserves/Investors

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   100%

Institutional Cash Reserves/Institutional

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   64.15%

Institutional Cash Reserves/Institutional

  

MERRILL LYNCH, PIERCE FENNER &SMITH

200 NORTH COLLEGE ST FL 3

NCI 004-03-06

CHARLOTTE NC 28202-2191

   13.29%

Institutional Cash Reserves/Institutional

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   10.15%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   12.72%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   11.52%

 

49


Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   10.49%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   9.14%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   8.56%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   6.34%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   6.13%

Institutional Cash Reserves/L

  

JP MORGAN SECURITIES LLC

METROTECH CENTER 7TH FLOOR

BROOKLYN NY 11245-0003

   6.13%

Institutional U.S. Treasury Reserves/Institutional

  

MERRILL LYNCH, PIERCE FENNER & SMITH

200 NORTH COLLEGE ST FL 3

NCI 004-03-06

CHARLOTTE NC 28202-2191

   17.22%

Institutional U.S. Treasury Reserves/Institutional

  

HARE & CO 2

111 SANDERS CREEK PKWY

EAST SYRACUSE NY 13057-1382

   10.49%

Institutional U.S. Treasury Reserves/Institutional

  

CITIBANK NA

1 COURT SQUARE FL 22

LONG ISLAND NY 11120

   10.17%

Institutional U.S. Treasury Reserves/Institutional

  

CITIGROUP GLOBAL MARKETS INC

ATTN CARMINE FALCO

111 WALL ST FL 24

NEW YORK NY 10005-3501

   9.01%

Institutional U.S. Treasury Reserves/Institutional

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   7.26%

Institutional U.S. Treasury Reserves/Institutional

  

WELLS FARGO SECURITIES ACCOUNT

FOR THE EXCLUSIVE BENEFIT OF ITS

CUSTOMERS ATTN MONEY FUNDS

MAIL CODE D1109-010

1525 W WT HARRIS BLVD

CHARLOTTE NC 28262-8522

   6.47%

 

50


Institutional U.S. Treasury Reserves/Institutional

  

CITIBANK NA FBO ITS CLIENTS

ATTN BLANCHE ARREAGA

388 GREENWICH ST FL 25

NEW YORK NY 10013-2375

   5.33%

Institutional U.S. Treasury Reserves/Investors

  

SILICON VALLEY BANK

ATTN SVB INVESTMENT OPS

HF240

3003 TASMAN DR

SANTA CLARA CA 95054-1191

   81.66%

Institutional U.S. Treasury Reserves/Investors

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   18.15%

Institutional U.S. Treasury Obligations Money Market Fund/Institutional

  

WESTERN ASSET MANAGEMENT

ATTN ROBERT MOY

385 E COLORADO BLVD

CORPORATE FINANCE 5TH FL

PASADENA CA 91101-1929

   43.36%

Institutional U.S. Treasury Obligations Money Market Fund/Institutional

  

REFINERIA DE CARTAGENA PROYECTO

ATTN REYES REINOSO YANEZ

BOGOTA COLOMBIA

   23.15%

Institutional U.S. Treasury Obligations Money Market Fund/Institutional

  

CALIFORNIA PUBLIC EMPLOYEES

RETIREMENT SYSTEM

175 FEDERAL ST FL 11

BOSTON MA 02110-2221

   21.68%

Institutional U.S. Treasury Obligations Money Market Fund/Institutional

  

LEGG MASON INVESTOR SERVICES LLC

ATTN TREASURY HE FL 10

100 INTERNATIONAL DR

BALTIMORE MD 21202-4673

   7.23%

Institutional U.S. Treasury Obligations Money Market Fund/Administrative

  

FIDUCIARY TRUST INTL REVENUE

ATTN MICHAEL J HOGAN

600 5TH AVE FL 2

NEW YORK NY 10020-2326

   72.86%

Institutional U.S. Treasury Obligations Money Market Fund/Administrative

  

FIDUCIARY TRUST INTL

NON REVENUE

ATTN MICHAEL J HOGAN

600 5TH AVE FL 2

NEW YORK NY 10020-2326

   27.14%

Institutional U.S. Treasury Obligations Money Market Fund/Investors

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   100%

Institutional Government Reserves/Institutional

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   8.93%

 

51


Institutional Government Reserves/Institutional

  

SMITH BARNEY PRIVATE TRUST COMPANY

ATTN RAYMOND L1 BRAUN

CASH MANAGEMENT OPERATIONS

1 COURT SQUARE FL 22

LONG ISLAND CITY NY 11120-0001

   7.85%

Institutional Government Reserves/Institutional

  

HARE & CO 2

111 SANDERS CREEK PKWY

EAST SYRACUSE NY 13057-1382

   7.54%

Institutional Government Reserves/Institutional

  

HARE & CO 2

111 SANDERS CREEK PKWY

EAST SYRACUSE NY 13057-1382

   6.47%

Institutional Government Reserves/Institutional

  

PNC CAPITAL MARKETS LLC

ATTN TRADE CAPTURE

16 ALLEGHENY CENTER MALL

PITTSBURGH PA 15212-5333

   5.75%

Institutional Government Reserves/Institutional

  

MERRILL LYNCH, PIERCE FENNER & SMITH

200 NORTH COLLEGE ST FL 3

CHARLOTTE NC 28202-2191

   5.60%

Institutional Government Reserves/Investors

  

SILICON VALLEY BANK

ATTN SVB INVESTMENT OPS HF240

3003 TASMAN DR

SANTA CLARA CA 95054-1191

   70.41%

Institutional Government Reserves/Investors

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   29.59%

Institutional Government Reserves/L

  

CITIBANK NA AS TTEE FBO LLOYD’S

US SITUS SURPLUS REINSURANCE TRUST

FUND SYNDICATE 2357 ASTA

C/O CITIBANK GTS/INS TRUST UNIT

111 WALL ST FL 15

NEW YORK NY 10043-1000

   6.10%

On November 30, 2016, to the Trust’s knowledge, the following persons owned of record or beneficially 25% or more of the outstanding shares of a fund as set forth below. Shareholders who beneficially own 25% or more of the voting securities of a fund or who are otherwise deemed to “control” a fund may be able to determine or significantly influence the outcome of matters submitted to a vote of the fund’s shareholders.

 

Institutional Liquid Reserves

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   27.94%

Institutional Cash Reserves

  

JP MORGAN SECURITIES LLC

JPMS PROCESSING 28521

JPMS IB 352

4 METROTECH CENTER 7TH FLOOR BROOKLYN NY 11245-0003

   64.09%

 

52


Institutional U.S. Treasury Obligations Money Market Fund

  

FIDUCIARY TRUST INTL REVENUE

ATTN MICHAEL J HOGAN

600 5TH AVE FL 2

NEW YORK NY 10020-2326

   50.35%

Select Tax Fee Reserves

  

MORGAN STANLEY SMITH BARNEY

201 PLAZA TWO FL 3

JERSEY CITY NJ 07311

   80.84%

 

 

53


INVESTMENT MANAGEMENT AND OTHER SERVICES

Manager

Legg Mason Partners Fund Advisor, LLC (“LMPFA” or the “manager”) serves as investment manager to the funds and the portfolios and provides certain oversight services to the funds and the portfolios, in each case pursuant to an investment management agreement (each, a “Management Agreement”). LMPFA is a wholly-owned subsidiary of Legg Mason.

The manager has agreed, under each Management Agreement, subject to the supervision of the fund’s or portfolio’s Board, to provide the fund or portfolio with investment research, advice, management and supervision, furnish a continuous investment program for the fund’s or portfolio’s portfolio of securities and other investments consistent with the fund’s or portfolio’s investment objectives, policies and restrictions, and place orders pursuant to its investment determinations. The manager is permitted to enter into contracts with subadvisers or subadministrators, subject to the Board’s approval. The manager has entered into subadvisory agreements, as described below.

As compensation for services performed, facilities furnished and expenses assumed by the manager, each fund and portfolio (other than U.S. Treasury Obligations Portfolio) pays the manager a fee computed daily at an annual rate of the fund’s or portfolio’s average daily net assets as described below. The manager also performs administrative and management services as reasonably requested by each fund or portfolio necessary for the operation of the fund or portfolio, such as (i) supervising the overall administration of each fund or portfolio, including, as applicable, negotiation of contracts and fees with, and monitoring of performance and billings of, the transfer agent, shareholder servicing agents, custodian and other independent contractors or agents; (ii) providing certain compliance, fund accounting, regulatory reporting and tax reporting services; (iii) preparing or participating in the preparation of Board materials, registration statements, proxy statements and reports and other communications to shareholders; (iv) maintaining each fund’s and portfolio’s existence; and (v) maintaining the registration or qualification of each fund’s shares and each portfolio’s interests under federal and state laws.

Each Management Agreement will continue in effect from year to year, provided continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities (as defined in the 1940 Act) of the fund or portfolio, as applicable, and (b) in either event, by a majority of the Independent Trustees, with such Independent Trustees casting votes in person at a meeting called for such purpose.

Each Management Agreement provides that the manager may render services to others. Each Management Agreement is terminable without penalty by the Board or by vote of a majority of the outstanding voting securities of the fund or portfolio, as applicable, on not more than 60 days’ nor less than 30 days’ written notice to the manager, or by the manager on not less than 90 days’ written notice to the fund or portfolio, as applicable, and will automatically terminate in the event of its assignment (as defined in the 1940 Act) by the manager. No Management Agreement is assignable by the Trust except with the consent of the manager.

Each Management Agreement provides that the manager, its affiliates performing services contemplated by the Management Agreement, and the partners, shareholders, directors, officers and employees of the manager and such affiliates, will not be liable for any error of judgment or mistake of law, for any loss arising out of any investment, or for any act or omission in the execution of securities transactions for the fund or portfolio , but the manager is not protected against any liability to the fund or portfolio to which the manager would be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under the Management Agreement.

Subject to such policies as the Board of a fund or portfolio may determine, the manager manages the securities of and makes investment decisions for each portfolio. Currently, advisory services for each of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and

 

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Tax Free Reserves are provided through its corresponding portfolio, but the manager may, if requested by the Trustees, provide advisory services directly to such funds. In addition, the manager provides certain administrative services to each fund and each portfolio under the Management Agreements.

For its services under the Management Agreement for each of Liquid Reserves and Cash Reserves, the manager receives an investment management fee that is calculated daily and payable monthly according to the following schedule:

 

Average Daily Net Assets

   Fee Rate (% of Average
Daily Net Assets)
 

First $5 billion

     0.200  

Next $5 billion

     0.175  

Over $10 billion

     0.150  

Prior to August 29, 2016, Liquid Reserves paid an investment management fee that was calculated daily and payable monthly according to the following schedule:

 

Average Daily Net Assets

   Fee Rate (% of Average
Daily Net Assets)
 

First $1 billion

     0.250  

Next $1 billion

     0.225  

Next $3 billion

     0.200  

Next $5 billion

     0.175  

Over $10 billion

     0.150  

Prior to August 29, 2016, Cash Reserves paid an investment management fee that was calculated daily and payable monthly equal to 0.20% of Cash Reserves’ average daily net assets.

For its services under the Management Agreement for each of U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves, the manager receives an investment management fee that is calculated daily and payable monthly according to the following schedule:

 

Average Daily Net Assets

   Fee Rate (% of Average
Daily Net Assets)
 

First $1 billion

     0.250  

Next $1 billion

     0.225  

Next $3 billion

     0.200  

Next $5 billion

     0.175  

Over $10 billion

     0.150  

For Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves, the fund pays the applicable annual rate based on its average daily net assets, less the amount, if any, of the fund’s share of the management fee payable by its corresponding portfolio.

For the periods below, the funds and portfolios paid management fees to the manager as follows:

 

Fund

   Fiscal Year Ended
August 31,
     Gross
Management
Fees ($)
     Management Fees
Waived/Expenses
Reimbursed ($)
    Net Management Fees
(after waivers/expense
reimbursements) ($)
 

Liquid Reserves

     2016        13,559,787        (6,125,656     7,434,131  
     2015        11,485,753        (5,558,741     5,927,012  
     2014        11,645,051        (10,769,755     875,296  

 

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Fund

   Fiscal Year Ended
August 31,
     Gross
Management
Fees ($)
     Management Fees
Waived/Expenses
Reimbursed ($)
    Net Management Fees
(after waivers/expense
reimbursements) ($)
 

Liquid Reserves Portfolio

     2016        52,782,907        (52,782,907      
     2015        67,000,688        (67,000,688      
     2014        73,658,171        (9,830,251     63,827,920  

Cash Reserves*

     2016        22,692,822        (11,720,905     10,971,917  
     2015        18,175,984        (10,235,889     7,940,095  
     2014        17,685,529        (17,724,236      

U.S. Treasury Reserves

     2016        21,503,658        (6,192,583     15,311,075  
     2015        23,137,383        (20,166,740     2,970,643  
     2014        21,096,825        (21,951,079      

U.S. Treasury Reserves Portfolio

     2016        21,377,399        (21,377,399      
     2015        23,584,452        (23,584,452      
     2014        20,714,271        (15,580,231     5,134,040  

U.S. Treasury Obligations Fund

     2016        1,781,539        (804,239     977,300  
     2015        1,804,563        (2,254,788      
     2014        289,598        (585,237      

U.S. Treasury Obligations Portfolio

     2016        N/A        N/A       N/A  
     2015        N/A        N/A       N/A  
     2014        N/A        N/A       N/A  

Government Reserves

     2016        17,598,528        (7,694,601     9,903,927  
     2015        22,111,443        (16,349,413     5,762,030  
     2014        20,790,903        (21,302,381      

Government Portfolio

     2016        13,122,811        (13,122,811      
     2015        15,445,862        (15,445,862      
     2014        14,824,382        (8,608,839     6,215,543  

Select Tax Free Reserves

     2016        2,864,851        (2,412,945     451,906  
     2015        1,550,225        (1,553,826      
     2014        1,677,537        (1,880,497      

Tax Free Reserves Portfolio

     2016        2,012,341        (2,014,834      
     2015        1,179,141        (1,179,278      
     2014        1,319,878        (801,436     518,442  

 

* Prior to August 26, 2016, Cash Reserves invested all of its assets in Prime Cash Reserves Portfolio. Prime Cash Reserves Portfolio was dissolved on August 26, 2016. Effective August 29, 2016, Cash Reserves invests all of its assets in Liquid Reserves Portfolio.

Any expense limitation arrangements in place during a fund’s past three fiscal years can be found in the fund’s prospectus in effect (as amended or supplemented from time to time) for such year.

Subadviser

Western Asset Management Company (“Western Asset” or the “subadviser”) provides the day-to-day portfolio management of each fund and each portfolio as subadviser pursuant to a subadvisory agreement (each, a “Subadvisory Agreement”). Western Asset is a wholly-owned subsidiary of Legg Mason.

Under each Subadvisory Agreement, subject to the supervision of the Board and the manager, the subadviser regularly provides investment research, advice, management and supervision; furnishes a continuous

 

56


investment program for the allocated assets consistent with the fund’s or portfolio’s investment objectives, policies and restrictions; and places orders pursuant to its investment determinations. The subadviser may delegate to companies that the subadviser controls, is controlled by, or is under common control with, certain of the subadviser’s duties under a Subadvisory Agreement, subject to the subadviser’s supervision, provided the subadviser will not be relieved of its duties or obligations under the Subadvisory Agreement as a result of any delegation.

Each Subadvisory Agreement will continue in effect from year to year provided continuance is specifically approved at least annually with respect to a fund or portfolio (a) by the Board or by a majority of the outstanding voting securities (as defined in the 1940 Act) of the fund or portfolio, as applicable and (b) in either event, by a majority of the Independent Trustees with such Independent Trustees casting votes in person at a meeting called for such purpose.

The Board or a majority of the outstanding voting securities (as defined in the 1940 Act) of a fund or portfolio, as applicable, may terminate each Subadvisory Agreement on not more than 60 days’ nor less than 30 days’ written notice to the subadviser without penalty. The subadviser may terminate each Subadvisory Agreement on not less than 90 days’ written notice to the fund or portfolio, as applicable, and the manager without penalty. The manager and the subadviser may terminate each Subadvisory Agreement upon their mutual written consent. Each Subadvisory Agreement will terminate automatically in the event of assignment (as defined in the 1940 Act) by the subadviser. The manager may not assign a Subadvisory Agreement except with the subadviser’s consent.

Each Subadvisory Agreement provides that the subadviser, its affiliates performing services contemplated by the Subadvisory Agreement, and the partners, shareholders, directors, officers and employees of the subadviser and such affiliates will not be liable for any error of judgment or mistake of law, or for any loss arising out of any investment, or for any act or omission in the execution of securities transactions for the fund or portfolio, but the subadviser is not protected against any liability to the fund or portfolio or the manager to which the subadviser would be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under the Subadvisory Agreement.

As compensation for its services, the manager pays to the subadviser a fee equal to 70% of the management fee paid to the manager by each fund or portfolio, net of any waivers and expense reimbursements.

Expenses

In addition to amounts payable under the Management Agreement and the 12b-1 Plan (as discussed below), each fund and portfolio is responsible for its own expenses, including, among other things, interest; taxes; governmental fees; voluntary assessments and other expenses incurred in connection with membership in investment company organizations; organizational costs of the fund; costs (including brokerage commissions, transaction fees or charges, if any) in connection with the purchase or sale of the fund’s securities and other investments and any losses in connection therewith; fees and expenses of custodians, transfer agents, registrars, independent pricing vendors or other agents; legal expenses; loan commitment fees; expenses relating to the issuing and redemption or repurchase of the fund’s shares or portfolio’s interests and servicing shareholder accounts; expenses of registering and qualifying the fund’s shares for sale under applicable federal and state law; expenses of preparing, setting in print, printing and distributing prospectuses and statements of additional information and any supplements thereto, reports, proxy statements, notices and dividends to the fund’s shareholders or portfolio’s investors; costs of stationery; website costs; costs of meetings of the Board or any committee thereof, meetings of shareholders and other meetings of the fund or portfolio; Board fees; audit fees; travel expenses of officers, members of the Board and employees of the fund or portfolio, if any; the fund’s or portfolio’s pro rata portion of premiums on any fidelity bond and other insurance covering the fund or portfolio and its officers, members of the Board and employees; and litigation expenses and any non-recurring or

 

57


extraordinary expenses as may arise, including, without limitation, those relating to actions, suits or proceedings to which the fund or portfolio is a party and the legal obligation which the fund or portfolio may have to indemnify the fund’s or portfolio’s Board members and officers with respect thereto.

Management may agree to implement an expense limitation and/or reimburse operating expenses for one or more classes of shares. Any such expense limitations and/or reimbursements are described in a fund’s Prospectus(es). The expense limitations and/or reimbursements do not cover (a) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and taxes; (b) extraordinary expenses, such as any expenses or charges related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceedings, “for cause” regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time; and (c) other extraordinary expenses as determined for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses, by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of a fund portfolio or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and soliciting proxies for, a meeting of shareholders of a fund or class or a meeting of investors of a portfolio (except to the extent relating to routine items such as the election of board members or the approval of the independent registered public accounting firm); and (iii) expenses of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Some of these arrangements do not cover interest expenses.

These arrangements may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

In order to implement an expense limitation, the manager will, as necessary, waive management fees and/or reimburse operating expenses. The manager is also permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if a class’s or a fund’s total annual operating expenses have fallen to a level below the class’s or fund’s expense limitation. In no case will the manager recapture any amount that would result, on any particular business day of a fund, in the fund’s total annual operating expenses exceeding such expense limitation or any other lower limit then in effect.

The manager may also waive management fees and/or reimburse the operating expenses of one or more portfolios, subject to recapture, under terms similar to the arrangements described above for the funds.

Distributor

LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, located at 100 International Drive, Baltimore, Maryland 21202, serves as the sole and exclusive distributor of each fund pursuant to a written agreement (as amended, the “Distribution Agreement”).

Under the Distribution Agreement, the distributor is appointed as principal underwriter and distributor in connection with the offering and sale of shares of each fund. The distributor offers the shares on an agency or “best efforts” basis under which a fund issues only the number of shares actually sold. Shares of each fund are continuously offered by the distributor.

The Distribution Agreement is renewable from year to year with respect to a fund if approved (a) by the Board or by a vote of a majority of the fund’s outstanding voting securities, and (b) by the affirmative vote of a majority of Trustees who are not parties to such agreement or interested persons of any party by votes cast in person at a meeting called for such purpose.

 

58


The Distribution Agreement is terminable with respect to any fund without penalty by the Board or by vote of a majority of the outstanding voting securities of the fund, or by the distributor, on not less than 60 days’ written notice to the other party (unless the notice period is waived by mutual consent). The Distribution Agreement will automatically and immediately terminate in the event of its assignment.

LMIS also serves as exclusive Placement Agent with respect to each portfolio.

LMIS may be deemed to be an underwriter for purposes of the 1933 Act.

LMPFA, LMIS, their affiliates and their personnel have interests in promoting sales of the Legg Mason Funds, including remuneration, fees and profitability relating to services to and sales of the funds. Associated persons of LMPFA, LMIS or their affiliates (including wholesalers registered with LMIS) may receive additional compensation related to the sale of individual Legg Mason Funds or categories of Legg Mason Funds. LMPFA, the subadvisers, and their advisory or other personnel may also benefit from increased amounts of assets under management.

Financial intermediaries, including broker/dealers, investment advisers, financial consultants or advisers, mutual fund supermarkets, insurance companies, financial institutions and other financial intermediaries through which investors may purchase shares of a fund, also may benefit from the sales of shares of the Legg Mason Funds. For example, in connection with such sales, financial intermediaries may receive compensation from a fund (with respect to the fund as a whole or a particular class of shares) and/or from LMPFA, LMIS, and/or their affiliates, as further described below. The structure of these compensation arrangements, as well as the amounts paid under such arrangements, vary and may change from time to time. In addition, new compensation arrangements may be negotiated at any time. The compensation arrangements described in this section are not mutually exclusive, and a single financial intermediary may receive multiple types of compensation.

LMIS has agreements in place with financial intermediaries defining how much each firm will be paid for the sale of a particular mutual fund from sales charges, if any, paid by fund shareholders and from Rule 12b-1 Plan fees paid to LMIS by the funds. These financial intermediaries then pay their employees or associated persons who sell fund shares from the sales charges and/or fees they receive. The financial intermediary, and/or its employees or associated persons may receive a payment when a sale is made and will, in most cases, continue to receive ongoing payments while you are invested in the fund. In other cases, LMIS may retain all or a portion of such fees and sales charges.

In addition, LMIS, LMPFA and/or certain of their affiliates may make additional payments (which are often referred to as “revenue sharing” payments) to the financial intermediaries from their past profits and other available sources, including profits from their relationships with the funds. Revenue sharing payments are a form of compensation paid to a financial intermediary in addition to the sales charges paid by fund shareholders or Rule 12b-1 Plan fees paid by a fund. LMPFA, LMIS and/or certain of its affiliates may revise the terms of any existing revenue sharing arrangement, and may enter into additional revenue sharing arrangements with other financial services firms.

Revenue sharing arrangements are intended, among other things, to foster the sale of fund shares and/or to compensate financial services firms for assisting in marketing or promotional activities in connection with the sale of fund shares. In exchange for revenue sharing payments, LMPFA and LMIS generally expect to receive the opportunity for a fund to be sold through the financial intermediaries’ sales forces or to have access to third-party platforms or other marketing programs, including but not limited to mutual fund “supermarket” platforms or other sales programs. To the extent that financial intermediaries receiving revenue sharing payments sell more shares of a fund, LMPFA and LMIS and/or their affiliates benefit from the increase in fund assets as a result of the fees they receive from the fund. LMIS, LMPFA or their affiliates consider revenue sharing arrangements based on a variety of factors and services to be provided.

 

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Revenue sharing payments are usually calculated based on a percentage of fund sales and/or fund assets attributable to a particular financial intermediary. Payments may also be based on other criteria or factors such as, for example, a fee per each transaction. Specific payment formulas are negotiated based on a number of factors, including, but not limited to, reputation in the industry, ability to attract and retain assets, target markets, customer relationships and scope and quality of services provided. In addition, LMIS, LMPFA and/or certain of their affiliates may pay flat fees on a one-time or irregular basis for the initial set-up of a fund on a financial intermediary’s systems, participation or attendance at a financial intermediary’s meetings, or for other reasons. In addition, LMIS, LMPFA and/or certain of their affiliates may pay certain education and training costs of financial intermediaries (including, in some cases, travel expenses) to train and educate the personnel of the financial intermediaries. It is likely that financial intermediaries that execute portfolio transactions for a fund will include those firms with which LMPFA, LMIS and/or certain of their affiliates have entered into revenue sharing arrangements.

Each fund generally pays the transfer agent for certain recordkeeping and administrative services. In addition, each fund may pay financial intermediaries for certain recordkeeping, administrative, sub-accounting and networking services. These services include maintenance of shareholder accounts by the firms, such as recordkeeping and other activities that otherwise would be performed by a fund’s transfer agent. Administrative fees may be paid to a firm that undertakes, for example, shareholder communications on behalf of a fund. Networking services are services undertaken to support the electronic transmission of shareholder purchase and redemption orders through the National Securities Clearing Corporation (NSCC). These payments are generally based on either (1) a percentage of the average daily net assets of fund shareholders serviced by a financial intermediary or (2) a fixed dollar amount for each account serviced by a financial intermediary. LMIS, LMPFA and/or their affiliates may make all or a portion of these payments.

In addition, each fund reimburses LMIS for NSCC fees that are invoiced to LMIS as the party to the agreement with NSCC for the administrative services provided by NSCC to the fund and its shareholders. These services include transaction processing and settlement through Fund/SERV, electronic networking services to support the transmission of shareholder purchase and redemption orders to and from financial intermediaries, and related recordkeeping provided by NSCC to the fund and its shareholders.

If your fund shares are purchased through a retirement plan, LMIS, LMPFA or certain of their affiliates may also make similar payments to those described in this section to the plan’s recordkeeper or an affiliate.

Revenue sharing payments, as well as the other types of compensation arrangements described in this section, may provide an incentive for financial intermediaries and their employees or associated persons to recommend or sell shares of a fund to customers and in doing so may create conflicts of interest between the firms’ financial interests and the interests of their customers. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for any fund-related marketing or shareholder servicing activities.

As of December 31, 2015, LMIS, LMPFA or their affiliates made revenue sharing payments to the financial intermediaries listed below (or their affiliates or successors). It is possible that each intermediary listed is not receiving payments with respect to each fund in the Legg Mason fund complex. This list of intermediaries will change over time, and any additions, modifications or deletions thereto that have occurred since December 31 2015 are not reflected.

 

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BMO Harris Bank, N.A.

BNP Paribas Prime Brokerage, Inc.

BOKF, NA

Bridge Bank, N.A.

Citibank N.A.

Citigroup Global Markets Inc.

Comerica Bank

Federal Deposit Insurance Corporation

Fiduciary Trust Company International

Goldman, Sachs & Co.

Institutional Cash Distributors, LLC

J.P. Morgan Clearing Corp

Janney Montgomery Scott, LLC

Jefferies LLC

M Holdings Securities, Inc.

Merrill Lynch, Pierce, Fenner & Smith Incorporated

Morgan Stanley Smith Barney LLC

MSCS Financial Services Division of Broadridge
    Business Process Outsourcing, LLC

My Treasury Limited

Newport Coast Securities, Inc.

Oppenheimer & Co. Inc.

Pershing LLC

PFS Investments, Inc.

PNC Capital Markets LLC

Silicon Valley Bank

State Street Bank and Trust Company

State Street Global Markets LLC

SunGard Brokerage & Securities Services LLC

The Bank of New York Mellon

Treasury Brokerage

U.S. Bancorp Investments, Inc.

Union Bank, N.A.

US Bank NA

Wells Fargo Securities, LLC

 

 

LMIS, LMPFA or their affiliates may also pay fees, from their own assets, to financial intermediaries for providing other distribution-related services as well as recordkeeping, administrative, subaccounting, and networking services (or portions thereof), and other shareholder or administrative services in connection with investments in the funds. These payments may be considered revenue sharing payments. The financial intermediaries receiving such payments may not be listed above.

You should assume that your financial intermediary receives revenue sharing payments and/or other compensation described in this SAI. Please contact your financial intermediary for details about any payments it (and its employees) may receive from a fund and/or from LMIS, LMPFA and/or their affiliates. You should review your financial intermediary’s disclosure and/or talk to your broker/dealer or financial intermediary to obtain more information on how this compensation may have influenced your broker/dealer’s or financial intermediary’s recommendation of a fund.

Services and Distribution Plan

The Trust, on behalf of each fund, has adopted a shareholder services and distribution plan (the “12b-1 Plan”) in accordance with Rule 12b-1 under the 1940 Act. Under the 12b-1 Plan, a fund may pay monthly fees to LMIS at an annual rate not to exceed the percentage set forth below of the average daily net assets of each class indicated. Each fund will provide the Board with periodic reports of amounts expended under the 12b-1 Plan and the purposes for which such expenditures were made.

 

Fund—Class

   Total Service and/or
Distribution Fees as
a Percentage of
Daily Net Assets (%)
 

Liquid Reserves

  

Institutional Shares

     0.00  

Investor Shares

     0.10  

Administrative Shares

     0.20  

 

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Fund—Class

   Total Service and/or
Distribution Fees as
a Percentage of
Daily Net Assets (%)
 

Cash Reserves

  

Institutional Shares

     0.00  

Class L

     0.10  

Investor Shares

     0.10  

Administrative Shares

     0.20  

U.S. Treasury Reserves

  

Institutional Shares

     0.00  

Investor Shares

     0.10  

Administrative Shares

     0.20  

U.S. Treasury Obligations Fund

  

Institutional Shares

     0.00  

Investor Shares

     0.10  

Administrative Shares

     0.20  

Government Reserves

  

Institutional Shares

     0.00  

Class L

     0.10  

Investor Shares

     0.10  

Administrative Shares

     0.20  

Tax Free Reserves

  

Select Shares

     0.00  

Investor Shares

     0.10  

Administrative Shares

     0.20  

Fees under the 12b-1 Plan may be used to make payments to the distributor, Service Agents and other parties in respect of the sale of shares of the funds, for advertising, marketing or other promotional activity, and payments for preparation, printing, and distribution of prospectuses, statements of additional information and reports for recipients other than existing shareholders. Each fund also may make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient may vary based upon certain factors, including, among other things, the levels of sales of shares and/or shareholder services; provided, however, that the fees paid to a recipient with respect to a particular class that may be used to cover expenses primarily intended to result in the sale of shares of that class, or that may be used to cover expenses primarily intended for personal service and/or maintenance of shareholder accounts, may not exceed the maximum amounts, if any, as may from time to time be permitted for such services under Financial Industry Regulatory Authority (“FINRA”) Conduct Rule 2830 or any successor rule, in each case as amended or interpreted by FINRA.

Since fees paid under the 12b-1 Plan are not tied directly to expenses incurred by the distributor (or others), the amount of the fees paid by a class of a fund during any year may be more or less than actual expenses incurred by the distributor (or others), pursuant to the 12b-1 Plan. This type of distribution fee arrangement is characterized by the staff of the SEC as being of the “compensation variety” (in contrast to “reimbursement” arrangements by which a distributor’s payments are directly linked to its expenses). Thus, even if the distributor’s expenses exceed the fees provided for by the 12b-1 Plan, a fund will not be obligated to pay more than those fees and, if expenses incurred by the distributor (or others) are less than the fees paid to the distributor and others, they will realize a profit.

The 12b-1 Plan recognizes that various service providers to a fund, such as its manager, may make payments for distribution, marketing or sales-related expenses out of their own resources of any kind, including profits or payments received from the funds for other purposes, such as management fees. The 12b-1 Plan provides that, to the extent that such payments might be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of a fund, the payments are deemed to be authorized by the 12b-1 Plan.

 

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Under its terms, the 12b-1 Plan continues in effect for successive annual periods, provided continuance is specifically approved at least annually by vote of the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of the 12b-1 Plan or in any agreements related to it (“Qualified Trustees”). The 12b-1 Plan may not be amended to increase the amount of the service and distribution fees without shareholder approval, and all amendments of the 12b-1 Plan also must be approved by the Trustees, including the Qualified Trustees, in the manner described above. The 12b-1 Plan may be terminated with respect to a class of a fund at any time, without penalty, by vote of a majority of the Qualified Trustees or by vote of a majority of the outstanding voting securities of the class (as defined in the 1940 Act).

The following service and distribution fees were paid by the funds, after waivers (if any), pursuant to the 12b-1 Plan in effect during the last three fiscal years:

 

      Fiscal Year Ended August 31  

Fund

   2014 ($)      2015 ($)      2016 ($)  

Liquid Reserves

        

SVB Securities Liquid Reserves Shares*

     69,886        49,292        30,650  

SVB Securities Institutional Liquid Reserves Shares*

     663,280        441,418        341,660  

Investor Shares

     26,442        33,224        178,474  

Cash Reserves

        

Class L

     287,928        339,343        763,795  

Class S*,**

     177,444        215,831        243,647  

SVB Securities Horizon Shares*

     325,556        260,152        432,748  

Investor Shares

     7,622        35,261        163,151  

Government Reserves

        

Class L

           8,000  

Investor Shares

     6,037        20,691        105,575  

U.S Treasury Reserves

        

Investor Shares

     35,854        193,355        1,140,99  

U.S. Treasury Obligations Fund

        

Investor Shares

     1,496        725        1,000  

Administrative Shares

     109,871        544,877        1,294,135  

Select Tax Free Reserves

        

Investor Shares

     10,603        37,343        124,396  

 

* The fund no longer offers this share class.
** Effective November 9, 2016 this share class was liquidated.

No information is presented for Administrative Shares of each fund, except U.S. Treasury Obligations Fund, because no shares of Administrative Shares were outstanding during the fiscal year ended August 31, 2016.

For the fiscal year ended August 31, 2016, LMIS incurred distribution expenses for advertising, printing and mailing prospectuses, support services and overhead expenses and compensation to Service Agents and third parties as expressed in the following table. The distributor may have made revenue sharing payments in addition to the expenses shown here.

 

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Fund/Class

   Third Party
Fees ($)
     Financial
Consultant
Compensation
(Amortized) ($)
     Marketing ($)      Printing ($)      Total ($)  

Liquid Reserves

              

SVB Securities Liquid Reserves Shares*

     12,386               616        2        13,004  

SVB Securities Institutional Liquid Reserves Shares*

     171,544               13,509        66        185,119  

Investor Shares

     64,450               6,770        20        71,240  

Cash Reserves

              

Class L

     373,810               25,187        134        399,131  

Class S

     2,754               3,564        21        6,339  

SVB Securities Horizon Shares*

     283,313               5,643        28        288,984  

Investor Shares

     53,583               5,525        22        59,130  

Government Reserves

              

Class L

     4,000               1,818               5,818  

Investor Shares

     35,867               5,799        15        41,681  

U.S. Treasury Reserves

              

Investor Shares

     397,607               45,863        153        443,623  

U.S. Treasury Obligations Fund

              

Investor Shares

     334               1,712               2,046  

Administrative Shares

     217,198               72,928        111        290,237  

Select Tax Free Reserves

              

Investor Shares

     23,966               10,285        17        34,268  

 

* This fund no longer offers this share class. For the fiscal year ended August 31, 2016, all payments made under the 12b-1 Plan for SVB Securities Institutional Liquid Reserves Shares, SVB Securities Liquid Reserves Shares, classes of Liquid Reserves, and SVB Securities Horizon Shares, a class of Cash Reserves, were paid directly to SVB Securities as Service Agent for such classes.

No information is presented for Administrative Shares of each fund, except U.S. Treasury Obligations Fund, because no shares of Administrative Shares were outstanding during the fiscal year ended August 31, 2016.

In addition, various service providers, including the manager, may have made payments for distribution related expenses out of their own resources, including past profits, or from payments received from the funds for other purposes, such as management fees. See “Distributor” above.

Dealer Commissions and Concessions

From time to time, the funds’ distributor or the manager, at their expense, may provide additional commissions, compensation or promotional incentives (“concessions”) to dealers that sell or arrange for the sale of shares of the funds. Such concessions provided by the funds’ distributor or the manager may include financial assistance to dealers in connection with preapproved conferences or seminars, sales or training programs for invited registered representatives and other employees, payment for travel expenses, including lodging, incurred by registered representatives and other employees for such seminars or training programs, seminars for the public, advertising and sales campaigns regarding one or more funds, and/or other dealer-sponsored events. From time to time, the funds’ distributor or manager may make expense reimbursements for special training of a dealer’s registered representatives and other employees in group meetings or to help pay the expenses of sales contests. Other concessions may be offered to the extent not prohibited by state laws or any self-regulatory agency, such as FINRA.

 

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Custodian and Transfer Agent

State Street Bank and Trust Company (“State Street”), One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian of the funds and the portfolios. State Street, among other things, maintains a custody account or accounts in the name of each fund and portfolio, receives and delivers all assets for the funds and the portfolios upon purchase and upon sale or maturity, collects and receives all income and other payments and distributions on account of the assets of the funds and the portfolios and makes disbursements on behalf of the funds and the portfolios. State Street neither determines the funds’ or portfolios’ investment policies nor decides which securities the funds or portfolios will buy or sell. For its services, State Street receives a monthly fee based upon the daily average market value of securities held in custody and also receives securities transaction charges, including out-of-pocket expenses. The funds and the portfolios may also periodically enter into arrangements with other qualified custodians with respect to certain types of securities or other transactions such as repurchase agreements. State Street may also act as the funds’ or portfolios’ securities lending agent and in that case would receive a share of the income generated by such activities.

Boston Financial Data Services, Inc. (“BFDS”), located at 2000 Crown Colony Drive, Quincy, Massachusetts 02169, serves as the funds’ transfer agent. Under the transfer agency agreement with BFDS, BFDS maintains the shareholder account records for each fund, handles certain communications between shareholders and each fund and distributes dividends and distributions payable by the funds. For these services, BFDS receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for each fund during the month and is reimbursed for out-of-pocket expenses.

Counsel

Morgan, Lewis & Bockius LLP, located at One Federal Street, Boston, Massachusetts 02110, serves as counsel to each fund and portfolio.

Sullivan & Worcester LLP, located at 1666 K Street, N.W., Washington, D.C. 20006, serves as counsel to the Independent Trustees of each fund’s and portfolio’s Board.

Independent Registered Public Accounting Firm

KPMG LLP, an independent registered public accounting firm, located at 345 Park Avenue, New York, New York 10154, has been selected to audit and report upon each fund’s and portfolio’s financial statements and financial highlights.

Code of Ethics

Pursuant to Rule 17j-1 under the 1940 Act, the funds, the portfolios, the manager, the subadviser and the distributor each has adopted a code of ethics that permits its personnel to invest in securities for their own accounts, including securities that may be purchased or held by the funds or the portfolios. All personnel must place the interests of clients first and avoid activities, interests and relationships that might interfere with the duty to make decisions in the best interests of the clients. All personal securities transactions by employees must adhere to the requirements of the codes of ethics and must be conducted in such a manner as to avoid any actual or potential conflict interest, the appearance of such a conflict or the abuse of an employee’s position of trust and responsibility. Copies of the codes of ethics applicable to personnel of the funds, the portfolios, the manager, the subadviser and the distributor to the Independent Trustees of the Trust are on file with the SEC.

Proxy Voting Policies and Procedures

Although individual Trustees may not agree with particular policies or votes by the manager or subadviser, the Board has delegated proxy voting discretion to the manager and/or the subadviser, believing that the manager and/or the subadviser should be responsible for voting because it is a matter relating to the investment decision making process.

 

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The manager delegates the responsibility for voting proxies for each fund and portfolio to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, the manager does not expect to have proxy-voting responsibility for the funds or the portfolios. Should the manager become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, the manager will utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained. In the case of a material conflict between the interests of the manager (or its affiliates if such conflict is known to persons responsible for voting at the manager) and a fund or portfolio , the board of directors of the manager will consider how to address the conflict and/or how to vote the proxies. The manager will maintain records of all proxy votes in accordance with applicable securities laws and regulations, to the extent that the manager votes proxies. The manager will be responsible for gathering relevant documents and records related to proxy voting from the subadviser and providing them to each fund and portfolio as required for each fund and portfolio to comply with applicable rules under the 1940 Act.

The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to a fund’s or portfolio’s portfolio securities are voted and are attached as Appendix B to this SAI. Information regarding how each fund or portfolio voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge: (1) by calling 1-877-721-1926, (2) on www.leggmason.com/moneymarketfunds (click on the name of the fund) and (3) on the SEC’s website at http://www.sec.gov.

 

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PURCHASE OF SHARES

General

See the funds’ Prospectuses for a discussion of how to purchase fund shares. Investors may purchase shares from a Service Agent. In addition, certain investors may purchase certain classes of shares directly from a fund. The following persons are also eligible to purchase shares of certain classes of a fund through the fund: (i) current employees of the fund’s manager and its affiliates; (ii) current and former board members of investment companies managed by affiliates of Legg Mason; (iii) current and former board members of Legg Mason; and (iv) the immediate families of such persons. Immediate families are such person’s spouse, including the surviving spouse of a deceased board member, and children under the age of 21. For such investors, the minimum initial investment is $1,000 and the minimum for each purchase of additional shares is $50. When purchasing shares of a fund, investors must specify the class of shares being purchased. Service Agents may charge their customers an annual account fee. Accounts held directly with the transfer agent are not subject to a maintenance fee.

Tax Free Reserves Only

The fund is only offered to accounts that are beneficially owned solely by natural persons. Natural persons include any person who provides the fund or the fund’s authorized agent or intermediary with a social security number issued to that person, a government-issued identification document such as a driver’s license or passport that bears a photograph of the person, or other similar documentation. Natural persons also may be able to invest in the fund through certain tax-advantaged savings accounts, trusts and other retirement and investment accounts, provided all beneficial owners of the accounts are natural persons, Examples may include: (i) certain retirement accounts, such as participant directed defined contribution plans, individual retirement accounts, deferred compensation plans for employees of government or tax-exempt organizations, and Keogh plans; (ii) college savings plans; (iii) health savings accounts; (iv) custodial accounts; (v) accounts of the estate of a natural person; (vi) medical savings accounts); (vii) ordinary trusts; and (viii) other accounts beneficially owned solely by natural persons.

Beneficial ownership typically means having voting power, which includes the power to vote, or direct the voting of, the fund shares, and/or sole or shared investment power, which includes the power to dispose of, or direct the disposition of, the fund shares.

The fund will require the fund’s authorized agent or intermediary to certify to the fund that it has determined that all beneficial owners of accounts that have invested in the fund through or with the assistance of such authorized agent or intermediary are natural persons pursuant to reasonably designed procedures.

Accounts that are not beneficially owned solely by natural persons, such as those opened by businesses, including small businesses, defined benefit plans and endowments, are not eligible to invest in, and will be involuntarily redeemed from, the fund.

REDEMPTION OF SHARES

General

The right of redemption may be suspended or the date of payment postponed (a) for any period during which the New York Stock Exchange (“NYSE”) is closed (other than for customary weekend and holiday closings), (b) when trading in the markets a fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the fund’s or portfolio’s investments or determination of net asset value is not reasonably practicable, or (c) for any other periods as the SEC by rule or by order may permit for protection of a fund’s shareholders.

 

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If a shareholder holds shares in more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer shares of the class than specified, the redemption request will be delayed until the transfer agent receives further instructions.

The Service Agent may charge you a fee for executing your order. The amount and applicability of such a fee is determined and should be disclosed to its customers by each Service Agent.

Additional Information Regarding Telephone Redemption and Exchange Program. Each fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program.

Redemption Fees and Gates (each fund other than U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves)

Each fund may impose a liquidity fee on redemptions from the fund (up to 2%) or temporarily restrict redemptions from the fund for up to 10 business days (a “redemption gate”), in the event that the fund’s weekly liquid assets1 fall below the following thresholds:

 

   

30% weekly liquid assets—if a fund’s weekly liquid assets fall below 30% of the fund’s total assets, and the Board of Trustees of the fund determines that it is in the best interests of the fund, the fund may, as early as the same day, impose a liquidity fee of not more than 2% of the amount redeemed or a redemption gate that temporarily suspends the right of redemption

 

   

10% weekly liquid assets—if a fund’s weekly liquid assets fall below 10% of the fund’s total assets, the fund will impose at the beginning of the next business day, a liquidity fee of 1% of the amount redeemed, unless the Board of Trustees of the fund determines that imposing such a fee would not be in the best interests of the fund or determines that a lower or higher fee (not to exceed 2%) would be in the best interests of the fund.

If a fund imposes a redemption gate, the fund and the fund’s authorized agent or intermediary will not accept redemption orders until the fund has notified shareholders that the redemption gate has been lifted. Any redemption orders submitted while a redemption gate is in effect will be cancelled without further notice. Pending redemption orders may be affected if a fund imposes a redemption gate. If you still wish to redeem shares once the redemption gate has been lifted, you will need to submit a new redemption request to the fund or the fund’s authorized agent or intermediary.

Liquidity fees and redemption gates may be terminated at any time at the discretion of the Board of Trustees. In addition, liquidity fees and redemption gates will terminate at the beginning of the next business day once the fund has invested 30% or more of its total assets in weekly liquid assets. The fund may only suspend redemptions for up to 10 business days in any 90-day period.

A liquidity fee imposed by a fund will reduce the amount you will receive upon the redemption of your shares, and could cause you to recognize a capital loss or could decrease the capital gain or increase the capital loss you would otherwise recognize. Liquidity fees would be retained by the fund. Pending redemption orders may be affected if a fund imposes a liquidity fee.

 

1  “Weekly liquid assets” include (i) cash; (ii) direct obligations of the U.S. Government; (iii) Government securities issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States, that are issued at a discount to the principal amount to be repaid at maturity without the provision for the payment of interest and have a remaining maturity of 60 days or less; (iv) securities that will mature or are subject to a demand feature that is exercisable and payable within five business days; and (v) amounts receivable and due unconditionally within five business days on pending sales of portfolio securities.

 

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Any announcement regarding the imposition of a liquidity fee or redemption gate, or the termination of a liquidity fee or a redemption gate, will be available at the fund’s website, as noted below and will be filed with the Securities and Exchange Commission.

 

Liquid Reserves

  https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-liquid-reserves.html

Cash Reserves

  https://www.leggmason.com/en-us/products/money-markets/western-asset-institutional-cash-reserves.html

Select Tax Free Reserves

  https://www.leggmason.com/en-us/products/money-markets/western-asset-select-tax-free-reserves.html

If a fund’s weekly liquid assets fall below 10% of the fund’s total assets, the fund reserves the right to permanently suspend redemptions and liquidate if the Board of Trustees of the fund determines that it is not in the best interests of the fund to continue operating.

Involuntary Redemptions of Shares

Subject to applicable law, a fund may cause a shareholder’s shares to be redeemed under certain circumstances, including in order to eliminate small accounts for administrative efficiencies and cost savings, to protect the tax status of a fund if necessary and to eliminate ownership of shares by a particular shareholder when the fund determines, pursuant to adopted policies, that the particular shareholder’s ownership is not in the best interests of the other shareholders of that fund (for example, in the case of a market timer). In addition, Tax Free Reserves reserves the right to redeem shares of any investor that is not a natural person.

Distributions in Kind

If the Board determines that it would be detrimental to the best interests of the remaining shareholders of a fund to make a redemption payment wholly in cash, a fund may pay, in accordance with SEC rules, any portion of a redemption by a distribution in kind of fund securities in lieu of cash. If a redemption is paid in portfolio securities, such securities will be valued in accordance with the procedures described under “Share price” in the applicable fund’s Prospectuses. Securities issued as a distribution in kind may incur transaction costs when shareholders subsequently sell those securities, and the market prices of those securities will be subject to fluctuation until they are sold.

EXCHANGE PRIVILEGE

General

The exchange privilege enables shareholders to acquire shares of the same class, if offered, of other Western Asset money market funds, when they believe that a shift between funds is an appropriate investment decision. Prior to any exchange, the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is being considered. The funds’ Prospectuses describe the requirements for exchanging shares of the funds.

Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange on a day during a fund’s business hours are redeemed at the final net asset value calculated on such day and the proceeds are immediately invested in shares of the fund being acquired at that fund’s final net asset value calculated on such day. Each fund reserves the right to reject any exchange request.

The exchange privilege is not available with respect to Liquid Reserves, Cash Reserves or Class L shares of Government Reserves.

 

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Additional Information Regarding the Exchange Privilege

The funds are not designed to provide investors with a means of speculation on short-term market movements. A pattern of frequent exchanges by investors can be disruptive to efficient portfolio management and, consequently, can be detrimental to a fund and its shareholders. See “Frequent trading of fund shares” in each fund’s Prospectuses.

During times of drastic economic or market conditions, each fund may suspend the exchange privilege temporarily without notice and treat exchange requests based on their separate components—redemption orders with a simultaneous request to purchase the other fund’s shares. In such a case, the redemption request would be processed at the fund’s next determined net asset value but the purchase order would be effective only at the net asset value next determined after the fund being purchased formally accepts the order, which may result in the purchase being delayed.

The exchange privilege may be modified or terminated at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should contact the transfer agent or, if they hold fund shares through a Service Agent, their Service Agent, to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares exchanged and could result in taxable gain or loss to the shareholder making the exchange. A shareholder generally will not recognize a gain or loss on an exchange if the fund whose shares are exchanged maintains a net asset value of $1.00 per share. Other taxes or tax-related consequences may apply, and you should consult your tax adviser before requesting an exchange.

VALUATION OF SHARES

The net asset value per share of each class of the funds is determined on such days and at such times as is set forth in the funds’ Prospectuses. Net asset value is calculated for each class of a fund by dividing the value of the fund’s net assets (i.e., the value of its assets attributable to a class, including (if applicable) its investment in its underlying portfolio, if any, less its liabilities, including expenses payable or accrued) by the number of the shares of the class outstanding at the time the determination is made. As of the date of this SAI, the NYSE is normally open for trading every weekday except in the event of an emergency or for the following holidays (or the days on which they are observed): New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Federal Reserve Bank of New York is closed for the following holidays (or the days on which they are observed): New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. As of the date of this SAI, the Securities Industry and Financial Markets Association (SIFMA) recommends an early close to the bond markets on Good Friday, the business day following Thanksgiving Day and the business day preceding the following holidays (or the days on which they are observed): New Year’s Day, Good Friday, Memorial Day, Independence Day and Christmas Day.

The value of a portfolio’s net assets (i.e., the value of its securities and other assets less its liabilities, including expenses payable or accrued) is determined at the same times and on the same days as the net asset value per share of the corresponding fund is determined (although a portfolio’s net asset value may also be determined at other times in addition to these times to accommodate the net asset value times of other investors in the portfolio). The net asset value of a fund’s investment in its corresponding portfolio is equal to the fund’s pro rata share of the total investment of the fund and of other investors in the portfolio less the fund’s pro rata share of the portfolio’s liabilities.

For each fund other than Liquid Reserves and Cash Reserves

It is anticipated that the net asset value of each share of each fund will remain constant at $1.00 and, although no assurance can be given that they will be able to do so on a continuing basis, as described below, the funds employ specific investment policies and procedures to accomplish this result.

 

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The securities held by a fund or portfolio are valued at their amortized cost. Amortized cost valuation involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If the market value (or deemed market value) of the securities held by a fund or portfolio deviates more than 1/2 of 1% from their value determined on the basis of amortized cost, the applicable Board will consider whether any action should be initiated, as described in the following paragraph. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of an instrument is higher or lower than the price the fund or portfolio would receive if the instrument were sold.

Pursuant to the rules of the SEC, the funds’ and portfolios’ Trustees have established procedures to stabilize the value of the funds’ and portfolios’ net assets within 1/2 of 1% of the value determined on the basis of amortized cost. These procedures include a review of the extent of any such deviation of net asset value, based on available market rates. Should that deviation exceed 1/2 of 1% for a fund or portfolio, the Trustees will consider whether any action should be initiated to eliminate or reduce material dilution or other unfair results to investors in the fund or portfolio. Such action may include redemption or withdrawal in kind, selling securities prior to maturity and utilizing a net asset value as determined by using available market quotations.

Because of the short-term maturities of the portfolio investments of each fund, the funds do not expect to realize any material long-term capital gains or losses. Any net realized short-term capital gains will be declared and distributed to the funds’ shareholders annually after the close of each fund’s fiscal year. Distributions of short-term capital gains are taxable to shareholders as ordinary income. Any realized short-term capital losses will be offset against short-term capital gains or, to the extent possible, utilized as capital loss carryover. Each fund may distribute short-term capital gains more frequently than annually, and each fund other than Government Reserves may reduce shares to reflect capital losses or make distributions of capital if necessary, in each case in order to maintain the fund’s or portfolio’s net asset value of $1.00 per share. Reducing the number of shares would be accomplished by means of a reverse stock split, if authorized by a fund’s Trustees. In a reverse stock split, the number of shares held by each shareholder would be reduced by the same proportional amount. That amount would be calculated such that, immediately after the reverse stock split, each outstanding share would be valued at $1.00. However, each shareholder would own fewer shares and, therefore, would have lost money.

It is expected that each fund (and each class of a fund) will have a positive net income at the time of each determination thereof. If for any reason a fund’s or a class’ net income is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, or if a fund’s expenses exceeded its income, the fund would first offset the negative amount with respect to each shareholder account in that fund or class from the dividends declared during the month with respect to those accounts. If and to the extent that negative net income exceeds declared dividends at the end of the month, the fund may reduce the number of outstanding fund shares of that fund or class as described above. In addition, even where a fund does not have negative income, a fund may retain some portion of its income, which would have the effect of increasing its net asset value.

For Liquid Reserves and Cash Reserves

Valuation of each fund’s securities and other assets is performed in accordance with procedures approved by the Board. These procedures delegate most valuation functions to the manager, which generally uses independent third party pricing services approved by each fund’s Board. Under the procedures, assets are valued as follows:

 

   

The valuations for fixed income securities are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of fair valuation techniques and methodologies.

 

   

The valuations of securities traded on foreign markets and certain other fixed income securities will generally be based on prices determined as of the earlier closing time of the markets on which they primarily trade. Foreign markets are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the fund’s shares may change on days when you will not be able to purchase or redeem the fund’s shares.

 

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If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may price securities using fair value procedures approved by the Board. These procedures permit, among other things, the use of a formula or other method that takes into consideration market indices, yield curves and other specific adjustments to determine fair value. Fair value of a security is the amount, as determined by the manager in good faith, that the fund might reasonably expect to receive upon a current sale of the security. The fund may also use fair value procedures if the manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the fund’s net asset value is calculated.

Many factors may influence the price at which each fund could sell any particular portfolio investment. The sales price may well differ—higher or lower—from the fund’s last valuation, and such differences could be significant, particularly for securities that trade in relatively thin markets and/or markets that experience extreme volatility. Moreover, valuing securities using fair value methodologies involves greater reliance on judgment than valuing securities based on market quotations. A fund that uses fair value methodologies may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that a fund could obtain the value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Investors who purchase or redeem fund shares on days when a fund is holding fair-valued securities may receive a greater or lesser number of shares, or redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology. Because of the differences in distribution fees and class-specific expenses, the per share NAV of each class may differ.

Because of the short-term maturities of the portfolio investments of each fund, the funds do not expect to realize any material long-term capital gains or losses. Any net realized short-term capital gains will be declared and distributed to the funds’ shareholders annually after the close of each fund’s fiscal year. Distributions of short-term capital gains are taxable to shareholders as ordinary income. Any realized short-term capital losses will be offset against short-term capital gains or, to the extent possible, utilized as capital loss carryover. Each fund may distribute short-term capital gains more frequently than annually, reduce shares to reflect capital losses or make distributions of capital. Reducing the number of shares would be accomplished by means of a reverse stock split, if authorized by a fund’s Trustees. In a reverse stock split, the number of shares held by each shareholder would be reduced by the same proportional amount.

PORTFOLIO TRANSACTIONS

Subject to such policies as may be established by the Board from time to time, the subadviser is primarily responsible for each fund’s and portfolio’s portfolio decisions and the placing of each fund’s and portfolio’s portfolio transactions with respect to assets allocated to the subadviser.

Pursuant to the Subadvisory Agreements, the subadviser is authorized to place orders pursuant to its investment determinations for a fund or portfolio either directly with the issuer or with any broker or dealer, foreign currency dealer, futures commission merchant or others selected by it. The general policy of the subadviser in selecting brokers and dealers is to obtain the best results achievable in the context of a number of factors which are considered both in relation to individual trades and broader trading patterns, including the reliability of the broker/dealer, the competitiveness of the price and the commission, the research services received and whether the broker/dealer commits its own capital.

In connection with the selection of brokers or dealers and the placing of such orders, subject to applicable law, brokers or dealers may be selected who also provide brokerage and research services (as those terms are

 

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defined in Section 28(e) of the Securities Exchange Act of 1934, as amended) to a fund or portfolio and/or the other accounts over which the subadviser or its affiliates exercise investment discretion. The subadviser is authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for a fund or portfolio which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the subadviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the subadviser and its affiliates have with respect to accounts over which they exercise investment discretion. The subadviser may also have arrangements with brokers pursuant to which such brokers provide research services to the subadviser in exchange for a certain volume of brokerage transactions to be executed by such broker. While the payment of higher commissions increases a fund’s or portfolio’s costs, the subadviser does not believe that the receipt of such brokerage and research services significantly reduces its expenses as subadviser. Arrangements for the receipt of research services from brokers may create conflicts of interest.

Research services furnished to the subadviser by brokers who effect securities transactions for a fund or portfolio may be used by the subadviser in servicing other investment companies and accounts which it manages. Similarly, research services furnished to the subadviser by brokers who effect securities transactions for other investment companies and accounts which the subadviser manages may be used by the subadviser in servicing a fund or portfolio. Not all of these research services are used by the subadviser in managing any particular account, including the funds and portfolios.

Debt securities purchased and sold by a fund or portfolio generally are traded on a net basis (i.e., without a commission) through dealers acting for their own account and not as brokers, or otherwise involve transactions directly with the issuer of the instrument. This means that a dealer makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a “spread.” Other portfolio transactions may be executed through brokers acting as agent. A fund or portfolio will pay a spread or commission in connection with such transactions.

In certain instances there may be securities that are suitable as an investment for a fund or portfolio as well as for one or more of the subadviser’s other clients. Investment decisions for a fund, for a portfolio and for the subadviser’s other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling the same security.

Under the subadviser’s procedures, investment professionals and their trading desks may seek to aggregate (or “bunch”) orders that are placed or received concurrently for more than one fund or account managed by the subadviser. In some cases, this policy may adversely affect the price paid or received by a fund or an account, or the size of the position obtained or liquidated. In other cases, however, the ability of the fund or account to participate in volume transactions will produce better executions for the fund or account. Certain brokers or dealers may be selected because of their ability to handle special executions such as those involving large block trades or broad distributions. Generally, when trades are aggregated, each fund or account within the block will receive the same price and commission. However, random allocations of aggregate transactions may be made to minimize custodial transaction costs. In addition, at the close of the trading day, when reasonable and practicable, the securities of partially filled orders will generally be allocated to each participating fund and account in the proportion that each order bears to the total of all orders (subject to rounding to “round lot” amounts).

For the fiscal year ended August 31, 2016, Liquid Reserves, Cash Reserves, U.S Treasury Reserves, U.S. Treasury Obligations Fund, Tax Free Reserves and Government Reserves did not direct any amounts to brokerage transactions related to research services or pay any brokerage commissions related to research services.

 

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Aggregate Brokerage Commissions Paid

For the fiscal years ended August 31, 2014, 2015 and 2016, Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves paid no brokerage commissions for portfolio transactions.

For the fiscal year ended August 31, 2016, the funds did not hold any securities issued by their regular broker/dealers.

DISCLOSURE OF PORTFOLIO HOLDINGS

The Board has adopted policies and procedures (the “policy”) developed by the manager with respect to the disclosure of a fund’s portfolio securities and any ongoing arrangements to make available information about the fund’s portfolio securities. The manager believes the policy is in the best interests of each fund and its shareholders and that it strikes an appropriate balance between the desire of investors for information about fund portfolio holdings and the need to protect funds from potentially harmful disclosures.

General rules/Website disclosure

The policy provides that information regarding a fund’s portfolio holdings may be shared at any time with employees of the manager, subadviser and other affiliated parties involved in the management, administration or operations of the fund (referred to as fund-affiliated personnel). Under the policy, the fund’s complete list of holdings (including the size of each position) and certain other information is disclosed as of the last business day of the month no later than five business days after month-end on the fund’s public website. The fund may disclose its complete portfolio holdings earlier, provided such information has been made available on the fund’s public website in accordance with the policy.

Each fund intends to disclose its complete portfolio holdings as of the last business day of each month no later than five business days after month-end on www.leggmason.com/moneymarketfunds (click on the name of the fund).

Ongoing arrangements

Under the policy, a fund may release portfolio holdings information on a regular basis to a custodian, sub-custodian, fund accounting agent, proxy voting provider, rating agency or other vendor or service provider for a legitimate business purpose, where the party receiving the information is under a duty of confidentiality, including a duty to prohibit the sharing of non-public information with unauthorized sources and trading upon non-public information. A fund may enter into other ongoing arrangements for the release of portfolio holdings information, but only if such arrangements serve a legitimate business purpose and are with a party who is subject to a confidentiality agreement and restrictions on trading upon non-public information. None of the funds, Legg Mason or any other affiliated party may receive compensation or any other consideration in connection with such arrangements. Ongoing arrangements to make available information about a fund’s portfolio securities will be reviewed at least annually by the fund’s Board.

Set forth below is a list, as of August 26, 2016, of those parties with whom the manager, on behalf of each fund and each portfolio, has authorized ongoing arrangements that include the release of portfolio holdings information in accordance with the policy, as well as the maximum frequency of the release under such arrangements, and the minimum length of the lag, if any, between the date of the information and the date on which the information is disclosed. The ongoing arrangements may vary for each party, and it is possible that not every party will receive information for each fund. The parties identified below as recipients are service providers, fund rating agencies, consultants and analysts.

 

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Recipient

   Frequency    Delay Before Dissemination

Charles River

   Daily    None

Institutional Shareholder Services

(Proxy Voting Services)

   Daily    None

Middle Office Solutions, LLC

   Daily    None

NaviSite, Inc.

   Daily    None

State Street Bank and Trust Company

(Fund Custodian and Accounting Agent)

   Daily    None

Thomson

   Semi-annually    None

Portfolio holdings information for a fund or portfolio may also be released from time to time pursuant to ongoing arrangements with the following parties:

 

Recipient

   Frequency    Delay Before Dissemination

Fidelity

   Quarterly    5 Business Days

Fitch (Rating Agency)

   Monthly    Sent 6-7 Business Days

Interactive Data Corp.

   Weekly    None

Liberty Hampshire

   Weekly and Month-End    None

S&P Global

   Monthly    Sent 6-7 Business Days

SunTrust

   Weekly and Month-End    None

Excluded from the lists of ongoing arrangements set forth above are ongoing arrangements where either (i) the disclosure of portfolio holdings information occurs concurrently with or after the time at which the portfolio holdings information is included in a public filing with the SEC that is required to include the information, or (ii) a fund’s portfolio holdings information is made available no earlier than the day next following the day on which the fund makes the information available on its website, as disclosed in the fund’s prospectus. The approval of the funds’ Chief Compliance Officer, or designee, must be obtained before entering into any new ongoing arrangement or altering any existing ongoing arrangement to make available portfolio holdings information, or with respect to any exceptions from the policy.

Release of limited portfolio holdings information

In addition to the ongoing arrangements described above, a fund’s complete or partial list of holdings (including size of positions) may be released to another party on a one-time basis, provided the party receiving the information has executed a non-disclosure and confidentiality agreement and provided that the specific release of information has been approved by the fund’s Chief Compliance Officer or designee as consistent with the policy. By way of illustration and not of limitation, release of non-public information about a fund’s portfolio holdings may be made (i) to a proposed or potential adviser or subadviser or other investment manager asked to provide investment management services to the fund, or (ii) to a third party in connection with a program or similar trade.

In addition, the policy permits the release to investors, potential investors, third parties and Legg Mason personnel that are not fund-affiliated personnel of limited portfolio holdings information in other circumstances, including:

 

  1. A fund’s top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public disclosure.

 

  2. A list of securities (that may include fund holdings together with other securities) followed by an investment professional (without position sizes or identification of particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers.

 

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  3. A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (i.e., brokers and custodians).

 

  4. A fund’s sector weightings, yield and duration (for fixed income and money market funds), performance attribution (e.g., analysis of the fund’s out-performance or underperformance of its benchmark based on its portfolio holdings) and other summary and statistical information that does not include identification of specific portfolio holdings may be released, even if non-public, if such release is otherwise in accordance with the policy’s general principles.

 

  5. A small number of a fund’s portfolio holdings (including information that the fund no longer holds a particular holding) may be released, but only if the release of the information could not reasonably be seen to interfere with current or future purchase or sales activities of the fund and is not contrary to law.

 

  6. A fund’s portfolio holdings may be released on an as-needed basis to its legal counsel, counsel to its independent trustees and its independent public accounting firm, in required regulatory filings or otherwise to governmental agencies and authorities.

Exceptions to the policy

The Chief Compliance Officer, or designee, may as is deemed appropriate, approve exceptions from the policy. Exceptions are granted only after a thorough examination and consultation with the manager’s legal department, as necessary. Exceptions from the policy are reported annually to each fund’s Board.

Limitations of policy

The portfolio holdings policy is designed to prevent sharing of portfolio information with third parties that have no legitimate business purpose for accessing the information. The policy may not be effective to limit access to portfolio holdings information in all circumstances, however. For example, the manager or a subadviser may manage accounts other than a fund that have investment objectives and strategies similar to those of the fund. Because these accounts, including a fund, may be similarly managed, portfolio holdings may be similar across the accounts. In that case, an investor in another account managed by the manager or a subadviser may be able to infer the portfolio holdings of the fund from the portfolio holdings in that investor’s account.

TAXES

The following is a summary of certain material U.S. federal (and, where noted, state and local) income tax considerations affecting the funds and their shareholders. This discussion is very general and, except where noted, does not address investors subject to special rules, such as investors who hold shares in a fund through an IRA, 401(k) or other tax-advantaged account. Current and prospective shareholders are therefore urged to consult their own tax advisers with respect to the specific federal, state, local and foreign tax consequences of investing in a fund. The summary is based on the laws in effect on the date of this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.

The Funds and Their Investments

Each fund will be treated as a separate taxpayer for U.S. federal income tax purposes. Each fund has elected to be treated, and intends to qualify each year, as a “regulated investment company” under Subchapter M of the Code. To so qualify, a fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in “qualified publicly traded partnerships” (i.e., partnerships

 

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that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains, and other traditionally permitted mutual fund income); and (b) diversify its holdings so that, at the end of each quarter of the fund’s taxable year, (i) at least 50% of the market value of the fund’s assets is represented by cash, securities of other regulated investment companies, U.S. government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the fund’s assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer, in the securities (other than the securities of other regulated investment companies) of any two or more issuers that the fund controls and that are determined to be engaged in the same or similar trades or businesses, or related trades or businesses, or in the securities of one or more “qualified publicly traded partnerships”.

A fund’s investments in partnerships, if any, including in qualified publicly traded partnerships, may result in that fund being subject to state, local or foreign income, franchise or withholding tax liabilities.

As a regulated investment company, a fund will not be subject to U.S. federal income tax on the portion of its taxable investment income and capital gains that it distributes to its shareholders, provided that it satisfies a minimum distribution requirement. To satisfy the minimum distribution requirement, a fund must distribute to its shareholders at least the sum of (i) 90% of its “investment company taxable income” (i.e., generally, its taxable income other than its net capital gain, plus or minus certain other adjustments), and (ii) 90% of its net tax-exempt income for the taxable year. A fund will be subject to income tax at regular corporate tax rates on any taxable income or gains that it does not distribute to its shareholders.

If, for any taxable year, a fund were to fail to qualify as a regulated investment company under the Code or were to fail to meet the distribution requirement, it would be taxed in the same manner as an ordinary corporation and distributions to its shareholders would not be deductible by the fund in computing its taxable income. In addition, in the event of a failure to qualify, the applicable fund’s distributions, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary dividend income for federal income tax purposes to the extent of the fund’s current and accumulated earnings and profits. However, such dividends would be eligible, subject to any generally applicable limitations, (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends-received deduction in the case of corporate shareholders. Moreover, if a fund were to fail to qualify as a regulated investment company in any year, it would be required to pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. Under certain circumstances, a fund may cure a failure to qualify as a regulated investment company, but in order to do so the fund may incur significant fund-level taxes and may be forced to dispose of certain assets. If a fund failed to qualify as a regulated investment company for a period greater than two taxable years, the fund would generally be required to recognize any net built-in gains with respect to certain of its assets upon a disposition of such assets within ten years of qualifying as a regulated investment company in a subsequent year.

The Code imposes a 4% nondeductible excise tax on a fund to the extent it does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income for that year and (ii) 98.2% of its capital gain net income (both long-term and short-term) for the one-year period ending, as a general rule, on October 31 of that year. For this purpose, however, any ordinary income or capital gain net income that is retained by a fund and subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. Each fund anticipates that it will pay such dividends and will make such distributions as are necessary to avoid the application of this excise tax. However, in a particular year, it may be determined that it would be in the best interests of shareholders for a fund not to make such distributions at the required level and to pay the excise tax on undistributed amounts.

 

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A fund may be required to treat amounts as taxable income or gain, subject to the distribution requirements referred to above, even though no corresponding amounts of cash are received concurrently, as a result of (1) mark-to-market rules, constructive sale rules or rules applicable to partnerships or trusts in which the fund invests or to certain “appreciated financial positions,” (2) the inability to obtain cash distributions or other amounts due to currency controls or restrictions on repatriation imposed by a foreign country with respect to a fund’s investments in issuers in such country, or (3) tax rules applicable to debt obligations acquired with “original issue discount,” including zero-coupon or deferred payment bonds and pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. These rules may also affect the amount, timing and character of income and gain recognized by the funds and of distributions to shareholders. In order to distribute this income and avoid a tax at the fund level, a fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. A fund might also meet the distribution requirements by borrowing the necessary cash, thereby incurring interest expenses.

Foreign Investments. Interest or other income (including, in some cases, capital gains) received by a fund from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases. If more than 50% of the value of a fund’s assets at the close of any taxable year consists of stock or securities of foreign corporations, which for this purpose may include obligations of foreign governmental issuers, the fund may elect, for U.S. federal income tax purposes, to treat any foreign income or withholding taxes paid by the fund as paid by its shareholders. For any year that a fund is eligible for and makes such an election, each shareholder of the fund will be required to include in its income an amount equal to his or her allocable share of qualified foreign income taxes paid by the fund, and shareholders will be entitled, subject to certain holding period requirements and other limitations, to credit their portions of these amounts against their United States federal income tax due, if any, or to deduct their portions from their United States taxable income, if any. No deductions for foreign taxes paid by a fund may be claimed, however, by noncorporate shareholders who do not itemize deductions, and no deduction for foreign taxes will be permitted to individuals in computing their alternative minimum tax liability. Foreign taxes paid by a fund may reduce the return from the fund’s investments.

Under certain circumstances, if a fund receives a refund of foreign taxes paid in respect of a prior year, its shareholders could incur a loss, or any foreign tax credits or deductions passed through to shareholders in respect of the fund’s foreign taxes for the current year could be reduced.

Capital Losses. As of August 31, 2016, Tax Free Reserves had capital losses of $6,846 that are not subject to expiration and may be carried forward to offset future taxable capital gains. These capital losses have been deferred as either short-term or long-term losses and will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred.

As of August 31, 2016, Liquid Reserves and Tax Free Reserves had unused capital loss carryforwards that are subject to expiration of $2,624,485 and $30,818, respectively. These amounts will be available to offset any future taxable capital gains of the applicable fund, after the utilization of any of the fund’s capital losses that are not subject to expiration. This ordering rule may cause a fund’s capital loss carryforwards that are subject to expiration to be more likely to expire unutilized. These carryforwards expire as follows:

 

Fund Name

   8/31/2017     8/31/2018     8/31/2019     Total  

Liquid Reserves

   $ (2,624,485   $ 0     $ 0     $ (2,624,485

Tax Free Reserves

   $ (25,906   $ (4,808   $ (104   $ (30,818

As of August 31, 2016, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund and Government Reserves did not have any unused capital loss carryforwards.

 

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Taxation of U.S. Shareholders

Dividends and Distributions. Dividends and other distributions by a fund are generally treated under the Code as received by its shareholders at the time the dividend or distribution is made. However, if any dividend or distribution is declared by a fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month but is actually paid during the following January, such dividend or distribution will be deemed to have been received by each shareholder on December 31 of the year in which the dividend was declared. Under normal circumstances, each fund intends to distribute annually to its shareholders substantially all of its investment company taxable income, and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryforwards). However, a fund may determine not to distribute, or determine to defer the distribution of, some portion of its income in non-routine circumstances. A fund may also determine to retain for investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryforwards), in which case, the fund will be subject to a corporate tax on the amount retained. In that event, the fund will designate such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the income tax paid by the fund on the undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to the excess of the amount of undistributed net capital gain included in their respective income over their respective income tax credits. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the applicable fund upon timely filing appropriate returns or claims for refund with the Internal Revenue Service (the “IRS”).

Exempt-interest dividends paid by Tax Free Reserves are exempt from regular federal income taxes. Other distributions from a fund’s net investment income and of net realized short-term capital gains are taxable to a U.S. shareholder as ordinary income, whether paid in cash or in shares. Distributions of net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss), if any, that a fund reports as capital gain dividends are taxable as long-term capital gains, whether paid in cash or in shares, and regardless of how long a shareholder has held shares of the fund.

Each fund expects that it generally will not earn or distribute any long-term capital gains. The funds do not anticipate that any of their dividends paid will qualify for the dividends-received deduction for corporate shareholders. The funds also do not expect any distributions to be treated as “qualified dividend income,” which is taxable to noncorporate shareholders at reduced rates.

Dividends and distributions from a fund other than exempt-interest dividends will generally be taken into account in determining a shareholder’s “net investment income” for purposes of the Medicare contribution tax applicable to certain individuals, estates and trusts.

Distributions in excess of a fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of the shareholder’s basis in his or her shares of the fund, and as a capital gain thereafter (if the shareholder holds his or her shares of the fund as capital assets).

Each shareholder who receives distributions from a fund in the form of additional shares will be treated for U.S. federal income tax purposes as if receiving a distribution in an amount equal to the amount of money that the shareholder would have received if he or she had instead elected to receive cash distributions. The shareholder’s aggregate tax basis in shares of the applicable fund will be increased by such amount.

Tax Free Reserves. Tax Free Reserves intends to satisfy conditions that will enable it to pay “exempt-interest dividends” to its shareholders. Exempt-interest dividends are dividends attributable to interest income

 

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received from municipal obligations and are generally not subject to regular federal income taxes, although they may be considered taxable for certain state and local income tax purposes and may be subject to federal individual and corporate alternative minimum taxes. Repurchase agreements on municipal obligations generally give rise to taxable interest income which will not be included in exempt-interest dividends when distributed by the fund. Because Tax Free Reserves will distribute exempt-interest dividends, interest on indebtedness incurred by shareholders, directly or indirectly, to purchase or carry its shares is not deductible for U.S. federal income tax purposes. Investors receiving social security or railroad retirement benefits should be aware that exempt-interest dividends received from the fund may, under certain circumstances, cause a portion of such benefits to be subject to federal income tax. Furthermore, a portion of any exempt-interest dividend paid by the fund that represents income derived from certain revenue or private activity bonds held by the fund may not retain its federal tax-exempt status in the hands of a shareholder who is a “substantial user” of a facility financed by such bonds, or a “related person” thereof. Moreover, some or all of the exempt-interest dividends distributed by Tax Free Reserves may be a specific preference item, or a component of an adjustment item, for purposes of the federal individual and corporate alternative minimum taxes. Shareholders should consult their own tax advisors to determine whether they are (i) “substantial users” with respect to a facility or “related” to such users within the meaning of the Code or (ii) subject to a federal alternative minimum tax or the federal “excess net passive income” tax.

Sales of Shares. Upon the sale or exchange of his or her shares, a shareholder will generally recognize a taxable gain or loss equal to the difference between the amount realized and his or her basis in those shares. A redemption of shares by a fund will be treated as a sale for this purpose. However, a shareholder of a fund will generally not have any gain or loss on the sale or exchange so long as that fund maintains a stable net asset value of $1.00 per share and does not impose a liquidity fee.

There is uncertainty with respect to the tax treatment of liquidity fees received by a fund. The tax treatment of liquidity fees may be the subject of future guidance issued by the IRS. If a fund maintains a stable net asset value of $1.00 per share, the imposition of a liquidity fee on a shareholder’s redemption of shares is generally expected to cause the shareholder to recognize a loss. If a fund does not maintain a stable net asset value of $1.00 per share, the imposition of a liquidity fee on a redemption of fund shares could cause the shareholder to recognize a loss or could decrease the gain or increase the loss the shareholder would otherwise recognize. Although there is no definitive guidance, any liquidity fees received by a fund may result in distributions or gains that would be taxable to the fund’s shareholders. Any gain or loss recognized on a redemption of fund shares will be treated as capital gain or loss if the shares are capital assets in the shareholder’s hands.

For shareholders not electing the NAV method described below, any capital gain or loss will generally be long-term capital gain or loss if the shares are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. For shareholders in a fund that attempts to maintain a stable NAV of $1.00 per share who have not elected the NAV method, any loss realized on a sale or exchange will be disallowed to the extent the shares are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss.

A shareholder may elect the “NAV method” for computing gains and losses from redemptions and exchanges. Under the NAV method, rather than computing gain or loss separately for each taxable disposition of fund shares, an electing shareholder would determine gain or loss on an aggregate basis for each “computation period” (which could be a taxable year or certain shorter periods within a taxable year). Gain or loss under the NAV method would be based on the change in the aggregate value of the electing shareholder’s shares during the applicable period (or, for the first period in which the NAV method applies, the difference between the aggregate value at the end of the period and the adjusted tax basis at the beginning of the period), reduced by the shareholder’s purchases of fund shares and increased by the proceeds of redemptions of fund shares during that period. If a shareholder holds shares as a capital asset, any resulting net gain or loss would be treated as short-term

 

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capital gain or loss. The NAV method election is generally made by a shareholder on a fund-by-fund basis. Additionally, if a shareholder holds a fund’s shares in more than one account, the shareholder is required to treat each account as a separate fund for purposes of these rules. For shares in a fund that maintains a stable net asset value of $1.00 per share and that does not impose a liquidity fee, there is not expected to be a benefit to electing the NAV method. Shareholders should consult their tax advisers about the NAV method.

Any loss realized by a shareholder on the sale of fund shares held by the shareholder for six months or less will be treated for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the shareholder (including amounts credited to the shareholders as undistributed capital gains) with respect to such shares.

If a shareholder recognizes a loss with respect to a fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. The fact that a loss is so reportable does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper.

If a shareholder’s shares are redeemed to pay a fee because the shareholder’s account balance is less than a certain threshold, the deductibility of that fee by a shareholder that is an individual may be subject to generally applicable limitations on miscellaneous itemized deductions.

Backup Withholding. Each fund may be required in certain circumstances to apply backup withholding on dividends (including exempt-interest dividends), redemptions and other distributions payable to noncorporate shareholders who fail to provide the fund with their correct taxpayer identification numbers or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. The backup withholding rate is 28%. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholder’s U.S. federal income tax liabilities.

Notices. Shareholders of each fund will receive, if appropriate, various written notices after the close of the fund’s taxable year regarding the U.S. federal income tax status of certain dividends, distributions and deemed distributions and redemption proceeds that were paid (or that are treated as having been paid) by the fund to its shareholders during the preceding taxable year.

Other Taxes. Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign taxes depending on each shareholder’s particular situation.

Generally, shareholders will have to pay state or local taxes on fund dividends and other distributions, although distributions derived from interest on U.S. government obligations (but not distributions of gain from the sale of such obligations) may be exempt from certain state and local taxes.

Taxation of Non-U.S. Shareholders

Ordinary dividends and certain other payments made by a fund to non-U.S. shareholders are generally subject to federal withholding tax at a 30% rate (or such lower rate as may be determined in accordance with any applicable treaty). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN or similar form certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. federal income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional “branch profits tax” imposed at a rate of 30%

 

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(or a lower treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. Backup withholding will not be applied to payments that have already been subject to the 30% withholding tax.

The 30% withholding tax generally will not apply to exempt-interest dividends, to distributions of the excess of net long-term capital gains over net short-term capital losses or to redemption proceeds. The 30% withholding tax also will not apply to dividends that a fund reports as (a) interest-related dividends, to the extent such dividends are derived from the fund’s “qualified net interest income,” or (b) short-term capital gain dividends, to the extent such dividends are derived from the fund’s “qualified short-term gain.” “Qualified net interest income” is a fund’s net income derived from U.S.-source interest and original issue discount, subject to certain exceptions and limitations. “Qualified short-term gain” generally means the excess of the net short-term capital gain of a fund for the taxable year over its net long-term capital loss, if any. In the case of shares held through an intermediary, the intermediary may withhold even if a fund reports a payment as an interest-related dividend or a short-term capital gain dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their accounts.

Under legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act), each fund is required to withhold 30% of certain ordinary dividends it pays after June 30, 2014 (or, in certain cases, after later dates), and 30% of the gross proceeds of share redemptions and certain capital gain dividends it pays after December 31, 2018, to shareholders that fail to meet prescribed information reporting or certification requirements. In general, no such withholding will be required with respect to a U.S. person or non-U.S. individual that timely provides the certifications required by the applicable fund or its agent on a valid IRS Form W-9 or applicable IRS Form W-8, respectively. Shareholders potentially subject to withholding include foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and non-financial foreign entities (“NFFEs”).

To avoid withholding under FATCA, an FFI generally must enter into an information sharing agreement with the IRS in which it agrees to report certain identifying information (including name, address, and taxpayer identification number) with respect to its U.S. account holders (which, in the case of an entity shareholder, may include its direct and indirect U.S. owners), and an NFFE generally must identify and provide other required information to the fund or other withholding agent regarding its U.S. owners, if any. Such non-U.S. shareholders also may fall into certain exempt, excepted or deemed compliant categories as established by regulations and other guidance. A non-U.S. shareholder resident or doing business in a country that has entered into an intergovernmental agreement with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the shareholder and the applicable foreign government comply with the terms of the agreement.

A non-U.S. entity that invests in a fund will need to provide the fund with documentation properly certifying the entity’s status under FATCA in order to avoid FATCA withholding.

Non-U.S. investors should consult their own tax advisers regarding the impact of these requirements on their investment in a fund.

The foregoing is only a summary of certain material U.S. federal income tax consequences (and, where noted, state and local tax consequences) affecting the funds and their shareholders. Current and prospective shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a fund.

THE TRUST

The certificate of trust to establish Legg Mason Partners Institutional Trust (the “Trust”) was filed with the State Department of Assessments and Taxation of Maryland on October 4, 2006. U.S. Treasury Obligations Fund

 

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was established as a series of the Trust on February 12, 2013. As of April 16, 2007, each fund (other than U.S. Treasury Obligations Fund) was redomiciled as a series of the Trust. Immediately prior to such redomiciliation, Government Reserves was reorganized on April 16, 2007 as a series of CitiFunds Institutional Trust, a Massachusetts business trust. Prior to reorganization of Government Reserves as series of CitiFunds Institutional Trust, the fund was a series of Smith Barney Institutional Cash Management Fund Inc., a Maryland corporation.

Prior to the reorganization of Liquid Reserves, Cash Reserves, U.S. Treasury Reserves and Government Reserves as series of the Trust, the funds were series of CitiFunds Institutional Trust. Prior to January 1, 2001, Liquid Reserves, Cash Reserves, U.S. Treasury Reserves and Tax Free Reserves were called CitiFunds Institutional Liquid Reserves, CitiFunds Institutional Cash Reserves, CitiFunds Institutional U.S. Treasury Reserves and CitiFunds Institutional Tax Free Reserves, respectively. Prior to January 2, 1998, Liquid Reserves, U.S. Treasury Reserves and Tax Free Reserves were called Landmark Institutional Liquid Reserves, Landmark Institutional U.S. Treasury Reserves and Landmark Institutional Tax Free Reserves, respectively. Prior to August 26, 2016, Select Tax Free Reserves was called Western Asset Institutional Tax Free Reserves.

Each fund is an open-end, management investment company.

The staff of the SEC has expressed the view that the use of a combined Prospectus for certain Funds could possibly subject a Fund to liability for any misstatement, inaccuracy, or incomplete disclosure in the Prospectus concerning the other Fund.

The Trust is a Maryland statutory trust. A Maryland statutory trust is an unincorporated business association that is established under, and governed by, Maryland law. Maryland law provides a statutory framework for the powers, duties, rights and obligations of the trustees and shareholders of a statutory trust, while the more specific powers, duties, rights and obligations of the trustees and the shareholders are determined by the trustees as set forth in a trust’s declaration of trust. Some of the more significant provisions of the Trust’s declaration of trust (the “Declaration”) are described below.

Shareholder Voting. The Declaration provides for shareholder voting as required by the 1940 Act or other applicable laws but otherwise permits, consistent with Maryland law, actions by the Trustees of the Trust (the “Trustees”) without seeking the consent of shareholders. The Trustees may, without shareholder approval, amend the Declaration or authorize the merger or consolidation of the Trust into another trust or entity, reorganize the Trust or any series or class into another trust or entity or a series or class of another entity, sell all or substantially all of the assets of the Trust or any series or class to another entity, or a series or class of another entity, or terminate the Trust or any series or class.

A fund is not required to hold an annual meeting of shareholders, but a fund will call special meetings of shareholders whenever required by the 1940 Act or by the terms of the Declaration. The Declaration provides for “dollar-weighted voting” which means that a shareholder’s voting power is determined, not by the number of shares the shareholder owns, but by the dollar value of those shares determined on the record date. All shareholders of record of all series and classes of the Trust vote together, except where required by the 1940 Act to vote separately by series or by class, or when the Trustees have determined that a matter affects only the interests of one or more series or classes of shares. There is no cumulative voting on any matter submitted to a vote of the shareholders.

Election and Removal of Trustees. The Declaration provides that the Trustees may establish the number of Trustees and that vacancies on the Board may be filled by the remaining Trustees, except when election of Trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The Declaration also provides that a mandatory retirement age may be set by action of two-thirds of the Trustees and that Trustees may be removed, with or without cause, by a vote of shareholders holding two-thirds of the voting power of the Trust, or by a vote of two-thirds of the remaining Trustees. The provisions of the Declaration relating to the election and removal of Trustees may not be amended without the approval of two-thirds of the Trustees.

 

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Amendments to the Declaration. The Trustees are authorized to amend the Declaration without the vote of shareholders, but no amendment may be made that impairs the exemption from personal liability granted in the Declaration to persons who are or have been shareholders, Trustees, officers or employees of the Trust or that limits the rights to indemnification, or insurance provided in the Declaration with respect to actions or omissions of persons entitled to indemnification under the Declaration prior to the amendment.

Issuance and Redemption of Shares. A fund may issue an unlimited number of shares for such consideration and on such terms as the Trustees may determine. All shares offered pursuant to the Prospectus(es) of the fund, when issued, will be fully paid and non-assessable. Shareholders are not entitled to any appraisal, preemptive, conversion, exchange or similar rights, except as the Trustees may determine. A fund may involuntarily redeem a shareholder’s shares upon certain conditions as may be determined by the Trustees, including, for example, if the shareholder fails to provide a fund with identification required by law, or if the fund is unable to verify the information received from the shareholder. Additionally, as discussed below, shares may be redeemed in connection with the closing of small accounts.

Disclosure of Shareholder Holdings. The Declaration specifically requires shareholders, upon demand, to disclose to a fund information with respect to the direct and indirect ownership of shares in order to comply with various laws or regulations, and a fund may disclose such ownership if required by law or regulation, or as the Trustees otherwise decide.

Small Accounts. The Declaration provides that a fund may close out a shareholder’s account by redeeming all of the shares in the account if the account falls below a minimum account size (which may vary by class) that may be set by the Trustees from time to time. Alternately, the Declaration permits a fund to assess a fee for small accounts (which may vary by class) and redeem shares in the account to cover such fees, or convert the shares into another share class that is geared to smaller accounts.

Series and Classes. The Declaration provides that the Trustees may establish series and classes in addition to those currently established and that the Trustees may determine the rights and preferences, limitations and restrictions, including qualifications for ownership, conversion and exchange features, minimum purchase and account size, expenses and charges, and other features of the series and classes. The Trustees may change any of those features, terminate any series or class, combine series with other series in the Trust, combine one or more classes of a series with another class in that series or convert the shares of one class into shares of another class.

Each share of a fund, as a series of the Trust, represents an interest in the fund only and not in the assets of any other series of the Trust.

Shareholder, Trustee and Officer Liability. The Declaration provides that shareholders are not personally liable for the obligations of a fund and requires the fund to indemnify a shareholder against any loss or expense arising from any such liability. The fund will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. The Declaration further provides that a Trustee acting in his or her capacity as a Trustee is not personally liable to any person, other than the Trust or its shareholders, in connection with the affairs of the Trust. Each Trustee is required to perform his or her duties in good faith and in a manner he or she believes to be in the best interests of the Trust. All actions and omissions of Trustees are presumed to be in accordance with the foregoing standard of performance, and any person alleging the contrary has the burden of proving that allegation.

The Declaration limits a Trustee’s liability to the Trust or any shareholder to the fullest extent permitted under current Maryland law by providing that a Trustee is liable to the Trust or its shareholders for monetary damages only (a) to the extent that it is proved that he or she actually received an improper benefit or profit in money, property, or services or (b) to the extent that a judgment or other final adjudication adverse to the Trustee is entered in a proceeding based on a finding in the proceeding that the Trustee’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.

 

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The Declaration requires the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust to the fullest extent permitted by law against liability and expenses in connection with any claim or proceeding in which he or she is involved by virtue of having been a Trustee, officer or employee. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is not available.

The Declaration provides that any Trustee who serves as chair of the Board, a member or chair of a committee of the Board, lead independent Trustee, audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.

Derivative Actions. The Declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction, and other harm that can be caused to a fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand by no fewer than three unrelated shareholders must be made on the Trustees. The Declaration details information, certifications, undertakings and acknowledgements that must be included in the demand. The Trustees are not required to consider a demand that is not submitted in accordance with the requirements contained in the Declaration. The Declaration also requires that, in order to bring a derivative action, the complaining shareholders must be joined in the action by shareholders owning, at the time of the alleged wrongdoing, at the time of demand, and at the time the action is commenced, shares representing at least 5% of the voting power of the affected funds. The Trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the Trustees who are considered independent for the purposes of considering the demand determine that a suit should be maintained, then the Trust will commence the suit and the suit will proceed directly and not derivatively. If a majority of the independent Trustees determines that maintaining the suit would not be in the best interests of a fund, the Trustees are required to reject the demand and the complaining shareholders may not proceed with the derivative action unless the shareholders are able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the requested action was not consistent with the standard of performance required of the Trustees in performing their duties. If a demand is rejected, the complaining shareholders will be responsible for the costs and expenses (including attorneys’ fees) incurred by the Trust in connection with the consideration of the demand, if, in the judgment of the independent Trustees, the demand was made without reasonable cause or for an improper purpose. If a derivative action is brought in violation of the Declaration, the shareholders bringing the action may be responsible for a fund’s costs, including attorneys’ fees.

The Declaration further provides that a fund shall be responsible for payment of attorneys’ fees and legal expenses incurred by a complaining shareholder only if required by law, and any attorneys’ fees that a fund is obligated to pay shall be calculated using reasonable hourly rates. The Declaration also requires that actions by shareholders against the Trust or the funds be brought only in federal court in Baltimore, Maryland, or if not permitted to be brought in federal court, then in state court in Baltimore, Maryland, and that the right to jury trial be waived to the fullest extent permitted by law.

Liquid Reserves Portfolio, U.S. Treasury Reserves Portfolio, U.S. Treasury Obligations Portfolio, Government Portfolio and Tax Free Reserves Portfolio, in which Liquid Reserves, Cash Reserves, U.S. Treasury Reserves, U.S. Treasury Obligations Fund, Government Reserves and Tax Free Reserves, respectively, invests are series of Master Portfolio Trust, a Maryland statutory trust and is also governed by a declaration of trust similar to the Declaration. Whenever a vote is submitted to a portfolio’s investors, the corresponding fund will generally call a meeting of its own shareholders. To the extent it does not receive instructions from its shareholders, the fund will vote its shares in the portfolio in the same proportion as the vote of shareholders who do give voting instructions. Alternatively, without seeking instructions from its shareholders, a fund could vote its shares in its corresponding portfolio in proportion to the vote of all the other investors in the portfolio.

 

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FINANCIAL STATEMENTS

The audited financial statements of Liquid Reserves (Statement of Assets and Liabilities as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five- year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm) and of Liquid Reserves Portfolio (Statement of Assets and Liabilities including the Schedule of Investments as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five-year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm), each of which is included in the Annual Report to Shareholders of Liquid Reserves, are incorporated by reference into this SAI (Filed on October 25, 2016; Accession Number 0001193125-16-746024).

The audited financial statements of Cash Reserves (Statement of Assets and Liabilities as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five- year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm), and of Liquid Reserves Portfolio (Statement of Assets and Liabilities including the Schedule of Investments as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five-year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm) each of which is included in the Annual Report to Shareholders of Cash Reserves, are incorporated by reference into this SAI (Filed on October 25, 2016; Accession Number 0001193125-16-746030).

The audited financial statements of U.S. Treasury Reserves (Statement of Assets and Liabilities as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five-year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm) and of U.S. Treasury Reserves Portfolio (Statement of Assets and Liabilities including the Schedule of Investments as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five-year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm), each of which is included in the Annual Report to Shareholders of U.S. Treasury Reserves, are incorporated by reference into this SAI (Filed on October 25, 2016; Accession Number 0001193125-16-745333).

The audited financial statements of U.S. Treasury Obligations Fund (Statement of Assets and Liabilities as of August 31, 2016, Statement of Operations for the fiscal year ended August 31, 2016, Statement of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for the period ended August 31, 2016 and the fiscal year ended August 31, 2016 and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm) and of U.S. Treasury Obligations Portfolio (Statement of Assets and Liabilities, including the Schedule of Investments, as of August 31, 2016, Statement of Operations for the fiscal year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the three-year period ended August 31, 2016, Financial Highlights for the period ended August 31, 2014 and the fiscal years ended August 31, 2015 and August 31, 2016 and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm), each of which is included in the Annual Report to Shareholders of U.S. Treasury Obligations Fund, are incorporated by reference into this SAI (Filed on October 25, 2016; Accession Number 0001193125-16-746706).

 

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The audited financial statements of Government Reserves (Statement of Assets and Liabilities as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for the four-years ended August 31, 2016, the period from June 1, 2012 through August 31, 2012 and for the year ended May 31, 2012, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm) and of Government Portfolio (Statement of Assets and Liabilities, including the Schedule of Investments, as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for the two-year period ended August 31, 2016, the period from June 1, 2012 through August 31, 2012, for the year ended May 31, 2012, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm), each of which is included in the Annual Report to Shareholders of Government Reserves, are incorporated by reference into this SAI (Filed on October 26, 2016, Accession Number 0001193125-16-747975).

The audited financial statements of Tax Free Reserves (Statement of Assets and Liabilities as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five- year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm) and of Tax Free Reserves Portfolio (Statement of Assets and Liabilities including the Schedule of Investments as of August 31, 2016, Statement of Operations for the year ended August 31, 2016, Statements of Changes in Net Assets for each of the years in the two-year period ended August 31, 2016, Financial Highlights for each of the years in the five-year period ended August 31, 2016, and Notes to Financial Statements along with the Report of Independent Registered Public Accounting Firm), each of which is included in the Annual Report to Shareholders of Tax Free Reserves, are incorporated by reference into this SAI (Filed on October 26, 2016; Accession Number 0001193125-16-747879).

 

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APPENDIX A

DESCRIPTION OF RATINGS

The ratings of Moody’s Investors Service, Inc., S&P’s Global Ratings and Fitch Ratings represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt obligations with the same maturity, coupon and rating may have different yields while debt obligations of the same maturity and coupon with different ratings may have the same yield. As described by the rating agencies, ratings are generally given to securities at the time of issuances. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.

Moody’s Investors Service, Inc. Global Rating Scales

Ratings assigned on Moody’s global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.1,2

Moody’s differentiates structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial corporate, financial institution, and public sector entities) on the global long-term scale by adding (sf) to all structured finance ratings.3 The addition of (sf) to structured finance ratings should eliminate any presumption that such ratings and fundamental ratings at the same letter grade level will behave the same. The (sf) indicator for structured finance security ratings indicates that otherwise similarly rated structured finance and fundamental securities may have different risk characteristics. Through its current methodologies, however, Moody’s aspires to achieve broad expected equivalence in structured finance and fundamental rating performance when measured over a long period of time.

Description of Moody’s Investors Service, Inc.’s Global Long-Term Obligation Ratings:

Aaa — Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.

Aa — Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

 

1  For certain structured finance, preferred stock and hybrid securities in which payment default events are either not defined or do not match investors’ expectations for timely payment, long-term and short-term ratings reflect the likelihood of impairment and financial loss in the event of impairment.
2  Supranational institutions and central banks that hold sovereign debt or extend sovereign loans, such as the IMF or the European Central Bank, may not always be treated similarly to other investors and lenders with similar credit exposures. Long-term and short-term ratings assigned to obligations held by both supranational institutions and central banks, as well as other investors, reflect only the credit risks faced by other investors unless specifically noted otherwise.
3 

Like other global scale ratings, (sf) ratings reflect both the likelihood of a default and the expected loss suffered in the event of default. Ratings are assigned based on a rating committee’s assessment of a security’s expected loss rate (default probability multiplied by expected loss severity), and may be subject to the constraint that the final expected loss rating assigned would not be more than a certain number of notches, typically three to five notches, above the rating that would be assigned based on an assessment of default probability alone. The magnitude of this constraint may vary with the level of the rating, the seasoning of the transaction, and the uncertainty around the assessments of expected loss and probability of default.

 

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A — Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.

Baa — Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.

Ba — Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.

B — Obligations rated B are considered speculative and are subject to high credit risk.

Caa — Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.

Ca — Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C — Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.

Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.

By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.

Description of Moody’s Investors Service, Inc.’s Global Short-Term Obligation Ratings:

P-1 — Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.

P-2 — Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.

P-3 — Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.

NP — Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.

Description of Moody’s Investors Service, Inc.’s US Municipal Ratings:

US Municipal Short-Term Obligation Ratings:

While the global short-term “prime” rating scale is applied to US municipal tax-exempt commercial paper, these programs are typically backed by external letters of credit or liquidity facilities and their short-term prime ratings usually map to the long-term rating of the enhancing bank or financial institution and not to the municipality’s rating. Other short-term municipal obligations, which generally have different funding sources for repayment, are rated using two additional short-term rating scales (i.e., the MIG and VMIG scales discussed below).

 

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The Municipal Investment Grade (“MIG”) scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels—MIG 1 through MIG 3—while speculative grade short-term obligations are designated SG.

MIG 1 — This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.

MIG 2 — This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.

MIG 3 — This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.

SG — This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.

US Municipal Demand Obligation Ratings:

In the case of variable rate demand obligations (“VRDOs”), a two-component rating is assigned: a long or short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of risk associated with scheduled principal and interest payments. The second element represents Moody’s evaluation of risk associated with the ability to receive purchase price upon demand (“demand feature”). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade (“VMIG”) scale. VMIG ratings of demand obligations with unconditional liquidity support are mapped from the short-term debt rating (or counterparty assessment) of the support provider, or the underlying obligor in the absence of third party liquidity support, with VMIG 1 corresponding to P-1, VMIG 2 to P-2, VMIG 3 to P-3 and SG to not prime. For example, the VMIG rating for an industrial revenue bond with Company XYZ as the underlying obligor would normally have the same numerical modifier as Company XYZ’s prime rating. Transitions of VMIG ratings of demand obligations with conditional liquidity support, as shown in the diagram below, differ from transitions on the Prime scale to reflect the risk that external liquidity support will terminate if the issuer’s long-term rating drops below investment grade.

VMIG 1 — This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 2 — This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 3 — This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

SG — This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.

 

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Description of S&P’s Global Ratings’ Long-Term Issue Credit Ratings:

Long-Term Issue Credit Ratings are based, in varying degrees, on S&P Global Ratings’ analysis of the following considerations: (1) the likelihood of payment—the capacity and willingness of the obligor to meet its financial commitment on a financial obligation in accordance with the terms of the obligation; (2) the nature and provisions of the financial obligation, and the promise we impute; and (3) the protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)

AAA — An obligation rated “AAA” has the highest rating assigned by S&P Global Ratings. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

AA — An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

A — An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB — An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB, B, CCC, CC, and C — Obligations rated “BB”, “B”, “CCC”, “CC”, and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB — An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B — An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC — An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC — An obligation rated “CC” is currently highly vulnerable to nonpayment. The “CC” rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.

 

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C — An obligation rated “C” is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher.

D — An obligation rated “D” is in default or in breach of an imputed promise. For non-hybrid capital instruments, the “D” rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation’s rating is lowered to “D” if it is subject to a distressed exchange offer.

NR: This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.

The ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

Description of S&P Global Ratings’ Short-Term Issue Credit Ratings:

Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity date of no more than 365 days—including commercial paper.

A-1 — A short-term obligation rated “A-1” is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2 — A short-term obligation rated “A-2” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3 — A short-term obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B — A short-term obligation rated “B” is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.

C — A short-term obligation rated “C” is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

D — A short-term obligation rated “D” is in default or in breach of an imputed promise. For non-hybrid capital instruments, the “D” rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings’ believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation’s rating is lowered to “D” if it is subject to a distressed exchange offer.

 

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Description of S&P Global Ratings’ Municipal Short-Term Note Ratings Definitions:

An S&P Global Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings’ analysis will review the following considerations: (1) amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and (2) source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.

Note rating symbols are as follows:

SP-1 — Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.

SP-2 — Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.

SP-3 — Speculative capacity to pay principal and interest.

Description of S&P Global Ratings’ Dual Ratings:

Dual ratings may be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature. The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term rating symbol (for example, “AAA/A-1+” or “A-1+/A-1”). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, “SP-1+/A-1+”).

Description of S&P Global Ratings’ Active Qualifiers (Currently applied and/or outstanding)

S&P Global Ratings uses the following qualifiers that limit the scope of a rating. The structure of the transaction can require the use of a qualifier such as a “p” qualifier, which indicates the rating addressed the principal portion of the obligation only. A qualifier appears as a suffix and is part of the rating.

Federal deposit insurance limit: “L” qualifier. Ratings qualified with “L” apply only to amounts invested up to federal deposit insurance limits.

Principal: “p” qualifier. This suffix is used for issues in which the credit factors, the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The “p” suffix indicates that the rating addresses the principal portion of the obligation only and that the interest is not rated.

Preliminary Ratings: “prelim” qualifier. Preliminary ratings, with the “prelim” suffix, may be assigned to obligors or obligations, including financial programs, in the circumstances described below. Assignment of a final rating is conditional on the receipt by S&P Global Ratings of appropriate documentation. S&P Global Ratings reserves the right not to issue a final rating. Moreover, if a final rating is issued, it may differ from the preliminary rating. (1) Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. (2) Preliminary ratings may be assigned to obligations that will likely be issued upon the obligor’s emergence from bankruptcy or similar reorganization, based on late-stage reorganization plans, documentation and discussions with the obligor.

 

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Preliminary ratings may also be assigned to the obligors. These ratings consider the anticipated general credit quality of the reorganized or post-bankruptcy issuer as well as attributes of the anticipated obligation(s). (4) Preliminary ratings may be assigned to entities that are being formed or that are in the process of being independently established when, in S&P Global Ratings’ opinion, documentation is close to final. Preliminary ratings may also be assigned to the obligations of these entities. (5) Preliminary ratings may be assigned when a previously unrated entity is undergoing a well-formulated restructuring, recapitalization, significant financing or other transformative event, generally at the point that investor or lender commitments are invited. The preliminary rating may be assigned to the entity and to its proposed obligation(s). These preliminary ratings consider the anticipated general credit quality of the obligor, as well as attributes of the anticipated obligation(s), assuming successful completion of the transformative event. Should the transformative event not occur, S&P Global Ratings would likely withdraw these preliminary ratings. (6) A preliminary recovery rating may be assigned to an obligation that has a preliminary issue credit rating.

Termination Structures: “t” qualifier. This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.

Counterparty Instrument Rating: “cir” qualifier. This symbol indicates a Counterparty Instrument Rating (CIR), which is a forward-looking opinion about the creditworthiness of an issuer in a securitization structure with respect to a specific financial obligation to a counterparty (including interest rate swaps, currency swaps, and liquidity facilities). The CIR is determined on an ultimate payment basis; these opinions do not take into account timeliness of payment.

Description of Fitch Ratings’ Corporate Finance Long-Term Obligation Ratings:

Ratings of individual securities or financial obligations of a corporate issuer address relative vulnerability to default on an ordinal scale. In addition, for financial obligations in corporate finance, a measure of recovery given default on that liability is also included in the rating assessment. This notably applies to covered bonds ratings, which incorporate both an indication of the probability of default and of the recovery given a default of this debt instrument.

The relationship between issuer scale and obligation scale assumes an historical average recovery of between 30%-50% on the senior, unsecured obligations of an issuer. As a result, individual obligations of entities, such as corporations, are assigned ratings higher, lower, or the same as that entity’s issuer rating or IDR. At the lower end of the ratings scale, Fitch Ratings now additionally publishes explicit Recovery Ratings in many cases to complement issuer and obligation ratings.

AAA: Highest credit quality. “AAA” ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA: Very high credit quality. “AA” ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A: High credit quality. “A” ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

BBB: Good credit quality. “BBB” ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

 

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BB: Speculative. “BB” ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.

B: Highly speculative. “B” ratings indicate that material credit risk is present†.

CCC: Substantial credit risk. “CCC” ratings indicate that substantial credit risk is present†.

CC: Very high levels of credit risk. “CC” ratings indicate very high levels of credit risk†.

C: Exceptionally high levels of credit risk. “C” indicates exceptionally high levels of credit risk†.

Defaulted obligations typically are not assigned “RD” or “D” ratings, but are instead rated in the “B” to “C” rating categories, depending upon their recovery prospects and other relevant characteristics. This approach better aligns obligations that have comparable overall expected loss but varying vulnerability to default and loss.

Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the “AAA” obligation rating category, or to corporate finance obligation ratings in the categories below “CCC”.

The subscript “emr” is appended to a rating to denote embedded market risk which is beyond the scope of the rating. The designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the analysis of the counterparty risk, which in all other respects follows published Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to any degree subject to market risk.

Description of Fitch Ratings’ Structured, Project Finance Long-Term Obligation Ratings:

Ratings of structured and project finance obligations on the long-term scale, including the financial obligations of sovereigns, consider the obligations’ relative vulnerability to default. These ratings are typically assigned to an individual security or tranche in a transaction and not to an issuer.

AAA: Highest credit quality. “AAA” ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA: Very high credit quality. “AA” ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A: High credit quality. “A” ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

BBB: Good credit quality. “BBB” ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

BB: Speculative. “BB” ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.

 

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B: Highly speculative. “B” ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

CCC: Substantial credit risk. Default is a real possibility.

CC: Very high levels of credit risk. Default of some kind appears probable.

C: Exceptionally high levels of credit risk. Default appears imminent or inevitable.

D: Default. Indicates a default. Default generally is defined as one of the following: (1) failure to make payment of principal and/or interest under the contractual terms of the rated obligation; (2) bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of the business of an issuer/obligor; or (3) distressed exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation to avoid a probable payment default.

Structured Finance Defaults: “Imminent” default, categorized under “C”, typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the immediate future.

Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to pay interest and/or principal in full in accordance with the terms of the obligation’s documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation will typically be rated in the “C” category.

Structured Finance Write-downs: Where an instrument has experienced an involuntary and, in the agency’s opinion, irreversible “write-down” of principal (i.e. other than through amortization, and resulting in a loss to the investor), a credit rating of “D” will be assigned to the instrument. Where the agency believes the “write-down” may prove to be temporary (and the loss may be “written up” again in future if and when performance improves), then a credit rating of “C” will typically be assigned. Should the “write-down” then later be reversed, the credit rating will be raised to an appropriate level for that instrument. Should the “write-down” later be deemed as irreversible, the credit rating will be lowered to “D”.

Notes: In the case of structured and project finance, while the ratings do not address the loss severity given default of the rated liability, loss severity assumptions on the underlying assets are nonetheless typically included as part of the analysis. Loss severity assumptions are used to derive pool cash flows available to service the rated liability.

The suffix “sf” denotes an issue that is a structured finance transaction. For an explanation of how Fitch determines structured finance ratings, please see our criteria available at fitchratings.com.

The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the “AAA” Long-Term Rating category, or categories below “B”.

Enhanced Equipment Trust Certificates (EETCs) are corporate-structured hybrid debt securities that airlines typically use to finance aircraft equipment. Due to the hybrid characteristics of these bonds, Fitch’s rating approach incorporates elements of both the structured finance and corporate rating methodologies. Although rated as asset-backed securities, unlike other structured finance ratings, EETC ratings involve a measure of recovery given default akin to ratings of financial obligations in corporate finance, as described above.

 

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Description of Fitch Ratings’ Corporate, Public and Structured Finance Short-Term Obligation Ratings:

A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.

F1: Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

F2: Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.

F3: Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.

B: Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.

C: High short-term default risk. Default is a real possibility.

RD: Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only.

D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.

Fitch Rating Watches and Rating Outlooks

Fitch takes certain actions in relation to its ratings. These actions can indicate a change in the relative credit quality of the rated entity or a relative change in servicing quality. In addition, actions regarding Outlooks or Watches provide an indication of a potential rating change, or other events (Data Actions) and indicate the likely direction of the rating.

Rating Watch: Rating Watches indicate that there is a heightened probability of a rating change and the likely direction of such a change. These are designated as “Positive”, indicating a potential upgrade, “Negative”, for a potential downgrade, or “Evolving”, if ratings may be raised, lowered or affirmed. However, ratings that are not on Rating Watch can be raised or lowered without being placed on Rating Watch first, if circumstances warrant such an action.

A Rating Watch is typically event-driven and, as such, it is generally resolved over a relatively short period. The event driving the Watch may be either anticipated or have already occurred, but in both cases, the exact rating implications remain undetermined. The Watch period is typically used to gather further information and/or subject the information to further analysis. Additionally, a Watch may be used where the rating implications are already clear, but where a triggering event (e.g. shareholder or regulatory approval) exists. The Watch will typically extend to cover the period until the triggering event is resolved or its outcome is predictable with a high enough degree of certainty to permit resolution of the Watch.

Rating Watches can be employed by all analytical groups and are applied to the ratings of individual entities and/or individual instruments. At the lowest categories of speculative grade (“CCC”, “CC” and “C”) the high volatility of credit profiles may imply that almost all ratings should carry a Watch. Watches are nonetheless only applied selectively in these categories, where a committee decides that particular events or threats are best communicated by the addition of the Watch designation.

 

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Rating Outlook: Ratings Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. The majority of Outlooks are generally Stable, which is consistent with the historical migration experience of ratings over a one- to two-year period. Positive or Negative rating Outlooks do not imply that a rating change is inevitable and, similarly, ratings with Stable Outlooks can be raised or lowered without a prior revision to the Outlook, if circumstances warrant such an action. Occasionally, where the fundamental trend has strong, conflicting elements of both positive and negative, the Rating Outlook may be described as Evolving.

Outlooks are currently applied on the long-term scale to issuer ratings in corporate finance (including sovereigns, industrials, utilities, financial institutions and insurance companies) and public finance outside the U.S.; to issue ratings in public finance in the U.S.; to certain issues in project finance; to Insurer Financial Strength Ratings; to issuer and/or issue ratings in a number of National Rating scales; and to the ratings of structured finance transactions and covered bonds. Outlooks are not applied to ratings assigned on the short-term scale and are applied selectively to ratings in the “CCC”, “CC” and “C” categories. Defaulted ratings typically do not carry an Outlook.

Deciding When to Assign Rating Watch or Outlook

Timing is informative but not critical to the choice of a Watch rather than an Outlook. A discrete event that is largely clear and the terms of which are defined, but which will not happen for more than six months — such as a lengthy regulatory approval process — would nonetheless likely see ratings placed on Watch rather than a revision to the Outlook.

An Outlook revision may, however, be deemed more appropriate where a series of potential event risks has been identified, none of which individually warrants a Watch but which cumulatively indicate heightened probability of a rating change over the following one to two years.

A revision to the Outlook may also be appropriate where a specific event has been identified, but where the conditions and implications of that event are largely unclear and subject to high execution risk over an extended period — for example a proposed, but politically controversial, privatization.

Expected Ratings: Where a rating is referred to as “expected”, alternatively referred to as “expects to rate” or suffixed as (“EXP”), this indicates that a full rating has been assigned based upon the agency’s expectations regarding final documentation, typically based upon a review of the final draft documentation provided by the issuer. If such final documentation is received and is as expected, the expected rating will typically be converted to a final rating. Fitch may also employ “expects to rate” language for new issuers (currently unrated) for ratings that are assigned in the course of a restructuring, refinancing or corporate reorganization. The “expects to rate” will reflect and refer to the rating level expected following the conclusion of the proposed operation (debt issuance, restructure, or merger). While expected ratings typically convert to final ratings within a short time, determined by timing of transaction closure, in the period between assignment of an expected rating and a final rating, expected ratings may be raised, lowered or placed on Rating Watch or withdrawn, as with final ratings.

Private Ratings: Fitch Ratings also prepares a limited number of private ratings, for example for entities with no publicly traded debt, or where the rating is required for internal benchmarking or regulatory purposes. These ratings are generally provided directly to the rated entity, which is then responsible for ensuring that any party to whom it discloses the private rating is updated when any change in the rating occurs.

Private ratings undergo the same analysis, committee process and surveillance as published ratings, unless otherwise disclosed as “point-in-time” in nature.

 

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Program Ratings: Program ratings assigned to corporate and public finance note issuance programs (e.g. medium-term note programs) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program.

“Interest-Only” Ratings: Interest-only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.

“Principal-Only” Ratings: Principal-only ratings address the likelihood that a security holder will receive its initial principal investment either before or by the scheduled maturity date.

“Rate of Return” Ratings: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.

Matured/Paid-In-Full: a. “Matured” — This action is used when an issue has reached the end of its repayment term and rating coverage is discontinued. Denoted as “NR”. b. “Paid-In-Full” — This action indicates that the issue has been paid in full. As the issue no longer exists, it is therefore no longer rated. Denoted as “PIF”.

A designation of “Not Rated” or “NR” is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.

Withdrawn: The rating has been withdrawn and the issue or issuer is no longer rated by Fitch Ratings. Indicated in rating databases with the symbol “WD”.

“Unenhanced” Ratings: Unenhanced ratings reflect the underlying creditworthiness of financial instruments absent any credit enhancement that may be provided through bond insurance, financial guarantees, dedicated letters of credit, liquidity facilities, or intercept mechanisms.

In some cases, Fitch may choose to assign an unenhanced rating along with credit rating based on enhancement. The unenhanced rating indicates the creditworthiness of the financial instrument without considering any benefit of such enhancement. Financial obligations may be enhanced by a guarantee instrument provided by a rated third party.

Non-Credit Rating Scales: In addition, Fitch Ratings provides specialist ratings on other topics. Operational risk ratings are assigned to servicers of commercial and residential mortgages and other asset types.

Asset manager ratings opine on the relative operational and financial capabilities of asset managers, trustees and others. Fund Credit and/or Volatility Ratings are assigned to fund’s or local government investment pool’s portfolio. Many of these ratings are offered internationally and in some cases on a national basis applying appropriate ratings modifiers and identifiers.

 

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APPENDIX B

Western Asset Management Company

Proxy Voting Policies and Procedures

Policy

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.

Procedure

Responsibility and Oversight

The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

 

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Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

b. Impacted accounts are checked to confirm Western Asset voting authority.

c. Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

e. Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

f. Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset’s policies and procedures.

b. Copies of proxy statements received regarding client securities.

c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

e. A proxy log including:

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

3. Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

 

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6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

1. Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

2. Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board- approved proposals are as follows:

1. Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board- approved proposals on other matters relating to the board of directors with the following exceptions:

a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

 

B-102


b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

d. Votes are cast on a case-by-case basis in contested elections of directors.

2. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

3. Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

a. Western Asset votes for proposals relating to the authorization of additional common stock.

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase programs.

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

5. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

 

B-103


6. Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers—i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

 

B-104


4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

Retirement Accounts

For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.

In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.

 

B-105

EX-99.(17)(C) 8 d366715dex9917c.htm AUDITED FINANCIAL STATEMENTS OF THE AR OF WA INSTIT. CASH RES. FYE 12/31/16 Audited Financial Statements of the AR of WA Instit. Cash Res. FYE 12/31/16

Exhibit 17(c)

Statement of assets and liabilities

August 31, 2016

 

Assets:  

Investment in Liquid Reserves Portfolio, at value

   $ 9,752,008,994  

Prepaid expenses

     202,165  

Total Assets

     9,752,211,159  
Liabilities:  

Distributions payable

     1,723,599  

Investment management fee payable

     638,802  

Service and/or distribution fees payable

     38,208  

Trustees’ fees payable

     17,072  

Accrued expenses

     238,408  

Total Liabilities

     2,656,089  
Total Net Assets    $ 9,749,555,070  
Net Assets:  

Par value (Note 5)

   $ 97,494  

Paid-in capital in excess of par value

     9,749,154,519  

Undistributed net investment income

     185,383  

Accumulated net realized gain on investments allocated from Liquid Reserves Portfolio
and Prime Cash Reserves Portfolio

     117,674  
Total Net Assets    $ 9,749,555,070  
Net Assets:  

Class L

     $276,458,355  

Institutional Shares

     $9,419,746,358  

Class S

     $642,421  

Investor Shares

     $52,707,936  
Shares Outstanding:  

Class L

     276,451,828  

Institutional Shares

     9,419,583,291  

Class S

     642,398  

Investor Shares

     52,706,817  
Net Asset Value:  

Class L

     $1.00  

Institutional Shares

     $1.00  

Class S

     $1.00  

Investor Shares

     $1.00  

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   1


Statement of operations

For the Year Ended August 31, 2016†

 

Investment Income:  

Income from Prime Cash Reserves Portfolio

   $ 50,578,346  

Income from Liquid Reserves Portfolio

     496,606  

Allocated expenses from Prime Cash Reserves Portfolio

     (12,558,778)  

Allocated expenses from Liquid Reserves Portfolio

     (90,210)  

Allocated waiver from Prime Cash Reserves Portfolio

     11,272,907  

Allocated waiver from Liquid Reserves Portfolio

     80,266  

Total Investment Income

     49,779,137  
Expenses:  

Investment management fee (Note 2)

     22,692,822  

Service and/or distribution fees (Notes 2 and 3)

     1,603,341  

Legal fees

     401,652  

Trustees’ fees

     209,267  

Insurance

     121,849  

Transfer agent fees (Note 3)

     113,255  

Registration fees

     94,908  

Shareholder reports

     80,429  

Audit and tax fees

     36,380  

Fund accounting fees

     6,300  

Miscellaneous expenses

     64,792  

Total Expenses

     25,424,995  

Less: Fee waivers and/or expense reimbursements (Notes 2 and 3)

     (12,591,869)  

Net Expenses

     12,833,126  
Net Investment Income      36,946,011  
Net Realized Gain on Investments From Prime Cash Reserves Portfolio      145,615  
Increase in Net Assets From Operations    $ 37,091,626  

 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio (See Note 1).

 

See Notes to Financial Statements.

 

2    Western Asset Institutional Cash Reserves 2016 Annual Report


Statements of changes in net assets

 

For the Years Ended August 31,   2016     2015  
Operations:  

Net investment income

  $ 36,946,011     $ 7,861,791  

Net realized gain

    145,615       196,430  

Increase in Net Assets From Operations

    37,091,626       8,058,221  
Distributions to Shareholders From (Notes 1 and 4):  

Net investment income

    (36,946,018)       (7,860,320)  

Decrease in Net Assets From Distributions to Shareholders

    (36,946,018)       (7,860,320)  
Fund Share Transactions (Note 5):  

Net proceeds from sale of shares

    133,820,356,655       104,787,750,796  

Reinvestment of distributions

    17,796,141       3,547,002  

Cost of shares repurchased

    (136,475,603,210)       (101,203,069,034)  

Increase (Decrease) in Net Assets From Fund Share Transactions

    (2,637,450,414)       3,588,228,764  

Increase (Decrease) in Net Assets

    (2,637,304,806)       3,588,426,665  
Net Assets:  

Beginning of year

    12,386,859,876       8,798,433,211  

End of year*

  $ 9,749,555,070     $ 12,386,859,876  

*Includes undistributed net investment income of:

    $185,383       $185,390  

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   3


Financial highlights

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31:  
Class L Shares   2016†1     20151     20141     20131     2012  
Net asset value, beginning of year     $1.000       $1.000       $1.000       $1.000       $1.000  
Income (loss) from operations:  

Net investment income

    0.003       0.000 2      0.000 2      0.001       0.001  

Net realized gain (loss)2

    0.000       0.000       0.000       0.000       (0.000)  

Total income from operations

    0.003       0.000 2      0.000 2      0.001       0.001  
Less distributions from:  

Net investment income

    (0.003)       (0.000) 2      (0.000) 2      (0.001)       (0.001)  

Net realized gains

                (0.000) 2      (0.000) 2      (0.000) 2 

Total distributions

    (0.003)       (0.000) 2      (0.000) 2      (0.001)       (0.001)  
Net asset value, end of year     $1.000       $1.000       $1.000       $1.000       $1.000  

Total return3

    0.30     0.04     0.02     0.07     0.13
Net assets, end of year (millions)     $276       $1,010       $660       $556       $511  
Ratios to average net assets:  

Gross expenses4

    0.43 %5      0.43 %5      0.42 %5      0.43 %5      0.33

Net expenses4,6,7

    0.16       0.16       0.16       0.18       0.19  

Net investment income

    0.28       0.05       0.02       0.07       0.13  

 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio (See Note 1).

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

Amount represents less than $0.0005 per share.

 

3 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

6 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class L shares did not exceed 0.30%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

7 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

4    Western Asset Institutional Cash Reserves 2016 Annual Report


For a share of each class of beneficial interest outstanding throughout each year ended August 31:  
Institutional Shares   2016†1     20151     20141     20131     2012  
Net asset value, beginning of year     $1.000       $1.000       $1.000       $1.000       $1.000  
Income (loss) from operations:  

Net investment income

    0.003       0.001       0.001       0.001       0.002  

Net realized gain (loss)2

    0.000       0.000       0.000       0.000       (0.000)  

Total income from operations

    0.003       0.001       0.001       0.001       0.002  
Less distributions from:  

Net investment income

    (0.003)       (0.001)       (0.001)       (0.001)       (0.002)  

Net realized gains

                (0.000) 2      (0.000) 2      (0.000) 2 

Total distributions

    (0.003)       (0.001)       (0.001)       (0.001)       (0.002)  
Net asset value, end of year     $1.000       $1.000       $1.000       $1.000       $1.000  

Total return3

    0.34     0.09     0.07     0.12     0.18
Net assets, end of year (millions)     $9,420       $10,950       $7,759       $7,747       $8,896  
Ratios to average net assets:  

Gross expenses4

    0.32 %5      0.32 %5      0.32 %5      0.32 %5      0.22

Net expenses4,6,7

    0.12       0.11       0.11       0.13       0.14  

Net investment income

    0.33       0.09       0.07       0.12       0.18  

 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio (See Note 1).

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

Amount represents less than $0.0005 per share.

 

3 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

6 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Prior to August 29, 2016, the expense limitation was 0.25%. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

7 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   5


Financial highlights (cont’d)

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31:  
Class S Shares   2016†1     20151     20141     20131     2012  
Net asset value, beginning of year     $1.000       $1.000       $1.000       $1.000       $1.000  
Income (loss) from operations:  

Net investment income

    0.002       0.000 2      0.000 2      0.000 2      0.000 2 

Net realized gain (loss)2

    0.000       0.000       0.000       0.000       (0.000)  

Total income from operations

    0.002       0.000 2      0.000 2      0.000 2      0.000 2 
Less distributions from:  

Net investment income

    (0.002)       (0.000) 2      (0.000) 2      (0.000) 2      (0.000) 2 

Net realized gains

                (0.000) 2      (0.000) 2      (0.000) 2 

Total distributions

    (0.002)       (0.000) 2      (0.000) 2      (0.000) 2      (0.000) 2 
Net asset value, end of year     $1.000       $1.000       $1.000       $1.000       $1.000  

Total return3

    0.22     0.01     0.01     0.01     0.01
Net assets, end of year (millions)     $1       $134       $120       $86       $83  
Ratios to average net assets:  

Gross expenses4

    0.58 %5      0.57 %5      0.58 %5      0.58 %5      0.48

Net expenses4,6,7

    0.23       0.19       0.17       0.24       0.31  

Net investment income

    0.19       0.01       0.01       0.01       0.01  

 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio (See Note 1).

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

Amount represents less than $0.0005 per share.

 

3 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

6 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class S shares did not exceed 0.45%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

7 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

6    Western Asset Institutional Cash Reserves 2016 Annual Report


For a share of each class of beneficial interest outstanding throughout each year ended August 31,
unless otherwise noted:
 
Investor Shares   2016†1     20151     20141,2  
Net asset value, beginning of year     $1.000       $1.000       $1.000  
Income (loss) from operations:  

Net investment income

    0.003       0.000 3      0.000 3 

Net realized gain (loss)3

    0.000       0.000       (0.000)  

Total income from operations

    0.003       0.000 3      0.000 3 
Less distributions from:  

Net investment income

    (0.003)       (0.000) 3      (0.000) 3 

Net realized gains

                (0.000) 3 

Total distributions

    (0.003)       (0.000) 3      (0.000) 3 
Net asset value, end of year     $1.000       $1.000       $1.000  

Total return4

    0.29     0.04     0.02
Net assets, end of year (millions)     $53       $113       $64  
Ratios to average net assets:  

Gross expenses5,6

    0.42     0.42     0.44 %7 

Net expenses5,9,8

    0.17       0.16       0.16 7 

Net investment income

    0.30       0.05       0.01 7 

 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio (See Note 1).

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the period September 3, 2013 (inception date) to August 31, 2014.

 

3 

Amount represents less than $0.0005 per share.

 

4 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

5 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

6 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

7 

Annualized.

 

8 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Investor Shares did not exceed 0.35%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

9 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   7


Notes to financial statements

 

1. Organization and significant accounting policies

Western Asset Institutional Cash Reserves (the “Fund”) is a separate diversified investment series of Legg Mason Partners Institutional Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Effective August 29, 2016, the Fund invests all of its investable assets in Liquid Reserves Portfolio (the “Portfolio”), a separate investment series of Master Portfolio Trust, that has the same investment objective and strategies as the Fund in what is called a master-feeder structure.

Prior to August 29, 2016, the Fund was a feeder fund that invested in securities through a different underlying mutual fund, Prime Cash Reserves Portfolio that had the same investment objective and strategies as the Fund, in a master-feeder structure. The Board of Trustees of Prime Cash Reserves Portfolio authorized the termination of Prime Cash Reserves Portfolio, which occurred on August 26, 2016. In light of the termination of Prime Cash Reserves Portfolio, the Board of Trustees of the Fund determined that it was in the best interests of the Fund’s shareholders to withdraw the Fund’s investment from Prime Cash Reserves Portfolio and instead invest as a feeder fund in a different underlying mutual fund, Liquid Reserves Portfolio, on August 29, 2016. The Fund’s investment objective, policies and strategies remain unchanged.

The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The Fund records its investment in the Portfolio at value. The value of such investment in the Portfolio reflects the Fund’s proportionate interest (19.6% at August 31, 2016) in the net assets of the Portfolio.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. The disclosure and valuation of securities held by the Portfolio are discussed in Note 1(a) of the Portfolio’s Notes to Financial Statements, which are included elsewhere in this report.

(b) Investment transactions and investment income. Net investment income of the Portfolio is allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Gross realized gains and/or losses of the Portfolio are allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation is closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders. The Fund also pays certain other expenses which can be directly attributed to the Fund.

 

8    Western Asset Institutional Cash Reserves 2016 Annual Report


(c) Distributions to shareholders. Distributions from net investment income on the shares of the Fund are declared each business day and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(d) Share class accounting. Investment income, common expenses and realized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

(e) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(f) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the Fund had no reclassifications.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. LMPFA was Prime Cash Reserves Portfolio’s investment manager and Western Asset was Prime Cash Reserves Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the Investment Management Agreement, the Fund pays an investment management fee, calculated daily and payable monthly, in accordance with the following breakpoint schedule:

 

Average Daily Net Assets      Fee Rate  
First $5 billion        0.200
Next $5 billion        0.175  
Over $10 billion        0.150  

Prior to August 29, 2016, the Fund paid an investment management fee at an annual rate of 0.20% of the Fund’s average daily net assets.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   9


Notes to financial statements (cont’d)

 

Since the Fund invests all of its investable assets in Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016), the investment management fee of the Fund will be reduced by the investment management fee allocated to the Fund by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class L shares, Institutional Shares, Class S shares and Investor Shares did not exceed 0.30%, 0.20%, 0.45 and 0.35%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Prior to August 29, 2016, the expense limitation was 0.25% for Institutional Shares. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the year ended August 31, 2016, fees waived and/or expenses reimbursed amounted to $12,591,869.

LMPFA is permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will LMPFA recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Class specific expenses, waivers and/or expense reimbursements

The Fund has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Fund pays a service and/or distribution fee with respect to its Class L shares, Class S shares, SVB Securities Horizon Shares and Investor Shares calculated at the annual rate of 0.10%, 0.25%, 0.27% and 0.10% of the average daily net assets of each class, respectively. Service and/or distribution fees are accrued daily and paid monthly.

 

10    Western Asset Institutional Cash Reserves 2016 Annual Report


For the year ended August 31, 2016, class specific expenses were as follows:

 

        Service and/or
Distribution Fees
       Transfer Agent
Fees
 
Class L      $ 763,795 1       $ 43,699  
Institutional Shares                 58,152  
Class S        243,647 1         4,504  
SVB Securities Horizon Shares2        432,748 1         3,688  
Investor Shares        163,151 1         3,212  
Total      $ 1,603,341        $ 113,255  

 

1 

Amount shown is exclusive of waivers. For the year ended August 31, 2016, the service and/or distribution fees waived amounted to $381,898 for Class L shares, $240,887 for Class S shares, $140,478 for SVB Securities Horizon Shares and $107,701 for Investor Shares. Such waivers are voluntarily and may be reduced or terminated at any time.

 

2 

On August 29, 2016, SVB Securities Horizon Shares were fully redeemed.

For the year ended August 31, 2016, waivers and/or expense reimbursements by class were as follows:

 

        Waivers/Expense
Reimbursements
 
Class L      $ 1,264,533  
Institutional Shares        10,632,882  
Class S        242,476  
SVB Securities Horizon Shares1        199,927  
Investor Shares        252,051  
Total      $ 12,591,869  

 

1 

On August 29, 2016, SVB Securities Horizon Shares were fully redeemed.

4. Distributions to shareholders by class

 

        Year Ended
August 31, 2016
       Year Ended
August 31, 2015
 
Net Investment Income:                      
Class L      $ 2,107,116        $ 310,514  
Institutional Shares        34,029,491          7,476,184  
Class S        193,349          17,614  
SVB Securities Horizon Shares1        129,622          17,120  
Investor Shares        486,440          38,888  
Total      $ 36,946,018        $ 7,860,320  

 

1 

On August 29, 2016, SVB Securities Horizon Shares were fully redeemed.

5. Shares of beneficial interest

At August 31, 2016, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   11


Notes to financial statements (cont’d)

 

Transactions in shares of each class were as follows:

 

        Year Ended
August 31, 2016
       Year Ended
August 31, 2015
 
Class L                      
Shares sold        6,261,124,866          6,270,124,860  
Shares issued on reinvestment        793,780          89,533  
Shares repurchased        (6,995,881,227)          (5,920,480,990)  
Net increase (decrease)        (733,962,581)          349,733,403  
Institutional Shares                      
Shares sold        126,819,974,272          97,643,034,596  
Shares issued on reinvestment        16,224,505          3,384,107  
Shares repurchased        (128,366,246,145)          (94,455,445,212)  
Net increase (decrease)        (1,530,047,368)          3,190,973,491  
Class S                      
Shares sold        286,790,538          378,571,398  
Shares issued on reinvestment        178,436          17,614  
Shares repurchased        (419,919,342)          (364,827,697)  
Net increase (decrease)        (132,950,368)          13,761,315  
SVB Securities Horizon Shares1                      
Shares sold        60,378,449          99,848,058  
Shares issued on reinvestment        125,587          16,860  
Shares repurchased        (240,966,070)          (114,523,012)  
Net decrease        (180,462,034)          (14,658,094)  
Investor Shares                      
Shares sold        392,088,530          396,171,884  
Shares issued on reinvestment        473,833          38,888  
Shares repurchased        (452,590,426)          (347,792,123)  
Net increase (decrease)        (60,028,063)          48,418,649  

 

1 

On August 29, 2016, SVB Securities Horizon Shares were fully redeemed.

Because the Fund has maintained a $1.00 net asset value per share from inception, the number of shares sold, shares issued on reinvestment of dividends declared, and shares repurchased, is equal to the dollar amount shown in the Statements of Changes in Net Assets for the corresponding fund share transactions.

6. Income tax information and distributions to shareholders

The tax character of distributions paid during the fiscal years ended August 31, was as follows:

 

        2016        2015  
Distributions paid from:                      
Ordinary income      $ 36,946,018        $ 7,860,320  

As of August 31, 2016, there were no significant differences between the book and tax basis components of net assets.

 

12    Western Asset Institutional Cash Reserves 2016 Annual Report


During the taxable year ended August 31, 2016, the Fund utilized $27,941 of its deferred capital losses available from prior years.

7. Money market fund reform

The U.S. Securities and Exchange Commission has adopted certain reforms to the rules that govern money market funds (the “Reforms”). Under the Reforms, the Fund may no longer use the amortized cost method of valuation to seek to maintain a stable NAV of $1.00 per share. Instead, on or about October 11, 2016, the Fund will be required to calculate its NAV based on the current market-based value of its portfolio securities. In addition, as of that date, the Fund will use “basis point” rounding to calculate its share value to the nearest 1/100th of 1%, which means, that share prices will be rounded to four decimal places (i.e., $1.0000). In addition, no later than October 14, 2016, the Fund may impose fees upon the sale of shares or temporarily suspend the ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors.

8. Subsequent event

Subsequent to the year ended August 31, 2016, shareholder redemptions from Institutional Shares, Class S shares and Investor Shares exceeded 50% of Institutional Shares, Class S shares and Investor Shares net assets as of August 31, 2016.

 

Western Asset Institutional Cash Reserves 2016 Annual Report   13


Report of independent registered public

accounting firm

 

The Board of Trustees and Shareholders

Legg Mason Partners Institutional Trust:

We have audited the accompanying statement of assets and liabilities of Western Asset Institutional Cash Reserves (the “Fund”), a series of Legg Mason Partners Institutional Trust, as of August 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years or period in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2016, by examination of the underlying Liquid Reserves Portfolio. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Institutional Cash Reserves as of August 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years or period in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

New York, New York

October 20, 2016

 

14    Western Asset Institutional Cash Reserves 2016 Annual Report


Schedule of investments

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  
Short-Term Investments — 101.2%                                

Certificates of Deposit — 29.6%

                               

Abbey National Treasury Services PLC

    0.420     9/2/16     $ 411,424,000     $ 411,424,000  

Abbey National Treasury Services PLC

    0.410     9/7/16       51,636,000       51,636,000  

Bank of Montreal

    0.610     9/19/16       242,000,000       242,000,000  

Bank of Montreal

    0.630     9/20/16       238,928,000       238,927,997  

Bank of Montreal

    0.660     10/4/16       116,000,000       115,997,876  

Bank of Montreal

    0.900     1/4/17       246,750,000       246,750,000  

Bank of Nova Scotia

    0.860     9/8/16       475,000,000       475,000,000  

Bank of Nova Scotia

    0.904     1/3/17       437,784,000       437,784,000  (a) 

Bank of Tokyo-Mitsubishi UFJ NY

    0.764     10/3/16       198,856,000       198,856,000  (a) 

BNP Paribas NY Branch

    0.710     10/3/16       467,856,000       467,856,000  

BNP Paribas NY Branch

    1.128     2/13/17       149,100,000       149,100,000  (a) 

Canadian Imperial Bank of Commerce

    0.400     9/1/16       100,000,000       100,000,000  

Canadian Imperial Bank of Commerce

    0.870     9/14/16       81,800,000       81,800,000  

Canadian Imperial Bank of Commerce

    0.650     10/3/16       490,000,000       490,000,000  

Canadian Imperial Bank of Commerce

    0.894     1/3/17       452,784,000       452,784,000  (a) 

Chase Bank USA N.A.

    1.215     5/26/17       112,366,000       112,366,000  (a) 

Citibank N.A.

    0.650     10/3/16       500,000,000       500,000,000  

Citibank N.A.

    0.700     10/6/16       455,105,000       455,105,000  

Citibank N.A.

    0.720     10/24/16       272,820,000       272,820,000  

Citibank N.A.

    0.900     12/15/16       346,250,000       346,250,000  

Credit Suisse NY

    0.950     9/13/16       50,000,000       50,003,308  

Credit Suisse NY

    0.950     9/16/16       50,000,000       50,004,136  

Credit Suisse NY

    1.223     3/3/17       50,000,000       50,000,000  (a) 

DnB NOR Bank ASA

    0.390     9/7/16       86,590,000       86,590,000  

Landesbank Hessen-Thuringen

    0.610     9/22/16       139,356,000       139,356,000  

Landesbank Hessen-Thuringen

    0.650     10/4/16       150,000,000       150,000,000  

Mitsubishi UFJ Trust & Banking NY

    0.690     10/3/16       245,000,000       245,002,175  

Mitsubishi UFJ Trust & Banking NY

    0.880     10/5/16       96,300,000       96,300,453  

Mitsubishi UFJ Trust & Banking NY

    0.800     10/21/16       240,000,000       240,000,000  

Mitsubishi UFJ Trust & Banking NY

    1.020     12/22/16       151,819,000       151,819,000  

Mizuho Bank Ltd.

    0.744     10/3/16       443,856,000       443,856,000  (a) 

Mizuho Bank Ltd.

    0.750     10/13/16       38,928,000       38,928,000  

Mizuho Bank Ltd.

    0.800     10/21/16       243,250,000       243,250,000  

Mizuho Bank Ltd.

    0.900     11/22/16       186,854,000       186,854,000  

National Bank of Canada

    0.470     9/1/16       177,856,000       177,856,000  

Natixis NY

    0.860     10/31/16       417,856,000       417,856,000  

Norinchukin Bank

    0.460     9/7/16       100,000,000       100,000,000  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   15


Schedule of investments (cont’d)

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Certificates of Deposit — continued

                               

Norinchukin Bank

    0.650     9/9/16     $ 26,938,000     $ 26,938,000  

Norinchukin Bank

    0.660     9/16/16       174,428,000       174,428,721  

Norinchukin Bank

    0.600     9/26/16       272,500,000       272,500,000  

Norinchukin Bank

    0.600     9/29/16       195,000,000       195,000,000  

Norinchukin Bank

    0.900     11/22/16       190,747,000       190,747,000  

Norinchukin Bank

    0.900     11/28/16       70,070,000       70,070,000  

Norinchukin Bank

    0.900     11/29/16       73,963,000       73,963,000  

Oversea-Chinese Banking Corp. Ltd.

    0.600     9/8/16       77,856,000       77,856,000  

Oversea-Chinese Banking Corp. Ltd.

    0.410     9/9/16       221,590,000       221,590,000  

Oversea-Chinese Banking Corp. Ltd.

    0.560     9/20/16       295,000,000       295,000,000  

Royal Bank of Canada

    0.850     9/21/16       190,750,000       190,750,000  

Royal Bank of Canada

    0.940     11/1/16       195,418,000       195,489,345  

Skandinaviska Enskilda Banken AB

    0.850     10/21/16       69,058,000       69,067,481  

Skandinaviska Enskilda Banken AB

    0.910     12/14/16       107,325,000       107,325,000  

Sumitomo Mitsui Banking Corp.

    0.650     10/3/16       495,000,000       494,997,804  

Sumitomo Mitsui Banking Corp.

    0.744     10/3/16       202,856,000       202,856,000  (a) 

Sumitomo Mitsui Banking Corp.

    0.670     10/7/16       515,000,000       515,000,000  

Sumitomo Mitsui Banking Corp.

    0.800     10/17/16       238,928,000       238,928,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.420     9/1/16       77,856,000       77,856,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.420     9/6/16       71,410,000       71,410,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.650     9/26/16       100,000,000       100,000,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.690     9/27/16       75,000,000       74,999,990  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.700     9/29/16       33,478,000       33,477,996  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.700     10/5/16       244,464,000       244,464,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.620     10/17/16       127,249,000       127,249,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.900     10/21/16       480,000,000       480,000,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    1.238     2/13/17       24,400,000       24,400,000  (a) 

Toronto Dominion Bank NY

    0.410     9/6/16       10,121,000       10,121,000  

Toronto Dominion Bank NY

    0.620     10/19/16       112,891,000       112,891,000  

Toronto Dominion Bank NY

    0.920     1/9/17       120,000,000       120,000,000  

UBS AG

    0.690     10/20/16       373,392,000       373,392,000  

UBS AG

    0.980     1/11/17       19,464,000       19,464,000  

Wells Fargo Bank N.A.

    0.850     9/1/16       125,000,000       125,000,000  

Wells Fargo Bank N.A.

    0.850     10/7/16       48,660,000       48,674,503  

Wells Fargo Bank N.A.

    1.000     12/12/16       18,200,000       18,200,000  

Wells Fargo Bank N.A.

    0.896     12/28/16       362,784,000       362,784,000  (a) 

Westpac Banking Corp.

    0.870     9/16/16       29,429,000       29,429,122  

Total Certificates of Deposit

                            14,780,450,907  

 

See Notes to Financial Statements.

 

16    Liquid Reserves Portfolio 2016 Annual Report


 

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — 40.3%

                               

Abbey National Treasury Services PLC

    0.500     9/1/16     $ 116,000,000     $ 116,000,000  (b) 

Abbey National Treasury Services PLC

    0.500     9/1/16       77,856,000       77,856,000  (b) 

Abbey National Treasury Services PLC

    0.914     9/14/16       99,750,000       99,717,221  (b) 

ABN AMRO Funding USA LLC

    0.864     9/1/16       232,000,000       232,000,000  (b)(c) 

ABN AMRO Funding USA LLC

    0.651     10/3/16       142,000,000       141,917,956  (b)(c) 

ABN AMRO Funding USA LLC

    0.651     10/3/16       100,000,000       99,942,222  (b)(c) 

ABN AMRO Funding USA LLC

    0.651     10/7/16       253,000,000       252,835,550  (b)(c) 

ABN AMRO Funding USA LLC

    0.701     10/18/16       50,000,000       49,954,305  (b)(c) 

ABN AMRO Funding USA LLC

    0.701     10/19/16       170,000,000       169,841,333  (b)(c) 

ABN AMRO Funding USA LLC

    0.975     12/2/16       33,730,000       33,646,387  (b)(c) 

ABN AMRO Funding USA LLC

    1.003     12/21/16       31,142,000       31,045,979  (b)(c) 

ANZ National International Ltd.

    0.650     9/7/16       36,205,000       36,201,078  (b)(c) 

ANZ National International Ltd.

    0.874     9/9/16       85,000,000       84,983,567  (b)(c) 

ANZ National International Ltd.

    0.884     9/12/16       100,000,000       99,973,111  (b)(c) 

ANZ National International Ltd.

    0.914     1/5/17       100,000,000       99,681,500  (b)(c) 

ANZ National International Ltd.

    1.108     2/21/17       48,600,000       48,600,000  (a)(c) 

ASB Finance Ltd.

    0.844     9/2/16       75,000,000       74,998,250  (b)(c) 

ASB Finance Ltd.

    1.135     3/2/17       88,000,000       88,000,000  (a)(c) 

Australia & New Zealand Banking Group Ltd.

    0.601     9/16/16       455,000,000       454,886,250  (b)(c) 

Australia & New Zealand Banking Group Ltd.

    0.601     9/20/16       395,000,000       394,874,917  (b)(c) 

Australia & New Zealand Banking Group Ltd.

    0.601     9/21/16       95,571,000       95,539,143  (b)(c) 

Australia & New Zealand Banking Group Ltd.

    0.651     10/3/16       583,000,000       582,663,155  (b)(c) 

Bank Nederlandse Gemeenten NV

    0.420     9/6/16       225,000,000       224,986,875  (b)(c) 

Bank Nederlandse Gemeenten NV

    0.440     9/7/16       60,000,000       59,995,600  (b)(c) 

Bank of Nova Scotia

    0.850     9/20/16       116,784,000       116,731,609  (b)(c) 

Bank of Nova Scotia

    0.874     9/23/16       192,330,000       192,227,744  (b)(c) 

Bank of Nova Scotia

    0.651     9/27/16       100,000,000       99,953,056  (b)(c) 

Bank of Nova Scotia

    0.651     9/28/16       500,000,000       499,756,250  (b)(c) 

Bank of Tokyo-Mitsubishi UFJ NY

    0.300     9/1/16       475,000,000       475,000,000  (a) 

BNP Paribas Fortis SA

    0.300     9/1/16       485,000,000       485,000,000  (b) 

BNP Paribas Fortis SA

    1.003     12/1/16       184,700,000       184,233,120  (b) 

BNP Paribas NY Branch

    0.711     10/21/16       195,000,000       194,807,709  (b) 

BNZ International Funding Ltd.

    1.133     3/1/17       235,000,000       235,000,000  (a)(c) 

Caisse des Depots et Consignations

    0.701     10/4/16       78,010,000       77,959,944  (b)(d) 

Caisse des Depots et Consignations

    0.641     10/6/16       500,000,000       499,688,888  (b)(d) 

Commonwealth Bank of Australia

    0.601     9/19/16       245,000,000       244,926,500  (b)(c) 

Commonwealth Bank of Australia

    0.888     1/11/17       99,750,000       99,750,000  (a)(c) 

Cooperatieve Rebobank U.A.

    0.840     9/15/16       91,161,000       91,131,221  (b) 

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   17


Schedule of investments (cont’d)

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

Cooperatieve Rebobank U.A.

    0.751     11/14/16     $ 35,035,000     $ 34,980,988  (b) 

CPPIB Capital Inc.

    0.450     9/27/16       14,014,000       14,009,445  (b)(d) 

Credit Agricole Corporate and Investment Bank

    0.320     9/1/16       96,584,000       96,584,000  (b) 

Credit Agricole Corporate and Investment Bank

    0.470     9/6/16       450,000,000       449,970,625  (b) 

Credit Agricole Corporate and Investment Bank

    0.801     10/20/16       77,856,000       77,771,223  (b) 

Credit Agricole Corporate and Investment Bank

    0.862     10/31/16       245,000,000       244,648,834  (b) 

Credit Suisse NY

    1.005     9/19/16       172,270,000       172,183,865  (b) 

Credit Suisse NY

    1.005     9/19/16       19,464,000       19,454,268  (b) 

Credit Suisse NY

    0.782     9/29/16       177,700,000       177,592,195  (b) 

Credit Suisse NY

    0.782     9/29/16       77,856,000       77,808,767  (b) 

Danske Corp.

    0.620-0.859     9/1/16       144,948,000       144,948,000  (b)(c) 

Danske Corp.

    0.620-0.859     9/1/16       100,000,000       100,000,000  (b)(c) 

Danske Corp.

    0.601     9/19/16       390,000,000       389,883,000  (b)(c) 

Danske Corp.

    0.661     10/17/16       143,998,000       143,876,562  (b)(c) 

DBS Bank Ltd.

    0.591     9/8/16       200,000,000       199,977,055  (b)(c) 

DBS Bank Ltd.

    0.650     9/21/16       69,136,000       69,111,034  (b)(c) 

DBS Bank Ltd.

    0.651     9/23/16       100,000,000       99,960,889  (b)(c) 

DBS Bank Ltd.

    0.651     9/23/16       100,000,000       99,960,278  (b)(c) 

DBS Bank Ltd.

    0.651     10/11/16       31,142,000       31,119,509  (b)(c) 

DBS Bank Ltd.

    0.904     12/14/16       237,000,000       236,383,800  (b)(c) 

DBS Bank Ltd.

    0.913     12/20/16       166,784,000       166,320,248  (b)(c) 

DnB NOR Bank ASA

    0.864     9/1/16       89,000,000       89,000,000  (b)(c) 

DnB NOR Bank ASA

    0.884     9/12/16       95,000,000       94,974,456  (b)(c) 

HSBC Bank PLC

    1.008     11/18/16       38,400,000       38,316,800  (b)(c) 

ING U.S. Funding LLC

    0.702     9/7/16       250,000,000       249,970,833  (b) 

ING U.S. Funding LLC

    0.702     9/8/16       90,000,000       89,987,750  (b) 

Kreditanstalt Fur Wiederaufbau International Finance Inc.

    0.420     9/2/16       250,000,000       249,997,083  (b) 

Landesbank Hessen-Thuringen

    0.864     9/1/16       98,000,000       98,000,000  (b)(c) 

Landesbank Hessen-Thuringen

    0.884     9/21/16       142,500,000       142,430,333  (b)(c) 

Landesbank Hessen-Thuringen

    0.752     11/8/16       432,499,000       431,886,293  (b)(c) 

Landesbank Hessen-Thuringen

    0.955     12/1/16       239,750,000       239,174,267  (b)(c) 

Mizuho Bank Ltd.

    0.907     11/23/16       89,534,000       89,347,185  (b)(c) 

National Australia Bank Ltd.

    0.701     11/2/16       67,734,000       67,652,343  (b)(c) 

National Bank of Canada

    0.490     9/28/16       300,000,000       299,889,749  (b)(c) 

National Bank of Canada

    0.490     9/28/16       77,856,000       77,827,388  (b)(c) 

Natixis NY

    0.300     9/1/16       100,000,000       100,000,000  (b) 

Nordea Bank AB

    0.601     9/20/16       110,000,000       109,965,167  (b)(c) 

 

See Notes to Financial Statements.

 

18    Liquid Reserves Portfolio 2016 Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

Nordea Bank AB

    0.601     9/20/16     $ 23,356,000     $ 23,348,604  (b)(c) 

NRW Bank

    0.611     9/15/16       179,500,000       179,457,419  (b)(c) 

NRW Bank

    0.621     9/19/16       107,000,000       106,966,830  (b)(c) 

NRW Bank

    0.621     9/20/16       245,000,000       244,919,831  (b)(c) 

NRW Bank

    0.621     9/20/16       70,000,000       69,980,050  (b)(c) 

NRW Bank

    0.546     9/21/16       500,000,000       499,848,611  (b)(c) 

NRW Bank

    0.546     9/22/16       500,000,000       499,841,041  (b)(c) 

NRW Bank

    0.621     9/23/16       379,250,000       379,106,306  (b)(c) 

Ontario Teachers’ Finance Trust

    0.905     9/1/16       100,000,000       100,000,000  (b)(c) 

Ontario Teachers’ Finance Trust

    0.900     9/6/16       77,856,000       77,846,268  (b)(c) 

Ontario Teachers’ Finance Trust

    0.995     12/20/16       92,310,000       92,030,762  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.601     9/6/16       135,000,000       134,988,750  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.712     10/24/16       163,928,000       163,756,650  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.712     10/25/16       100,000,000       99,893,500  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.752     11/10/16       35,000,000       34,948,958  (b)(c) 

Sanofi

    0.682     11/14/16       96,450,000       96,315,184  (b)(c) 

Societe Generale

    0.300-0.400     9/1/16       523,000,000       523,000,000  (b)(c) 

Societe Generale

    0.300-0.400     9/1/16       77,856,000       77,856,000  (b)(c) 

Societe Generale

    0.702     9/9/16       134,000,000       133,979,156  (b)(c) 

Sumitomo Mitsui Banking Corp.

    0.902     11/28/16       163,497,000       163,137,307  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.884     9/16/16       182,500,000       182,433,083  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.651     9/26/16       150,000,000       149,932,292  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.651     9/29/16       280,000,000       279,858,444  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.762     10/3/16       143,000,000       142,903,395  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.762     10/3/16       27,249,000       27,230,592  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.772     10/14/16       183,392,000       183,223,330  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.802     10/18/16       195,000,000       194,796,334  (b)(c) 

Svenska Handelsbanken AB

    0.830     9/7/16       33,478,000       33,473,369  (b)(c) 

Svenska Handelsbanken AB

    0.601     9/21/16       228,928,000       228,851,690  (b)(c) 

Swedish Export Credit

    0.834     9/23/16       288,000,000       287,853,920  (b) 

Toronto Dominion Holdings USA

    0.651     10/7/16       390,000,000       389,746,500  (b)(c) 

Toronto Dominion Holdings USA

    0.651     10/7/16       77,856,000       77,805,394  (b)(c) 

Toronto Dominion Holdings USA

    0.904     1/5/17       646,750,000       644,712,737  (b)(c) 

United Overseas Bank Ltd.

    0.440     9/9/16       200,000,000       199,980,445  (b)(c) 

United Overseas Bank Ltd.

    0.530     9/26/16       229,675,000       229,590,467  (b)(c) 

United Overseas Bank Ltd.

    0.712     10/7/16       212,856,000       212,704,872  (b)(c) 

United Overseas Bank Ltd.

    0.702     10/21/16       188,928,000       188,744,320  (b)(c) 

Westpac Banking Corp.

    0.864     9/16/16       100,000,000       99,964,167  (b)(c) 

Total Commercial Paper

                            20,116,297,250  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   19


Schedule of investments (cont’d)

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Corporate Bonds & Notes — 0.0%

                               

Coca-Cola Co.

    1.800     9/1/16     $ 22,030,000     $ 22,030,000  

Medium-Term Notes — 0.0%

                               

Toronto-Dominion Bank

    0.811     9/8/16       19,464,000       19,464,907  

Time Deposits — 13.7%

                               

BNP Paribas NY Branch

    0.300     9/1/16       275,000,000       275,000,000  

CIBC World Markets Corp.

    0.300     9/1/16       381,905,000       381,905,000  

Credit Agricole CIB

    0.320     9/1/16       1,117,216,000       1,117,216,000  

DNB Bank ASA

    0.300     9/1/16       830,000,000       830,000,000  

Natixis SA

    0.300     9/1/16       1,150,000,000       1,150,000,000  

Nordea Bank Finland PLC

    0.290     9/1/16       405,000,000       405,000,000  

Skandinaviska Enskilda Banken AB

    0.300     9/1/16       900,000,000       900,000,000  

Svenska Handelsbanken AB

    0.300     9/1/16       875,000,000       875,000,000  

Swedbank AB

    0.300     9/1/16       880,000,000       880,000,000  

Total Time Deposits

                            6,814,121,000  

U.S. Government Agencies — 0.8%

                               

Federal Home Loan Mortgage Corp. (FHLMC), Notes

    0.564     4/27/17       377,856,000       377,805,836  (a) 

U.S. Treasury Bills — 0.4%

                               

U.S. Treasury Bills

    0.475     6/22/17       180,000,000       179,304,690  (b) 

U.S. Treasury Notes — 13.5%

                               

U.S. Treasury Notes

    0.388     10/31/16       1,192,389,000       1,192,367,302  (a) 

U.S. Treasury Notes

    0.409     4/30/17       1,331,819,000       1,331,837,509  (a) 

U.S. Treasury Notes

    0.412     7/31/17       2,108,454,000       2,108,209,796  (a) 

U.S. Treasury Notes

    0.503     10/31/17       616,280,000       616,129,396  (a) 

U.S. Treasury Notes

    0.607     1/31/18       18,296,000       18,308,794  (a) 

U.S. Treasury Notes

    0.525     4/30/18       1,132,065,000       1,132,163,652  (a) 

U.S. Treasury Notes

    0.509     7/31/18       320,000,000       320,016,441  (a) 

Total U.S. Treasury Notes

                            6,719,032,890  

Repurchase Agreements — 2.9%

                               

Bank of America Corp. tri-party repurchase agreement dated 8/31/16; Proceeds at maturity — $1,151,309,722; (Fully collateralized by various U.S. government agency obligations and corporate bonds and notes, 0.000% to 8.875% due 9/1/16 to 10/15/97; Market value — $1,191,333,534)

    0.500     11/21/16       1,150,000,000       1,150,000,000  

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 8/24/16; Proceeds at maturity — $200,298,111; (Fully collateralized by various corporate bonds and notes and money market instruments, 0.000% to 6.191% due 10/5/16 to 12/1/45; Market value — $211,079,417)

    0.654     11/21/16       200,000,000       200,000,000  

 

See Notes to Financial Statements.

 

20    Liquid Reserves Portfolio 2016 Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Repurchase Agreements — continued

                               

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 8/24/16; Proceeds at maturity — $100,149,056; (Fully collateralized by various corporate bonds and notes, municipal bonds and money market instruments, 0.000% to 7.672% due 12/1/17 to 10/1/47; Market value — $105,000,002)

    0.654     11/21/16     $ 100,000,000     $ 100,000,000  

Total Repurchase Agreements

                            1,450,000,000  

Total Investments — 101.2% (Cost — $50,478,507,480#)

 

            50,478,507,480  

Liabilities in Excess of Other Assets — (1.2)%

                            (575,336,084

Total Net Assets — 100.0%

                          $ 49,903,171,396  

 

(a) 

Variable rate security. Interest rate disclosed is as of the most recent information available.

 

(b) 

Rate shown represents yield-to-maturity.

 

(c) 

Commercial paper exempt from registration under Section 4(2) of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

(d) 

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

# Aggregate cost for federal income tax purposes is substantially the same.

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   21


Statement of assets and liabilities

August 31, 2016

 

Assets:         

Investments, at value

   $ 50,478,507,480  

Cash

     650  

Interest receivable

     20,899,611  

Total Assets

     50,499,407,741  
Liabilities:         

Payable for securities purchased

     594,590,000  

Trustees’ fees payable

     81,164  

Accrued expenses

     1,565,181  

Total Liabilities

     596,236,345  
Total Net Assets    $ 49,903,171,396  
Represented by:         
Paid-in-capital    $ 49,903,171,396  

 

See Notes to Financial Statements.

 

22    Liquid Reserves Portfolio 2016 Annual Report


Statement of operations

For the Year Ended August 31, 2016

 

Investment Income:         

Interest

   $ 250,622,980  
Expenses:         

Investment management fee (Note 2)

     52,782,907  

Fund accounting fees

     2,809,948  

Legal fees

     972,863  

Trustees’ fees

     964,887  

Custody fees

     324,368  

Audit and tax fees

     45,230  

Miscellaneous expenses

     95,894  

Total Expenses

     57,996,097  

Less: Fee waivers and/or expense reimbursements (Note 2)

     (52,782,907)  

Net Expenses

     5,213,190  
Net Investment Income      245,409,790  
Net Realized Gain on Investments      686,995  
Increase in Net Assets From Operations    $ 246,096,785  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   23


Statements of changes in net assets

 

For the Years Ended August 31,    2016      2015  
Operations:                  

Net investment income

   $ 245,409,790      $ 143,882,505  

Net realized gain

     686,995        701,909  

Increase in Net Assets From Operations

     246,096,785        144,584,414  
Capital Transactions:                  

Proceeds from contributions

     114,933,457,934        96,487,778,857  

In-kind capital contributions (Note 3)

     10,124,686,062         

Value of withdrawals

     (138,942,587,255)        (107,494,184,065)  

Decrease in Net Assets From Capital Transaction

     (13,884,443,259)        (11,006,405,208)  

Decrease in Net Assets

     (13,638,346,474)        (10,861,820,794)  
Net Assets:                  

Beginning of year

     63,541,517,870        74,403,338,664  

End of year*

   $ 49,903,171,396      $ 63,541,517,870  

 

See Notes to Financial Statements.

 

24    Liquid Reserves Portfolio 2016 Annual Report


Financial highlights

 

For the years ended August 31:  
     2016     2015     2014     2013     2012  
Net assets, end of year (millions)     $49,903       $63,542       $74,403       $73,576       $61,127  
Total return1     0.48     0.22     0.10     0.17     0.23
Ratios to average net assets:          

Gross expenses

    0.11     0.11     0.11     0.11     0.11

Net expenses2,3

    0.01       0.01       0.10       0.10       0.10  

Net investment income

    0.46       0.21       0.10       0.17       0.23  

 

1 

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

2 

The investment manager has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time. Prior to August 18, 2014, as a result of a voluntary expense limitation arrangement, the ratio of expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of the Portfolio did not exceed 0.10%.

 

3 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   25


Notes to financial statements

 

1. Organization and significant accounting policies

Liquid Reserves Portfolio (the “Portfolio”) is a separate diversified investment series of Master Portfolio Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Declaration of Trust permits the Trustees to issue beneficial interests in the Portfolio. At August 31, 2016, all investors in the Portfolio were funds advised or administered by the manager of the Portfolio and/or its affiliates.

The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. In accordance with Rule 2a-7 under the 1940 Act, money market instruments are valued at amortized cost, which approximates market value. This method involves valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost is subject to its compliance with certain conditions as specified by Rule 2a-7 under the 1940 Act.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Portfolio’s pricing policies, and reporting to the Board of Trustees.

The Portfolio uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

 

Level 1 — quoted prices in active markets for identical investments

 

 

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

 

Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments)

 

26    Liquid Reserves Portfolio 2016 Annual Report


The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

 

ASSETS  
Description   Quoted Prices
(Level 1)
    Other Significant
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
Short-term investments†         $ 50,478,507,480           $ 50,478,507,480  

 

See Schedule of Investments for additional detailed categorizations.

(b) Repurchase agreements. The Portfolio may enter into repurchase agreements with institutions that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Portfolio acquires a debt security subject to an obligation of the seller to repurchase, and of the Portfolio to resell, the security at an agreed-upon price and time, thereby determining the yield during the Portfolio’s holding period. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian, acting on the Portfolio’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Portfolio generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Portfolio seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Portfolio may be delayed or limited.

(c) Interest income and expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.

(d) Method of allocation. Net investment income of the Portfolio is allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Gross realized gains and/or losses of the Portfolio are allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation is closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders.

(e) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these

 

Liquid Reserves Portfolio 2016 Annual Report   27


Notes to financial statements (cont’d)

 

underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

(f) Compensating balance arrangements. The Portfolio has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Portfolio’s cash on deposit with the bank.

(g) Income taxes. The Portfolio is classified as a partnership for federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Therefore, no federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of Subchapter M of the Internal Revenue Code.

Management has analyzed the Portfolio’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Portfolio’s financial statements. The Portfolio’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(h) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.

LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Portfolio.

LMPFA has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the year ended August 31, 2016, fees waived and/or expenses reimbursed amounted to $52,782,907.

 

28    Liquid Reserves Portfolio 2016 Annual Report


LMPFA is permitted to recapture amounts waived and/or reimbursed to the Portfolio during the same fiscal year under certain circumstances.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Investments

On August 29, 2016, Western Asset Institutional Cash Reserves Fund transferred all of its investable assets (including cash and receivables), with a value of $10,124,686,062, to the Portfolio in exchange for an interest in the Portfolio.

4. Derivative instruments and hedging activities

During the year ended August 31, 2016, the Portfolio did not invest in derivative instruments.

5. Money market fund reform

The U.S. Securities and Exchange Commission has adopted certain reforms to the rules that govern money market funds (the “Reforms”). Under the Reforms, the Portfolio may no longer use the amortized cost method of valuation to value its investments. Instead, on or about October 11, 2016, the Portfolio will value its investments using the current market-based value of its portfolio securities. In addition, no later than October 14, 2016, the Portfolio may impose fees upon the withdrawal of interests or temporarily suspend the withdrawal of interests if the Portfolio’s liquidity falls below required minimums because of market conditions or other factors. The Reforms require that feeder funds pass through to their investors such fees or gate imposed by a master fund in which a fund invests.

 

Liquid Reserves Portfolio 2016 Annual Report   29


Report of independent registered public

accounting firm

 

The Board of Trustees and Investors

Master Portfolio Trust:

We have audited the accompanying statement of assets and liabilities of Liquid Reserves Portfolio (the “Portfolio”), a series of Master Portfolio Trust, including the schedule of investments, as of August 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Portfolio’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2016, by correspondence with the custodian and broker or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Liquid Reserves Portfolio as of August 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

New York, New York

October 20, 2016

 

30    Liquid Reserves Portfolio 2016 Annual Report
EX-99.(17)(D) 9 d366715dex9917d.htm AUDITED FINANCIAL STATEMENTS OF THE AR OF WA INSTIT. LIQUID RES. FYE 12/31/16 Audited Financial Statements of the AR of WA Instit. Liquid Res. FYE 12/31/16

Exhibit 17(d)

Statement of assets and liabilities

August 31, 2016

 

Assets:  

Investment in Liquid Reserves Portfolio, at value

   $ 6,179,609,426  

Receivable for Fund shares sold

     221,669  

Prepaid expenses

     116,931  

Total Assets

     6,179,948,026  
Liabilities:  

Distributions payable

     1,344,762  

Payable for Fund shares repurchased

     568,375  

Investment management fee payable

     525,157  

Service and/or distribution fees payable

     23,745  

Trustees’ fees payable

     16,385  

Accrued expenses

     150,459  

Total Liabilities

     2,628,883  
Total Net Assets    $ 6,177,319,143  
Net Assets:  

Par value (Note 5)

   $ 61,767  

Paid-in capital in excess of par value

     6,179,856,182  

Undistributed net investment income

     25,679  

Accumulated net realized loss on investments allocated from Liquid Reserves Portfolio

     (2,624,485)  
Total Net Assets    $ 6,177,319,143  
Net Assets:  

Institutional Shares

     $5,953,296,077  

Investor Shares

     $224,023,066  
Shares Outstanding:  

Institutional Shares

     5,952,671,688  

Investor Shares

     224,000,090  
Net Asset Value:  

Institutional Shares

     $1.00  

Investor Shares

     $1.00  

 

See Notes to Financial Statements.

 

Western Asset Institutional Liquid Reserves 2016 Annual Report   1


Statement of operations

For the Year Ended August 31, 2016

 

Investment Income:         

Income from Liquid Reserves Portfolio

   $ 31,918,766  

Allocated expenses from Liquid Reserves Portfolio

     (7,269,828)  

Allocated waiver from Liquid Reserves Portfolio

     6,610,580  

Other income

     30,079  

Total Investment Income

     31,289,597  
Expenses:  

Investment management fee (Note 2)

     13,559,787  

Service and/or distribution fees (Notes 2 and 3)

     550,784  

Legal fees

     230,533  

Trustees’ fees

     132,196  

Registration fees

     82,416  

Insurance

     75,345  

Shareholder reports

     66,147  

Transfer agent fees (Note 3)

     61,505  

Audit and tax fees

     33,280  

Fund accounting fees

     6,300  

Miscellaneous expenses

     37,912  

Total Expenses

     14,836,205  

Less: Fee waivers and/or expense reimbursements (Notes 2 and 3)

     (6,427,355)  

Net Expenses

     8,408,850  
Net Investment Income      22,880,747  
Net Realized Gain on Investments From Liquid Reserves Portfolio      218,229  
Increase in Net Assets From Operations    $ 23,098,976  

 

See Notes to Financial Statements.

 

2    Western Asset Institutional Liquid Reserves 2016 Annual Report


Statements of changes in net assets

 

 

For the Years Ended August 31,    2016      2015  
Operations:  

Net investment income

   $ 22,880,747      $ 4,951,509  

Net realized gain

     218,229        150,228  

Increase in Net Assets From Operations

     23,098,976        5,101,737  
Distributions to Shareholders From (Notes 1 and 4):  

Net investment income

     (22,880,747)        (4,949,478)  

Decrease in Net Assets From Distributions to Shareholders

     (22,880,747)        (4,949,478)  
Fund Share Transactions (Note 5):  

Net proceeds from sale of shares

     80,819,057,588        31,062,224,148  

Reinvestment of distributions

     8,970,953        1,920,839  

Cost of shares repurchased

     (80,197,245,487)        (29,919,133,505)  

Increase in Net Assets From Fund Share Transactions

     630,783,054        1,145,011,482  

Increase in Net Assets

     631,001,283        1,145,163,741  
Net Assets:  

Beginning of year

     5,546,317,860        4,401,154,119  

End of year*

   $ 6,177,319,143      $ 5,546,317,860  

*Includes undistributed net investment income of:

     $25,679        $25,679  

 

See Notes to Financial Statements.

 

Western Asset Institutional Liquid Reserves 2016 Annual Report   3


Financial highlights

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31:  
Institutional Shares   20161     20151     20141     20131     2012  
Net asset value, beginning of year     $1.000       $1.000       $1.000       $1.000       $1.000  
Income from operations:  

Net investment income

    0.004       0.001       0.001       0.001       0.002  

Net realized gain2

    0.000       0.000       0.000       0.000       0.000  

Total income from operations

    0.004       0.001       0.001       0.001       0.002  
Less distributions from:  

Net investment income

    (0.004)       (0.001)       (0.001)       (0.001)       (0.002)  

Total distributions

    (0.004)       (0.001)       (0.001)       (0.001)       (0.002)  
Net asset value, end of year     $1.000       $1.000       $1.000       $1.000       $1.000  

Total return3

    0.36     0.10     0.07     0.13     0.18
Net assets, end of year (millions)     $5,953       $4,988       $3,729       $4,696       $5,362  
Ratios to average net assets:  

Gross expenses4

    0.33 %5      0.33 %5      0.33 %5      0.33 %5      0.23

Net expenses4,6,7

    0.13       0.13       0.13       0.14       0.15  

Net investment income

    0.35       0.10       0.07       0.13       0.18  

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

Amount represents less than $0.0005 per share.

 

3 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio.

 

6 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

7 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

4    Western Asset Institutional Liquid Reserves 2016 Annual Report


For a share of each class of beneficial interest outstanding throughout each year ended August 31,
unless otherwise noted:
 
Investor Shares1   2016     2015     20142  
Net asset value, beginning of year     $1.000       $1.000       $1.000  
Income from operations:  

Net investment income

    0.003       0.001       0.000 3 

Net realized gain3

    0.000       0.000       0.000  

Total income from operations

    0.003       0.001       0.000 3 
Less distributions from:  

Net investment income

    (0.003)       (0.001)       (0.000) 3 

Total distributions

    (0.003)       (0.001)       (0.000) 3 
Net asset value, end of year     $1.000       $1.000       $1.000  

Total return4

    0.31     0.05     0.02
Net assets, end of year (millions)     $224       $110       $79  
Ratios to average net assets:  

Gross expenses5,6

    0.43     0.43     0.46 %7 

Net expenses6,8,9

    0.18       0.18       0.18 7 

Net investment income

    0.33       0.05       0.02 7 

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the period September 3, 2013 (inception date) to August 31, 2014.

 

3 

Amount represents less than $0.0005 per share.

 

4 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

5 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio.

 

6 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

 

7 

Annualized.

 

8 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Investor Shares did not exceed 0.35%. This expense limitation arrangement cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

9 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Western Asset Institutional Liquid Reserves 2016 Annual Report   5


Notes to financial statements

 

1. Organization and significant accounting policies

Western Asset Institutional Liquid Reserves (the “Fund”) is a separate diversified investment series of Legg Mason Partners Institutional Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund invests all of its investable assets in Liquid Reserves Portfolio (the “Portfolio”), a separate investment series of Master Portfolio Trust, that has the same investment objective as the Fund.

The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The Fund records its investment in the Portfolio at value. The value of such investment in the Portfolio reflects the Fund’s proportionate interest (12.4% at August 31, 2016) in the net assets of the Portfolio.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. The disclosure and valuation of securities held by the Portfolio are discussed in Note 1(a) of the Portfolio’s Notes to Financial Statements, which are included elsewhere in this report.

(b) Investment transactions and investment income. Net investment income of the Portfolio is allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Gross realized gains and/or losses of the Portfolio are allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation is closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders. The Fund also pays certain other expenses which can be directly attributed to the Fund.

(c) Distributions to shareholders. Distributions from net investment income on the shares of the Fund are declared each business day and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

 

6    Western Asset Institutional Liquid Reserves 2016 Annual Report


(d) Share class accounting. Investment income, common expenses and realized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

(e) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(f) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the Fund had no reclassifications.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, in accordance with the following breakpoint schedule:

 

Average Daily Net Assets      Annual Rate  
First $5 billion        0.200
Next $5 billion        0.175  
Over $10 billion        0.150  

Prior to August 29, 2016, the Fund paid an investment management fee that was calculated daily and payable monthly, in accordance with the following breakpoint schedule:

 

Average Daily Net Assets      Annual Rate  
First $1 billion        0.250
Next $1 billion        0.225  
Next $3 billion        0.200  
Next $5 billion        0.175  
Over $10 billion        0.150  

 

Western Asset Institutional Liquid Reserves 2016 Annual Report   7


Notes to financial statements (cont’d)

 

Since the Fund invests all of its investable assets in Liquid Reserves Portfolio, the investment management fee of the Fund will be reduced by the investment management fee allocated to the Fund by Liquid Reserves Portfolio.

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares and Investor Shares did not exceed 0.20% and 0.35%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2017 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the year ended August 31, 2016, fees waived and/or expenses reimbursed amounted to $6,427,355.

LMPFA is permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will LMPFA recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Class specific expenses, waivers and/or expense reimbursements

The Fund has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Fund pays service and/or distribution fees with respect to its SVB Securities Liquid Reserves Shares, SVB Securities Institutional Liquid Reserves Shares and Investor Shares calculated at the annual rate not to exceed 0.45%, 0.10% and 0.10% of the average daily net assets of each class, respectively. Service and/or distribution fees are accrued daily and paid monthly.

 

8    Western Asset Institutional Liquid Reserves 2016 Annual Report


For the year ended August 31, 2016, class specific expenses were as follows:

 

        Service and/or
Distribution Fees
       Transfer Agent
Fees
 
Institutional Shares               $ 51,280  
SVB Securities Liquid Reserves Shares1      $ 30,650 2         2,396  
SVB Securities Institutional Liquid Reserves Shares3        341,660 2         4,813  
Investor Shares        178,474 2         3,016  
Total      $ 550,784        $ 61,505  

 

1 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

2 

Amount shown is exclusive of waivers. For the year ended August 31, 2016, the service and/or distribution fees waived amounted to $18,205, $170,380 and $113,114, for SVB Securities Liquid Reserves Shares, SVB Securities Institutional Liquid Reserves Shares and Investor Shares, respectively. Such waivers are voluntary and may be reduced or terminated at any time.

 

3 

On August 26, 2016, SVB Securities Institutional Liquid Reserves shares were fully redeemed.

For the year ended August 31, 2016, waivers and/or expense reimbursements by class were as follows:

 

        Waivers/Expense
Reimbursements
 
Institutional Shares      $ 5,796,920  
SVB Securities Liquid Reserves Shares1        19,337  
SVB Securities Institutional Liquid Reserves Shares2        348,405  
Investor Shares        262,693  
Total      $ 6,427,355  

 

1 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

2 

On August 26, 2016, SVB Securities Institutional Liquid Reserves shares were fully redeemed.

4. Distributions to shareholders by class

 

        Year Ended
August 31, 2016
       Year Ended
August 31, 2015
 
Net Investment Income:  
Institutional Shares      $ 21,463,499        $ 4,777,435  
SVB Securities Liquid Reserves Shares1        3,415          1,794  
SVB Securities Institutional Liquid Reserves Shares2        826,057          132,323  
Investor Shares        587,776          37,926  
Total      $ 22,880,747        $ 4,949,478  

 

1 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

2 

On August 26, 2016, SVB Securities Institutional Liquid Reserves shares were fully redeemed.

5. Shares of beneficial interest

At August 31, 2016, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Funds have the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.

 

Western Asset Institutional Liquid Reserves 2016 Annual Report   9


Notes to financial statements (cont’d)

 

Transactions in shares of each class were as follows:

 

        Year Ended
August 31, 2016
       Year Ended
August 31, 2015
 
Institutional Shares  
Shares sold        80,193,502,127          30,239,570,506  
Shares issued on reinvestment        7,653,520          1,757,254  
Shares repurchased        (79,236,098,116)          (28,982,340,828)  
Net increase        965,057,531          1,258,986,932  
SVB Securities Liquid Reserves Shares1  
Shares sold        15,161,457          32,953,792  
Shares issued on reinvestment        2,940          1,772  
Shares repurchased        (23,204,182)          (54,596,611)  
Net decrease        (8,039,785)          (21,641,047)  
SVB Securities Institutional Liquid Reserves Shares2  
Shares sold        295,281,497          651,948,453  
Shares issued on reinvestment        777,169          132,323  
Shares repurchased        (736,575,512)          (775,107,764)  
Net decrease        (440,516,846)          (123,026,988)  
Investor Shares  
Shares sold        315,112,507          137,751,397  
Shares issued on reinvestment        537,324          29,490  
Shares repurchased        (201,367,677)          (107,088,302)  
Net increase        114,282,154          30,692,585  

 

1 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

2 

On August 26, 2016, SVB Securities Institutional Liquid Reserves shares were fully redeemed.

Because the Fund has maintained a $1.00 net asset value per share from inception, the number of shares sold, shares issued on reinvestment of dividends declared, and shares repurchased, is equal to the dollar amount shown in the Statements of Changes in Net Assets for the corresponding fund share transactions.

6. Income tax information and distributions to shareholders

The tax character of distributions paid during the fiscal years ended August 31, was as follows:

 

        2016        2015  
Distributions paid from:                      
Ordinary income      $ 22,880,747        $ 4,949,478  

As of August 31, 2016, there were no significant differences between the book and tax basis components of net assets.

 

10    Western Asset Institutional Liquid Reserves 2016 Annual Report


During the taxable year ended August 31, 2016, the Fund utilized $218,229 of its capital loss carryforward available from prior years. Additionally, as of August 31, 2016, the Fund had the following net capital loss carryforward remaining:

 

Year of Expiration      Amount  
8/31/2017      $ (2,624,485

This amount will be available to offset any future taxable capital gains.

7. Money market fund reform

The U.S. Securities and Exchange Commission has adopted certain reforms to the rules that govern money market funds (the “Reforms”). Under the Reforms, the Fund may no longer use the amortized cost method of valuation to seek to maintain a stable NAV of $1.00 per share. Instead, on or about October 11, 2016, the Fund will be required to calculate its NAV based on the current market-based value of its portfolio securities. In addition, as of that date, the Fund will use “basis point” rounding to calculate its share value to the nearest 1/100th of 1%, which means, that share prices will be rounded to four decimal places (i.e., $1.0000). In addition, no later than October 14, 2016, the Fund may impose fees upon the sale of shares or temporarily suspend the ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors.

8. Subsequent event

Subsequent to the year ended August 31, 2016, shareholder redemptions from Institutional Shares and Investor Shares exceeded 50% of Institutional Shares and Investor Shares net assets as of August 31, 2016.

 

Western Asset Institutional Liquid Reserves 2016 Annual Report   11


Report of independent registered public

accounting firm

 

The Board of Trustees and Shareholders

Legg Mason Partners Institutional Trust:

We have audited the accompanying statement of assets and liabilities of Western Asset Institutional Liquid Reserves (the “Fund”), a series of Legg Mason Partners Institutional Trust, as of August 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2016, by examination of the underlying Liquid Reserves Portfolio. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Institutional Liquid Reserves as of August 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

New York, New York

October 20, 2016

 

12    Western Asset Institutional Liquid Reserves 2016 Annual Report


Schedule of investments

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  
Short-Term Investments — 101.2%                                

Certificates of Deposit — 29.6%

                               

Abbey National Treasury Services PLC

    0.420     9/2/16     $ 411,424,000     $ 411,424,000  

Abbey National Treasury Services PLC

    0.410     9/7/16       51,636,000       51,636,000  

Bank of Montreal

    0.610     9/19/16       242,000,000       242,000,000  

Bank of Montreal

    0.630     9/20/16       238,928,000       238,927,997  

Bank of Montreal

    0.660     10/4/16       116,000,000       115,997,876  

Bank of Montreal

    0.900     1/4/17       246,750,000       246,750,000  

Bank of Nova Scotia

    0.860     9/8/16       475,000,000       475,000,000  

Bank of Nova Scotia

    0.904     1/3/17       437,784,000       437,784,000  (a) 

Bank of Tokyo-Mitsubishi UFJ NY

    0.764     10/3/16       198,856,000       198,856,000  (a) 

BNP Paribas NY Branch

    0.710     10/3/16       467,856,000       467,856,000  

BNP Paribas NY Branch

    1.128     2/13/17       149,100,000       149,100,000  (a) 

Canadian Imperial Bank of Commerce

    0.400     9/1/16       100,000,000       100,000,000  

Canadian Imperial Bank of Commerce

    0.870     9/14/16       81,800,000       81,800,000  

Canadian Imperial Bank of Commerce

    0.650     10/3/16       490,000,000       490,000,000  

Canadian Imperial Bank of Commerce

    0.894     1/3/17       452,784,000       452,784,000  (a) 

Chase Bank USA N.A.

    1.215     5/26/17       112,366,000       112,366,000  (a) 

Citibank N.A.

    0.650     10/3/16       500,000,000       500,000,000  

Citibank N.A.

    0.700     10/6/16       455,105,000       455,105,000  

Citibank N.A.

    0.720     10/24/16       272,820,000       272,820,000  

Citibank N.A.

    0.900     12/15/16       346,250,000       346,250,000  

Credit Suisse NY

    0.950     9/13/16       50,000,000       50,003,308  

Credit Suisse NY

    0.950     9/16/16       50,000,000       50,004,136  

Credit Suisse NY

    1.223     3/3/17       50,000,000       50,000,000  (a) 

DnB NOR Bank ASA

    0.390     9/7/16       86,590,000       86,590,000  

Landesbank Hessen-Thuringen

    0.610     9/22/16       139,356,000       139,356,000  

Landesbank Hessen-Thuringen

    0.650     10/4/16       150,000,000       150,000,000  

Mitsubishi UFJ Trust & Banking NY

    0.690     10/3/16       245,000,000       245,002,175  

Mitsubishi UFJ Trust & Banking NY

    0.880     10/5/16       96,300,000       96,300,453  

Mitsubishi UFJ Trust & Banking NY

    0.800     10/21/16       240,000,000       240,000,000  

Mitsubishi UFJ Trust & Banking NY

    1.020     12/22/16       151,819,000       151,819,000  

Mizuho Bank Ltd.

    0.744     10/3/16       443,856,000       443,856,000  (a) 

Mizuho Bank Ltd.

    0.750     10/13/16       38,928,000       38,928,000  

Mizuho Bank Ltd.

    0.800     10/21/16       243,250,000       243,250,000  

Mizuho Bank Ltd.

    0.900     11/22/16       186,854,000       186,854,000  

National Bank of Canada

    0.470     9/1/16       177,856,000       177,856,000  

Natixis NY

    0.860     10/31/16       417,856,000       417,856,000  

Norinchukin Bank

    0.460     9/7/16       100,000,000       100,000,000  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   13


Schedule of investments (cont’d)

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Certificates of Deposit — continued

                               

Norinchukin Bank

    0.650     9/9/16     $ 26,938,000     $ 26,938,000  

Norinchukin Bank

    0.660     9/16/16       174,428,000       174,428,721  

Norinchukin Bank

    0.600     9/26/16       272,500,000       272,500,000  

Norinchukin Bank

    0.600     9/29/16       195,000,000       195,000,000  

Norinchukin Bank

    0.900     11/22/16       190,747,000       190,747,000  

Norinchukin Bank

    0.900     11/28/16       70,070,000       70,070,000  

Norinchukin Bank

    0.900     11/29/16       73,963,000       73,963,000  

Oversea-Chinese Banking Corp. Ltd.

    0.600     9/8/16       77,856,000       77,856,000  

Oversea-Chinese Banking Corp. Ltd.

    0.410     9/9/16       221,590,000       221,590,000  

Oversea-Chinese Banking Corp. Ltd.

    0.560     9/20/16       295,000,000       295,000,000  

Royal Bank of Canada

    0.850     9/21/16       190,750,000       190,750,000  

Royal Bank of Canada

    0.940     11/1/16       195,418,000       195,489,345  

Skandinaviska Enskilda Banken AB

    0.850     10/21/16       69,058,000       69,067,481  

Skandinaviska Enskilda Banken AB

    0.910     12/14/16       107,325,000       107,325,000  

Sumitomo Mitsui Banking Corp.

    0.650     10/3/16       495,000,000       494,997,804  

Sumitomo Mitsui Banking Corp.

    0.744     10/3/16       202,856,000       202,856,000  (a) 

Sumitomo Mitsui Banking Corp.

    0.670     10/7/16       515,000,000       515,000,000  

Sumitomo Mitsui Banking Corp.

    0.800     10/17/16       238,928,000       238,928,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.420     9/1/16       77,856,000       77,856,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.420     9/6/16       71,410,000       71,410,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.650     9/26/16       100,000,000       100,000,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.690     9/27/16       75,000,000       74,999,990  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.700     9/29/16       33,478,000       33,477,996  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.700     10/5/16       244,464,000       244,464,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.620     10/17/16       127,249,000       127,249,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.900     10/21/16       480,000,000       480,000,000  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    1.238     2/13/17       24,400,000       24,400,000  (a) 

Toronto Dominion Bank NY

    0.410     9/6/16       10,121,000       10,121,000  

Toronto Dominion Bank NY

    0.620     10/19/16       112,891,000       112,891,000  

Toronto Dominion Bank NY

    0.920     1/9/17       120,000,000       120,000,000  

UBS AG

    0.690     10/20/16       373,392,000       373,392,000  

UBS AG

    0.980     1/11/17       19,464,000       19,464,000  

Wells Fargo Bank N.A.

    0.850     9/1/16       125,000,000       125,000,000  

Wells Fargo Bank N.A.

    0.850     10/7/16       48,660,000       48,674,503  

Wells Fargo Bank N.A.

    1.000     12/12/16       18,200,000       18,200,000  

Wells Fargo Bank N.A.

    0.896     12/28/16       362,784,000       362,784,000  (a) 

Westpac Banking Corp.

    0.870     9/16/16       29,429,000       29,429,122  

Total Certificates of Deposit

                            14,780,450,907  

 

See Notes to Financial Statements.

 

14    Liquid Reserves Portfolio 2016 Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — 40.3%

                               

Abbey National Treasury Services PLC

    0.500     9/1/16     $ 116,000,000     $ 116,000,000  (b) 

Abbey National Treasury Services PLC

    0.500     9/1/16       77,856,000       77,856,000  (b) 

Abbey National Treasury Services PLC

    0.914     9/14/16       99,750,000       99,717,221  (b) 

ABN AMRO Funding USA LLC

    0.864     9/1/16       232,000,000       232,000,000  (b)(c) 

ABN AMRO Funding USA LLC

    0.651     10/3/16       142,000,000       141,917,956  (b)(c) 

ABN AMRO Funding USA LLC

    0.651     10/3/16       100,000,000       99,942,222  (b)(c) 

ABN AMRO Funding USA LLC

    0.651     10/7/16       253,000,000       252,835,550  (b)(c) 

ABN AMRO Funding USA LLC

    0.701     10/18/16       50,000,000       49,954,305  (b)(c) 

ABN AMRO Funding USA LLC

    0.701     10/19/16       170,000,000       169,841,333  (b)(c) 

ABN AMRO Funding USA LLC

    0.975     12/2/16       33,730,000       33,646,387  (b)(c) 

ABN AMRO Funding USA LLC

    1.003     12/21/16       31,142,000       31,045,979  (b)(c) 

ANZ National International Ltd.

    0.650     9/7/16       36,205,000       36,201,078  (b)(c) 

ANZ National International Ltd.

    0.874     9/9/16       85,000,000       84,983,567  (b)(c) 

ANZ National International Ltd.

    0.884     9/12/16       100,000,000       99,973,111  (b)(c) 

ANZ National International Ltd.

    0.914     1/5/17       100,000,000       99,681,500  (b)(c) 

ANZ National International Ltd.

    1.108     2/21/17       48,600,000       48,600,000  (a)(c) 

ASB Finance Ltd.

    0.844     9/2/16       75,000,000       74,998,250  (b)(c) 

ASB Finance Ltd.

    1.135     3/2/17       88,000,000       88,000,000  (a)(c) 

Australia & New Zealand Banking Group Ltd.

    0.601     9/16/16       455,000,000       454,886,250  (b)(c) 

Australia & New Zealand Banking Group Ltd.

    0.601     9/20/16       395,000,000       394,874,917  (b)(c) 

Australia & New Zealand Banking Group Ltd.

    0.601     9/21/16       95,571,000       95,539,143  (b)(c) 

Australia & New Zealand Banking Group Ltd.

    0.651     10/3/16       583,000,000       582,663,155  (b)(c) 

Bank Nederlandse Gemeenten NV

    0.420     9/6/16       225,000,000       224,986,875  (b)(c) 

Bank Nederlandse Gemeenten NV

    0.440     9/7/16       60,000,000       59,995,600  (b)(c) 

Bank of Nova Scotia

    0.850     9/20/16       116,784,000       116,731,609  (b)(c) 

Bank of Nova Scotia

    0.874     9/23/16       192,330,000       192,227,744  (b)(c) 

Bank of Nova Scotia

    0.651     9/27/16       100,000,000       99,953,056  (b)(c) 

Bank of Nova Scotia

    0.651     9/28/16       500,000,000       499,756,250  (b)(c) 

Bank of Tokyo-Mitsubishi UFJ NY

    0.300     9/1/16       475,000,000       475,000,000  (a) 

BNP Paribas Fortis SA

    0.300     9/1/16       485,000,000       485,000,000  (b) 

BNP Paribas Fortis SA

    1.003     12/1/16       184,700,000       184,233,120  (b) 

BNP Paribas NY Branch

    0.711     10/21/16       195,000,000       194,807,709  (b) 

BNZ International Funding Ltd.

    1.133     3/1/17       235,000,000       235,000,000  (a)(c) 

Caisse des Depots et Consignations

    0.701     10/4/16       78,010,000       77,959,944  (b)(d) 

Caisse des Depots et Consignations

    0.641     10/6/16       500,000,000       499,688,888  (b)(d) 

Commonwealth Bank of Australia

    0.601     9/19/16       245,000,000       244,926,500  (b)(c) 

Commonwealth Bank of Australia

    0.888     1/11/17       99,750,000       99,750,000  (a)(c) 

Cooperatieve Rebobank U.A.

    0.840     9/15/16       91,161,000       91,131,221  (b) 

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   15


Schedule of investments (cont’d)

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

Cooperatieve Rebobank U.A.

    0.751     11/14/16     $ 35,035,000     $ 34,980,988  (b) 

CPPIB Capital Inc.

    0.450     9/27/16       14,014,000       14,009,445  (b)(d) 

Credit Agricole Corporate and Investment Bank

    0.320     9/1/16       96,584,000       96,584,000  (b) 

Credit Agricole Corporate and Investment Bank

    0.470     9/6/16       450,000,000       449,970,625  (b) 

Credit Agricole Corporate and Investment Bank

    0.801     10/20/16       77,856,000       77,771,223  (b) 

Credit Agricole Corporate and Investment Bank

    0.862     10/31/16       245,000,000       244,648,834  (b) 

Credit Suisse NY

    1.005     9/19/16       172,270,000       172,183,865  (b) 

Credit Suisse NY

    1.005     9/19/16       19,464,000       19,454,268  (b) 

Credit Suisse NY

    0.782     9/29/16       177,700,000       177,592,195  (b) 

Credit Suisse NY

    0.782     9/29/16       77,856,000       77,808,767  (b) 

Danske Corp.

    0.620-0.859     9/1/16       144,948,000       144,948,000  (b)(c) 

Danske Corp.

    0.620-0.859     9/1/16       100,000,000       100,000,000  (b)(c) 

Danske Corp.

    0.601     9/19/16       390,000,000       389,883,000  (b)(c) 

Danske Corp.

    0.661     10/17/16       143,998,000       143,876,562  (b)(c) 

DBS Bank Ltd.

    0.591     9/8/16       200,000,000       199,977,055  (b)(c) 

DBS Bank Ltd.

    0.650     9/21/16       69,136,000       69,111,034  (b)(c) 

DBS Bank Ltd.

    0.651     9/23/16       100,000,000       99,960,889  (b)(c) 

DBS Bank Ltd.

    0.651     9/23/16       100,000,000       99,960,278  (b)(c) 

DBS Bank Ltd.

    0.651     10/11/16       31,142,000       31,119,509  (b)(c) 

DBS Bank Ltd.

    0.904     12/14/16       237,000,000       236,383,800  (b)(c) 

DBS Bank Ltd.

    0.913     12/20/16       166,784,000       166,320,248  (b)(c) 

DnB NOR Bank ASA

    0.864     9/1/16       89,000,000       89,000,000  (b)(c) 

DnB NOR Bank ASA

    0.884     9/12/16       95,000,000       94,974,456  (b)(c) 

HSBC Bank PLC

    1.008     11/18/16       38,400,000       38,316,800  (b)(c) 

ING U.S. Funding LLC

    0.702     9/7/16       250,000,000       249,970,833  (b) 

ING U.S. Funding LLC

    0.702     9/8/16       90,000,000       89,987,750  (b) 

Kreditanstalt Fur Wiederaufbau International Finance Inc.

    0.420     9/2/16       250,000,000       249,997,083  (b) 

Landesbank Hessen-Thuringen

    0.864     9/1/16       98,000,000       98,000,000  (b)(c) 

Landesbank Hessen-Thuringen

    0.884     9/21/16       142,500,000       142,430,333  (b)(c) 

Landesbank Hessen-Thuringen

    0.752     11/8/16       432,499,000       431,886,293  (b)(c) 

Landesbank Hessen-Thuringen

    0.955     12/1/16       239,750,000       239,174,267  (b)(c) 

Mizuho Bank Ltd.

    0.907     11/23/16       89,534,000       89,347,185  (b)(c) 

National Australia Bank Ltd.

    0.701     11/2/16       67,734,000       67,652,343  (b)(c) 

National Bank of Canada

    0.490     9/28/16       300,000,000       299,889,749  (b)(c) 

National Bank of Canada

    0.490     9/28/16       77,856,000       77,827,388  (b)(c) 

Natixis NY

    0.300     9/1/16       100,000,000       100,000,000  (b) 

Nordea Bank AB

    0.601     9/20/16       110,000,000       109,965,167  (b)(c) 

 

See Notes to Financial Statements.

 

16    Liquid Reserves Portfolio 2016 Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

Nordea Bank AB

    0.601     9/20/16     $ 23,356,000     $ 23,348,604  (b)(c) 

NRW Bank

    0.611     9/15/16       179,500,000       179,457,419  (b)(c) 

NRW Bank

    0.621     9/19/16       107,000,000       106,966,830  (b)(c) 

NRW Bank

    0.621     9/20/16       245,000,000       244,919,831  (b)(c) 

NRW Bank

    0.621     9/20/16       70,000,000       69,980,050  (b)(c) 

NRW Bank

    0.546     9/21/16       500,000,000       499,848,611  (b)(c) 

NRW Bank

    0.546     9/22/16       500,000,000       499,841,041  (b)(c) 

NRW Bank

    0.621     9/23/16       379,250,000       379,106,306  (b)(c) 

Ontario Teachers’ Finance Trust

    0.905     9/1/16       100,000,000       100,000,000  (b)(c) 

Ontario Teachers’ Finance Trust

    0.900     9/6/16       77,856,000       77,846,268  (b)(c) 

Ontario Teachers’ Finance Trust

    0.995     12/20/16       92,310,000       92,030,762  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.601     9/6/16       135,000,000       134,988,750  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.712     10/24/16       163,928,000       163,756,650  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.712     10/25/16       100,000,000       99,893,500  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.752     11/10/16       35,000,000       34,948,958  (b)(c) 

Sanofi

    0.682     11/14/16       96,450,000       96,315,184  (b)(c) 

Societe Generale

    0.300-0.400     9/1/16       523,000,000       523,000,000  (b)(c) 

Societe Generale

    0.300-0.400     9/1/16       77,856,000       77,856,000  (b)(c) 

Societe Generale

    0.702     9/9/16       134,000,000       133,979,156  (b)(c) 

Sumitomo Mitsui Banking Corp.

    0.902     11/28/16       163,497,000       163,137,307  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.884     9/16/16       182,500,000       182,433,083  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.651     9/26/16       150,000,000       149,932,292  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.651     9/29/16       280,000,000       279,858,444  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.762     10/3/16       143,000,000       142,903,395  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.762     10/3/16       27,249,000       27,230,592  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.772     10/14/16       183,392,000       183,223,330  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.802     10/18/16       195,000,000       194,796,334  (b)(c) 

Svenska Handelsbanken AB

    0.830     9/7/16       33,478,000       33,473,369  (b)(c) 

Svenska Handelsbanken AB

    0.601     9/21/16       228,928,000       228,851,690  (b)(c) 

Swedish Export Credit

    0.834     9/23/16       288,000,000       287,853,920  (b) 

Toronto Dominion Holdings USA

    0.651     10/7/16       390,000,000       389,746,500  (b)(c) 

Toronto Dominion Holdings USA

    0.651     10/7/16       77,856,000       77,805,394  (b)(c) 

Toronto Dominion Holdings USA

    0.904     1/5/17       646,750,000       644,712,737  (b)(c) 

United Overseas Bank Ltd.

    0.440     9/9/16       200,000,000       199,980,445  (b)(c) 

United Overseas Bank Ltd.

    0.530     9/26/16       229,675,000       229,590,467  (b)(c) 

United Overseas Bank Ltd.

    0.712     10/7/16       212,856,000       212,704,872  (b)(c) 

United Overseas Bank Ltd.

    0.702     10/21/16       188,928,000       188,744,320  (b)(c) 

Westpac Banking Corp.

    0.864     9/16/16       100,000,000       99,964,167  (b)(c) 

Total Commercial Paper

                            20,116,297,250  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   17


Schedule of investments (cont’d)

August 31, 2016

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Corporate Bonds & Notes — 0.0%

                               

Coca-Cola Co.

    1.800     9/1/16     $ 22,030,000     $ 22,030,000  

Medium-Term Notes — 0.0%

                               

Toronto-Dominion Bank

    0.811     9/8/16       19,464,000       19,464,907  

Time Deposits — 13.7%

                               

BNP Paribas NY Branch

    0.300     9/1/16       275,000,000       275,000,000  

CIBC World Markets Corp.

    0.300     9/1/16       381,905,000       381,905,000  

Credit Agricole CIB

    0.320     9/1/16       1,117,216,000       1,117,216,000  

DNB Bank ASA

    0.300     9/1/16       830,000,000       830,000,000  

Natixis SA

    0.300     9/1/16       1,150,000,000       1,150,000,000  

Nordea Bank Finland PLC

    0.290     9/1/16       405,000,000       405,000,000  

Skandinaviska Enskilda Banken AB

    0.300     9/1/16       900,000,000       900,000,000  

Svenska Handelsbanken AB

    0.300     9/1/16       875,000,000       875,000,000  

Swedbank AB

    0.300     9/1/16       880,000,000       880,000,000  

Total Time Deposits

                            6,814,121,000  

U.S. Government Agencies — 0.8%

                               

Federal Home Loan Mortgage Corp. (FHLMC), Notes

    0.564     4/27/17       377,856,000       377,805,836  (a) 

U.S. Treasury Bills — 0.4%

                               

U.S. Treasury Bills

    0.475     6/22/17       180,000,000       179,304,690  (b) 

U.S. Treasury Notes — 13.5%

                               

U.S. Treasury Notes

    0.388     10/31/16       1,192,389,000       1,192,367,302  (a) 

U.S. Treasury Notes

    0.409     4/30/17       1,331,819,000       1,331,837,509  (a) 

U.S. Treasury Notes

    0.412     7/31/17       2,108,454,000       2,108,209,796  (a) 

U.S. Treasury Notes

    0.503     10/31/17       616,280,000       616,129,396  (a) 

U.S. Treasury Notes

    0.607     1/31/18       18,296,000       18,308,794  (a) 

U.S. Treasury Notes

    0.525     4/30/18       1,132,065,000       1,132,163,652  (a) 

U.S. Treasury Notes

    0.509     7/31/18       320,000,000       320,016,441  (a) 

Total U.S. Treasury Notes

                            6,719,032,890  

Repurchase Agreements — 2.9%

                               

Bank of America Corp. tri-party repurchase agreement dated 8/31/16; Proceeds at maturity — $1,151,309,722; (Fully collateralized by various U.S. government agency obligations and corporate bonds and notes, 0.000% to 8.875% due 9/1/16 to 10/15/97; Market value — $1,191,333,534)

    0.500     11/21/16       1,150,000,000       1,150,000,000  

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 8/24/16; Proceeds at maturity — $200,298,111; (Fully collateralized by various corporate bonds and notes and money market instruments, 0.000% to 6.191% due 10/5/16 to 12/1/45; Market value — $211,079,417)

    0.654     11/21/16       200,000,000       200,000,000  

 

See Notes to Financial Statements.

 

18    Liquid Reserves Portfolio 2016 Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Repurchase Agreements — continued

                               

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 8/24/16; Proceeds at maturity — $100,149,056; (Fully collateralized by various corporate bonds and notes, municipal bonds and money market instruments, 0.000% to 7.672% due 12/1/17 to 10/1/47; Market value — $105,000,002)

    0.654     11/21/16     $ 100,000,000     $ 100,000,000  

Total Repurchase Agreements

                            1,450,000,000  

Total Investments — 101.2% (Cost — $50,478,507,480#)

 

            50,478,507,480  

Liabilities in Excess of Other Assets — (1.2)%

                            (575,336,084

Total Net Assets — 100.0%

                          $ 49,903,171,396  

 

(a) 

Variable rate security. Interest rate disclosed is as of the most recent information available.

 

(b) 

Rate shown represents yield-to-maturity.

 

(c) 

Commercial paper exempt from registration under Section 4(2) of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

(d) 

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

# Aggregate cost for federal income tax purposes is substantially the same.

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   19


Statement of assets and liabilities

August 31, 2016

 

Assets:         

Investments, at value

   $ 50,478,507,480  

Cash

     650  

Interest receivable

     20,899,611  

Total Assets

     50,499,407,741  
Liabilities:         

Payable for securities purchased

     594,590,000  

Trustees’ fees payable

     81,164  

Accrued expenses

     1,565,181  

Total Liabilities

     596,236,345  
Total Net Assets    $ 49,903,171,396  
Represented by:         
Paid-in-capital    $ 49,903,171,396  

 

See Notes to Financial Statements.

 

20    Liquid Reserves Portfolio 2016 Annual Report


Statement of operations

For the Year Ended August 31, 2016

 

Investment Income:         

Interest

   $ 250,622,980  
Expenses:         

Investment management fee (Note 2)

     52,782,907  

Fund accounting fees

     2,809,948  

Legal fees

     972,863  

Trustees’ fees

     964,887  

Custody fees

     324,368  

Audit and tax fees

     45,230  

Miscellaneous expenses

     95,894  

Total Expenses

     57,996,097  

Less: Fee waivers and/or expense reimbursements (Note 2)

     (52,782,907)  

Net Expenses

     5,213,190  
Net Investment Income      245,409,790  
Net Realized Gain on Investments      686,995  
Increase in Net Assets From Operations    $ 246,096,785  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   21


Statements of changes in net assets

 

For the Years Ended August 31,    2016      2015  
Operations:                  

Net investment income

   $ 245,409,790      $ 143,882,505  

Net realized gain

     686,995        701,909  

Increase in Net Assets From Operations

     246,096,785        144,584,414  
Capital Transactions:                  

Proceeds from contributions

     114,933,457,934        96,487,778,857  

In-kind capital contributions (Note 3)

     10,124,686,062         

Value of withdrawals

     (138,942,587,255)        (107,494,184,065)  

Decrease in Net Assets From Capital Transaction

     (13,884,443,259)        (11,006,405,208)  

Decrease in Net Assets

     (13,638,346,474)        (10,861,820,794)  
Net Assets:                  

Beginning of year

     63,541,517,870        74,403,338,664  

End of year*

   $ 49,903,171,396      $ 63,541,517,870  

 

See Notes to Financial Statements.

 

22    Liquid Reserves Portfolio 2016 Annual Report


Financial highlights

 

For the years ended August 31:  
     2016     2015     2014     2013     2012  
Net assets, end of year (millions)     $49,903       $63,542       $74,403       $73,576       $61,127  
Total return1     0.48     0.22     0.10     0.17     0.23
Ratios to average net assets:          

Gross expenses

    0.11     0.11     0.11     0.11     0.11

Net expenses2,3

    0.01       0.01       0.10       0.10       0.10  

Net investment income

    0.46       0.21       0.10       0.17       0.23  

 

1 

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

2 

The investment manager has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time. Prior to August 18, 2014, as a result of a voluntary expense limitation arrangement, the ratio of expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of the Portfolio did not exceed 0.10%.

 

3 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2016 Annual Report   23


Notes to financial statements

 

1. Organization and significant accounting policies

Liquid Reserves Portfolio (the “Portfolio”) is a separate diversified investment series of Master Portfolio Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Declaration of Trust permits the Trustees to issue beneficial interests in the Portfolio. At August 31, 2016, all investors in the Portfolio were funds advised or administered by the manager of the Portfolio and/or its affiliates.

The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. In accordance with Rule 2a-7 under the 1940 Act, money market instruments are valued at amortized cost, which approximates market value. This method involves valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost is subject to its compliance with certain conditions as specified by Rule 2a-7 under the 1940 Act.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Portfolio’s pricing policies, and reporting to the Board of Trustees.

The Portfolio uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

 

Level 1 — quoted prices in active markets for identical investments

 

 

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

 

Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments)

 

24    Liquid Reserves Portfolio 2016 Annual Report


The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

 

ASSETS  
Description   Quoted Prices
(Level 1)
    Other Significant
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
Short-term investments†         $ 50,478,507,480           $ 50,478,507,480  

 

See Schedule of Investments for additional detailed categorizations.

(b) Repurchase agreements. The Portfolio may enter into repurchase agreements with institutions that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Portfolio acquires a debt security subject to an obligation of the seller to repurchase, and of the Portfolio to resell, the security at an agreed-upon price and time, thereby determining the yield during the Portfolio’s holding period. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian, acting on the Portfolio’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Portfolio generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Portfolio seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Portfolio may be delayed or limited.

(c) Interest income and expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.

(d) Method of allocation. Net investment income of the Portfolio is allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Gross realized gains and/or losses of the Portfolio are allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation is closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders.

(e) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these

 

Liquid Reserves Portfolio 2016 Annual Report   25


Notes to financial statements (cont’d)

 

underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

(f) Compensating balance arrangements. The Portfolio has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Portfolio’s cash on deposit with the bank.

(g) Income taxes. The Portfolio is classified as a partnership for federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Therefore, no federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of Subchapter M of the Internal Revenue Code.

Management has analyzed the Portfolio’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Portfolio’s financial statements. The Portfolio’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(h) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.

LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Portfolio.

LMPFA has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the year ended August 31, 2016, fees waived and/or expenses reimbursed amounted to $52,782,907.

 

26    Liquid Reserves Portfolio 2016 Annual Report


LMPFA is permitted to recapture amounts waived and/or reimbursed to the Portfolio during the same fiscal year under certain circumstances.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Investments

On August 29, 2016, Western Asset Institutional Cash Reserves Fund transferred all of its investable assets (including cash and receivables), with a value of $10,124,686,062, to the Portfolio in exchange for an interest in the Portfolio.

4. Derivative instruments and hedging activities

During the year ended August 31, 2016, the Portfolio did not invest in derivative instruments.

5. Money market fund reform

The U.S. Securities and Exchange Commission has adopted certain reforms to the rules that govern money market funds (the “Reforms”). Under the Reforms, the Portfolio may no longer use the amortized cost method of valuation to value its investments. Instead, on or about October 11, 2016, the Portfolio will value its investments using the current market-based value of its portfolio securities. In addition, no later than October 14, 2016, the Portfolio may impose fees upon the withdrawal of interests or temporarily suspend the withdrawal of interests if the Portfolio’s liquidity falls below required minimums because of market conditions or other factors. The Reforms require that feeder funds pass through to their investors such fees or gate imposed by a master fund in which a fund invests.

 

Liquid Reserves Portfolio 2016 Annual Report   27


Report of independent registered public

accounting firm

 

The Board of Trustees and Investors

Master Portfolio Trust:

We have audited the accompanying statement of assets and liabilities of Liquid Reserves Portfolio (the “Portfolio”), a series of Master Portfolio Trust, including the schedule of investments, as of August 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Portfolio’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2016, by correspondence with the custodian and broker or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Liquid Reserves Portfolio as of August 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

New York, New York

October 20, 2016

 

28    Liquid Reserves Portfolio 2016 Annual Report
EX-99.(17)(E) 10 d366715dex9917e.htm UNAUDITED FINANCIAL STATEMENTS OF THE SAR OF WA INSTIT. CASH RES. FYE 2/28/17 Unaudited Financial Statements of the SAR of WA Instit. Cash Res. FYE 2/28/17

Exhibit 17(e)

Statement of assets and liabilities (unaudited)

February 28, 2017

 

Assets:         

Investment in Liquid Reserves Portfolio, at value

   $ 3,160,733,696  

Prepaid expenses

     148,913  

Total Assets

     3,160,882,609  
Liabilities:         

Distributions payable

     1,442,229  

Investment management fee payable

     290,977  

Trustees’ fees payable

     8,625  

Service and/or distribution fees payable

     47  

Accrued expenses

     186,709  

Total Liabilities

     1,928,587  
Total Net Assets    $ 3,158,954,022  
Net Assets:         

Par value (Note 5)

   $ 31,576  

Paid-in capital in excess of par value

     3,157,607,758  

Undistributed net investment income

     193,251  

Accumulated net realized gain on investments allocated from Liquid Reserves Portfolio

     519,635  

Net unrealized appreciation on investments allocated from Liquid Reserves Portfolio

     601,802  
Total Net Assets    $ 3,158,954,022  
Net Assets:         

Institutional Shares

     $3,158,877,761  

Investor Shares

     $76,261  
Shares Outstanding:         

Institutional Shares

     3,157,549,600  

Investor Shares

     76,227  
Net Asset Value:         

Institutional Shares

     $1.00  

Investor Shares

     $1.00  

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2017 Semi-Annual Report   1


Statement of operations (unaudited)

For the Six Months Ended February 28, 2017

 

Investment Income:         

Income from Liquid Reserves Portfolio

   $ 13,832,809  

Allocated expenses from Liquid Reserves Portfolio

     (2,164,498)  

Allocated waiver from Liquid Reserves Portfolio

     1,919,636  

Other income

     7,870  

Total Investment Income

     13,595,817  
Expenses:         

Investment management fee (Note 2)

     3,731,770  

Legal fees

     103,499  

Transfer agent fees (Note 3)

     68,777  

Service and/or distribution fees (Notes 2 and 3)

     68,154  

Registration fees

     67,856  

Insurance

     64,166  

Trustees’ fees

     45,976  

Shareholder reports

     29,938  

Audit and tax fees

     16,220  

Fund accounting fees

     3,124  

Excise tax (Note 1)

     107  

Miscellaneous expenses

     34,067  

Total Expenses

     4,233,654  

Less: Fee waivers and/or expense reimbursements (Notes 2 and 3)

     (1,663,189)  

Net Expenses

     2,570,465  
Net Investment Income      11,025,352  
Net Realized Gain on Investments From Liquid Reserves Portfolio      401,961  
Change in Net Unrealized Appreciation (Depreciation) From Investments in
Liquid Reserves Portfolio
     601,802  
Increase in Net Assets From Operations    $ 12,029,115  

 

See Notes to Financial Statements.

 

2    Western Asset Institutional Cash Reserves 2017 Semi-Annual Report


Statements of changes in net assets

 

For the Six Months Ended February 28, 2017 (unaudited)
and the Year Ended August 31, 2016
   2017      2016  
Operations:                  

Net investment income

   $ 11,025,352      $ 36,946,011  

Net realized gain

     401,961        145,615  

Change in net unrealized appreciation (depreciation)

     601,802         

Increase in Net Assets From Operations

     12,029,115        37,091,626  
Distributions to Shareholders From (Notes 1 and 4):                  

Net investment income

     (11,017,484)        (36,946,018)  

Decrease in Net Assets From Distributions to Shareholders

     (11,017,484)        (36,946,018)  
Fund Share Transactions (Note 5):                  

Net proceeds from sale of shares

     20,364,331,586        133,820,356,655  

Reinvestment of distributions

     2,837,267        17,796,141  

Cost of shares repurchased

     (26,958,781,532)        (136,475,603,210)  

Decrease in Net Assets From Fund Share Transactions

     (6,591,612,679)        (2,637,450,414)  

Decrease in Net Assets

     (6,590,601,048)        (2,637,304,806)  
Net Assets:                  

Beginning of period

     9,749,555,070        12,386,859,876  

End of period*

   $ 3,158,954,022      $ 9,749,555,070  

*Includes undistributed net investment income of:

     $193,251        $185,383  

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2017 Semi-Annual Report   3


Financial highlights

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31,
unless otherwise noted:
 
Institutional Shares   20171,2     20161,3     20151     20141     20131     2012  
Net asset value, beginning of period     $1.000       $1.000       $1.000       $1.000       $1.000       $1.000  
Income (loss) from operations:            

Net investment income

    0.003       0.003       0.001       0.001       0.001       0.002  

Net realized and unrealized gain (loss)4

    0.000       0.000       0.000       0.000       0.000       (0.000)  

Total income from operations

    0.003       0.003       0.001       0.001       0.001       0.002  
Less distributions from:            

Net investment income

    (0.003)       (0.003)       (0.001)       (0.001)       (0.001)       (0.002)  

Net realized gains

                      (0.000) 4      (0.000) 4      (0.000) 4 

Total distributions

    (0.003)       (0.003)       (0.001)       (0.001)       (0.001)       (0.002)  
Net asset value, end of period     $1.000       $1.000       $1.000       $1.000       $1.000       $1.000  

Total return5

    0.35     0.34     0.09     0.07     0.12     0.18
Net assets, end of period (millions)     $3,159       $9,420       $10,950       $7,759       $7,747       $8,896  
Ratios to average net assets:            

Gross expenses6

    0.33 %7,8      0.32 %8      0.32 %8      0.32 %8      0.32 %8      0.22

Net expenses6,9,10

    0.15 7      0.12       0.11       0.11       0.13       0.14  

Net investment income

    0.58 7      0.33       0.09       0.07       0.12       0.18  

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the six months ended February 28, 2017 (unaudited).

 

3 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio.

 

4 

Amount represents less than $0.0005 per share.

 

5 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

6 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

7 

Annualized.

 

8 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

9 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time. Prior to August 29, 2016, the expense limitation was 0.25%.

 

10 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

4    Western Asset Institutional Cash Reserves 2017 Semi-Annual Report


Financial highlights (cont’d)

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31,

unless otherwise noted:

 
Investor Shares   20171,2     20161,3     20151     20141,4  
Net asset value, beginning of period     $1.000       $1.000       $1.000       $1.000  
Income (loss) from operations:        

Net investment income

    0.002       0.003       0.000 5      0.000 5 

Net realized and unrealized gain (loss)5

    0.000       0.000       0.000       (0.000)  

Total income from operations

    0.002       0.003       0.000 5      0.000 5 
Less distributions from:        

Net investment income

    (0.002)       (0.003)       (0.000) 5      (0.000) 5 

Net realized gains

                      (0.000) 5 

Total distributions

    (0.002)       (0.003)       (0.000) 5      (0.000) 5 
Net asset value, end of period     $1.000       $1.000       $1.000       $1.000  

Total return6

    0.20     0.29     0.04     0.02
Net assets, end of period (000s)     $76       $52,708       $112,735       $64,316  
Ratios to average net assets:        

Gross expenses7,8

    0.54 %9      0.42     0.42     0.44 %9 

Net expenses7,10,11

    0.20 9      0.17       0.16       0.16 9 

Net investment income

    0.41 9      0.30       0.05       0.01 9 

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the period December 20, 2016 (re-inception date) to February 28, 2017 (unaudited). Investor Shares were fully redeemed on October 13, 2016 and resumed operations on December 20, 2016 upon shareholder investment.

 

3 

On August 29, 2016, Western Asset Institutional Cash Reserves began investing, as a feeder fund, in Liquid Reserves Portfolio. Prior to August 29, 2016, Western Asset Institutional Cash Reserves invested, as a feeder fund, in Prime Cash Reserves Portfolio.

 

4 

For the period September 3, 2013 (inception date) to August 31, 2014.

 

5 

Amount represents less than $0.0005 per share.

 

6 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

7 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses. Includes the Fund’s share of Prime Cash Reserves Portfolio’s allocated expenses prior to August 29, 2016.

 

8 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

 

9 

Annualized.

 

10 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Investor Shares did not exceed 0.35%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

11 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Western Asset Institutional Cash Reserves 2017 Semi-Annual Report   5


Notes to financial statements (unaudited)

 

1. Organization and significant accounting policies

Western Asset Institutional Cash Reserves (the “Fund”) is a separate diversified investment series of Legg Mason Partners Institutional Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Effective August 29, 2016, the Fund invests all of its investable assets in Liquid Reserves Portfolio (the “Portfolio”), a separate investment series of Master Portfolio Trust, that has the same investment objective as the Fund in what is called a master-feeder structure.

Prior to August 29, 2016, the Fund was feeder fund that invested in securities through a different underlying mutual fund, Prime Cash Reserves Portfolio that had the same investment objective and strategies as the Fund, in a master-feeder structure.

The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.

Effective October 11, 2016, the share price of the Fund fluctuates along with changes in the market-based value of fund assets. Because the share price of the Fund fluctuates, it has what is called a “floating net asset value” or “floating NAV”. Under Rule 2a-7 of the 1940 Act, the Fund must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Effective October 14, 2016, the Fund may impose fees upon the sale of shares or temporarily suspend the ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The Fund records its investment in the Portfolio at value. The value of such investment in the Portfolio reflects the Fund’s proportionate interest (12.13% at February 28, 2017) in the net assets of the Portfolio.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. The disclosure and valuation of securities held by the Portfolio are discussed in Note 1(a) of the Portfolio’s Notes to Financial Statements, which are included elsewhere in this report.

(b) Investment transactions and investment income. Net investment income and net realized/unrealized gains and losses of the Portfolio are allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Prior to October 11, 2016, gross realized gains

 

6    Western Asset Institutional Cash Reserves 2017 Semi-Annual Report


and/or losses of the Portfolio were allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation was closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders. The Fund also pays certain other expenses which can be directly attributed to the Fund.

(c) Distributions to shareholders. Distributions from net investment income on the shares of the Fund are declared each business day and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(d) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

(e) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

However, due to the timing of when distributions are made by the Fund, the Fund may be subject to an excise tax of 4% of the amount by which 98% of the Fund’s annual taxable income and 98.2% of net realized gains exceed the distributions from such taxable income and realized gains for the calendar year. The Fund paid an additional $107 of federal excise taxes attributable to calendar year 2014 in October 2016.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(f) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

 

Western Asset Institutional Cash Reserves 2017 Semi-Annual Report   7


Notes to financial statements (unaudited) (cont’d)

 

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and payable monthly, in accordance with the following breakpoint schedule:

 

Average Daily Net Assets      Annual Rate  
First $5 billion        0.200
Next $5 billion        0.175  
Over $10 billion        0.150  

Prior to August 29, 2016, the Fund paid an investment management fee at an annual rate of 0.20% of the Fund’s average daily net assets.

Since the Fund invests all of its investable assets in Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016), the investment management fee of the Fund will be reduced by the investment management fee allocated to the Fund by Liquid Reserves Portfolio (Prime Cash Reserves Portfolio prior to August 29, 2016).

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset monthly 70% of the net management fee it receives from the Fund.

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of, Institutional Shares, and Investor Shares did not exceed 0.20%, and 0.35%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time. Prior to full redemptions, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class L shares and Class S shares, did not exceed 0.30% and 0.45%, respectively.

During the six months ended February 28, 2017, fees waived and/or expenses reimbursed amounted to $1,663,189.

LMPFA is permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will LMPFA recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

 

8    Western Asset Institutional Cash Reserves 2017 Semi-Annual Report


3. Class specific expenses, waivers and/or expense reimbursements

The Fund has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Fund pays a service and/or distribution fee with respect to its Class L shares, Class S shares, and Investor Shares calculated at the annual rate of 0.10%, 0.25%, and 0.10% of the average daily net assets of each class, respectively. Service and/or distribution fees are accrued daily and paid monthly.

For the six months ended February 28, 2017, class specific expenses were as follows:

 

        Service and/or
Distribution Fees
       Transfer Agent
Fees
 
Class L2      $ 64,117 1       $ 29,058  
Institutional Shares                 33,998  
Class S3        157 1         1,029  
Investor Shares4        3,880 1         4,692  
Total      $ 68,154        $ 68,777  

 

1 

Amount shown is exclusive of waivers. For the six months ended February 28, 2017, the service and/or distribution fees waived amounted to $32,059 for Class L shares, $125 for Class S shares, and $1,940 for Investor shares. Such waivers are voluntarily and may be reduced or terminated at any time.

 

2 

On February 24, 2017, Class L shares were fully redeemed.

 

3 

On November 4, 2016, Class S shares were fully redeemed.

 

4 

Investor shares were fully redeemed on October 13, 2016 and resumed operations on December 20, 2016 upon shareholder investment.

For the six months ended February 28, 2017, waivers and/or expense reimbursements by class were as follows:

 

        Waivers/Expense
Reimbursements
 
Class L1      $ 136,997  
Institutional Shares        1,515,949  
Class S2        1,136  
Investor Shares3        9,107  
Total      $ 1,663,189  

 

1 

On February 24, 2017, Class L shares were fully redeemed.

 

2 

On November 4, 2016, Class S shares were fully redeemed.

 

3 

Investor shares were fully redeemed on October 13, 2016 and resumed operations on December 20, 2016 upon shareholder investment.

 

Western Asset Institutional Cash Reserves 2017 Semi-Annual Report   9


Notes to financial statements (unaudited) (cont’d)

 

4. Distributions to shareholders by class

 

        Six Months Ended
February 28, 2017
       Year Ended
August 31, 2016
 
Net Investment Income:                      
Class L1      $ 281,497        $ 2,107,116  
Institutional Shares        10,719,755          34,029,491  
Class S2        186          193,349  
SVB Securities Horizon Shares3                 129,622  
Investor Shares        16,046 4         486,440  
Total      $ 11,017,484        $ 36,946,018  

 

1 

On February 24, 2017, Class L shares were fully redeemed.

 

2 

On November 4, 2016, Class S shares were fully redeemed.

 

3 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

4 

Investor shares were fully redeemed on October 13, 2016 and resumed operations on December 20, 2016 upon shareholder investment.

5. Shares of beneficial interest

At February 28, 2017, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.

Transactions in shares of each class were as follows:

 

    Six Months Ended
February 28, 2017
    Year Ended
August 31, 2016
 
     Shares     Amount     Shares     Amount  
Class L1                                
Shares sold     844,931,378     $ 844,938,007       6,261,124,866     $ 6,261,124,866  
Shares issued on reinvestment     167,215       167,240       793,780       793,780  
Shares repurchased     (1,121,550,421)       (1,121,623,153)       (6,995,881,227)       (6,995,881,227)  
Net decrease     (276,451,828)     $ (276,517,906)       (733,962,581)     $ (733,962,581)  
Institutional Shares                                
Shares sold     19,516,134,061     $ 19,517,320,537       126,819,974,272     $ 126,819,974,272  
Shares issued on reinvestment     2,668,541       2,668,975       16,224,505       16,224,505  
Shares repurchased     (25,780,836,293)       (25,781,807,373)       (128,366,246,145)       (128,366,246,145)  
Net decrease     (6,262,033,691)     $ (6,261,817,861)       (1,530,047,368)     $ (1,530,047,368)  
Class S2                                
Shares sold     3,492     $ 3,486       286,790,538     $ 286,790,538  
Shares issued on reinvestment     176       176       178,436       178,436  
Shares repurchased     (646,066)       (646,156)       (419,919,342)       (419,919,342)  
Net decrease     (642,398)     $ (642,494)       (132,950,368)     $ (132,950,368)  

 

10    WWestern Asset Institutional Cash Reserves 2017 Semi-Annual Report


    Six Months Ended
February 28, 2017
    Year Ended
August 31, 2016
 
     Shares     Amount     Shares     Amount  
SVB Securities Horizon  Shares3                                
Shares sold                 60,378,449     $ 60,378,449  
Shares issued on reinvestment                 125,587       125,587  
Shares repurchased                 (240,966,070)       (240,966,070)  
Net increase (decrease)                 (180,462,034)     $ (180,462,034)  
Investor Shares                                
Shares sold     2,068,829 4    $ 2,069,556 4      392,088,530     $ 392,088,530  
Shares issued on reinvestment     876 4      876 4      473,833       473,833  
Shares repurchased     (54,700,295) 4      (54,704,850) 4      (452,590,426)       (452,590,426)  
Net decrease     (52,630,590) 4    $ (52,634,418) 4      (60,028,063)     $ (60,028,063)  

 

1 

On February 24, 2017, Class L shares were fully redeemed.

 

2 

On November 4, 2016, Class S shares were fully redeemed.

 

3 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

4 

Investor shares were fully redeemed on October 13, 2016 and resumed operations on December 20, 2016 upon shareholder investment.

6. Recent accounting pronouncement

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, the “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Fund’s financial statements and related disclosures.

7. Subsequent events

Subsequent to the six months ended February 28, 2017, shareholder redemptions from Institutional Share class and Investor Share class exceed 50% of Institutional Shares and Investor Shares net assets; respectively as of February 28, 2017.

On March 30, 2017, the Fund announced that effective March 30, 2017, the Fund will no longer offer Investor Shares. Effective as of that date, the share class will be closed to all incoming purchases.

8. Special shareholder notice

Effective November 9, 2016, the Fund no longer offers Class S shares. Effective as of that date, the share class was closed to all incoming purchases and exchanges.

 

Western Asset Institutional Cash Reserves 2017 Semi-Annual Report   11


Schedule of investments (unaudited)

February 28, 2017

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  
Short-Term Investments — 100.0%                                

Bank Notes — 0.4%

                               

Bank of America N.A.

    1.155     8/1/17     $ 100,000,000     $ 99,995,839  

Certificates of Deposit — 34.8%

                               

Abbey National Treasury Services PLC

    0.670     3/1/17       159,000,000       158,999,779  

Abbey National Treasury Services PLC

    0.670     3/2/17       110,000,000       109,999,688  

Abbey National Treasury Services PLC

    0.670     3/3/17       100,000,000       99,999,575  

Bank of Montreal

    1.080     3/16/17       107,500,000       107,518,076  

Bank of Montreal

    1.166     6/7/17       176,000,000       176,108,673  (a) 

Bank of Montreal

    1.216     8/7/17       243,000,000       243,091,844  (a) 

Bank of Montreal

    1.297     11/22/17       22,000,000       22,024,343  (a) 

Bank of Nova Scotia

    1.145     6/8/17       185,000,000       185,093,244  (a) 

Bank of Tokyo-Mitsubishi UFJ NY

    1.398     4/25/17       175,000,000       175,159,953  (a) 

BNP Paribas NY Branch

    1.281     5/15/17       187,900,000       188,063,195  (a) 

BNP Paribas NY Branch

    1.227     7/6/17       254,500,000       254,683,324  (a) 

BNP Paribas NY Branch

    1.397     11/22/17       22,000,000       22,039,919  (a) 

Chase Bank USA N.A.

    1.442     5/26/17       112,366,000       112,508,871  (a) 

Chase Bank USA N.A.

    1.152     7/10/17       100,000,000       100,046,682  (a) 

Credit Suisse NY

    1.480     3/3/17       50,000,000       50,003,464  

Credit Suisse NY

    1.472     4/10/17       82,000,000       82,066,873  (a) 

Credit Suisse NY

    1.478     5/1/17       138,000,000       138,154,140  (a) 

Credit Suisse NY

    1.477     5/22/17       315,000,000       315,423,363  (a) 

Credit Suisse NY

    1.472     7/10/17       168,500,000       168,582,252  (a) 

Credit Suisse NY

    1.792     11/17/17       22,000,000       22,041,200  (a) 

KBC Bank NV

    0.680     3/1/17       240,000,000       239,999,719  

KBC Bank NV

    1.050     3/2/17       97,000,000       97,001,747  

KBC Bank NV

    0.680     3/7/17       239,105,000       239,105,000  

Landesbank Hessen-Thuringen

    0.680     3/7/17       40,105,000       40,105,000  

Landesbank Hessen-Thuringen

    1.070     3/15/17       99,750,000       99,765,309  

Lloyds Bank PLC

    1.253     7/10/17       442,000,000       442,368,022  (a) 

Lloyds Bank PLC

    1.131     8/14/17       140,000,000       140,039,042  (a) 

Mitsubishi UFJ Trust & Banking NY

    1.393     6/9/17       242,000,000       242,223,211  (a) 

Mizuho Bank Ltd.

    1.409     4/21/17       215,000,000       215,189,073  (a) 

Mizuho Bank Ltd.

    1.372     5/17/17       25,000,000       25,021,945  (a) 

Mizuho Bank Ltd.

    1.379     5/18/17       22,000,000       22,019,259  (a) 

Mizuho Bank Ltd.

    1.377     5/22/17       375,000,000       375,315,499  (a) 

Mizuho Bank Ltd.

    1.359     7/24/17       150,000,000       150,099,231  (a) 

Mizuho Bank Ltd.

    1.222     8/17/17       180,000,000       180,028,114  (a) 

Mizuho Bank Ltd.

    1.300     8/24/17       18,450,000       18,450,434  

 

See Notes to Financial Statements.

 

12    Liquid Reserves Portfolio 2017 Semi-Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Certificates of Deposit — continued

                               

National Australia Bank of NY

    1.257     12/5/17     $ 47,000,000     $ 47,036,609  (a) 

Norinchukin Bank

    0.950     3/10/17       172,000,000       172,013,158  

Norinchukin Bank

    1.278     7/26/17       100,000,000       100,067,245  (a) 

Norinchukin Bank

    1.340     9/5/17       12,600,000       12,599,790  

Oversea-Chinese Banking Corp. Ltd.

    0.920     3/1/17       235,000,000       235,001,295  

Oversea-Chinese Banking Corp. Ltd.

    0.950     3/6/17       172,000,000       172,006,490  

Oversea-Chinese Banking Corp. Ltd.

    1.080     3/15/17       149,000,000       149,021,931  

Rabobank Nederland NY

    1.119     5/23/17       22,000,000       22,011,343  (a) 

Rabobank Nederland NY

    1.125     9/11/17       179,000,000       179,017,680  (a) 

Royal Bank of Canada

    1.151     6/12/17       77,000,000       77,043,906  (a) 

Royal Bank of Canada

    1.179     6/23/17       30,000,000       30,017,500  (a) 

Royal Bank of Canada

    1.217     8/4/17       258,025,000       258,211,490  (a) 

Societe Generale

    1.110     8/14/17       110,000,000       110,020,454  (a) 

Standard Chartered Bank

    1.391     5/18/17       17,000,000       17,018,924  

Standard Chartered Bank

    1.392     7/10/17       132,000,000       132,071,209  (a) 

Sumitomo Mitsui Banking Corp.

    1.369     5/2/17       100,000,000       100,082,254  (a) 

Sumitomo Mitsui Banking Corp.

    1.377     7/5/17       50,000,000       50,047,593  (a) 

Sumitomo Mitsui Banking Corp.

    1.377     7/6/17       95,000,000       95,089,725  (a) 

Sumitomo Mitsui Banking Corp.

    1.278     7/25/17       100,000,000       100,036,267  (a) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.680     3/1/17       70,000,000       70,000,169  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.810     4/17/17       100,000,000       100,007,965  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    1.357     7/6/17       447,000,000       447,383,745 (a) 

Toronto Dominion Bank NY

    1.080     3/15/17       190,000,000       190,034,314  

Toronto Dominion Bank NY

    1.161     7/11/17       323,000,000       323,167,078  (a) 

UBS AG

    1.309     4/21/17       342,000,000       342,252,714 (a) 

Wells Fargo Bank N.A.

    0.950     3/8/17       100,000,000       100,007,236  

Wells Fargo Bank N.A.

    1.248     4/26/17       190,000,000       190,130,752  (a) 

Total Certificates of Deposit

                            9,079,737,899  

Commercial Paper — 30.7%

                               

ABN AMRO Funding USA LLC

    1.268     4/3/17       119,550,000       119,448,721  (b)(c) 

ABN AMRO Funding USA LLC

    1.278     4/7/17       73,000,000       72,930,419  (b)(c) 

ABN AMRO Funding USA LLC

    1.227     8/7/17       42,390,000       42,139,428  (b)(c) 

ANZ New Zealand International Ltd.

    1.120     6/1/17       17,000,000       17,008,522  (a)(c) 

ANZ New Zealand International Ltd.

    1.147     6/6/17       135,000,000       135,076,352  (a)(c) 

ANZ New Zealand International Ltd.

    1.143     6/9/17       93,000,000       93,051,681  (a)(c) 

ASB Finance Ltd.

    1.390     3/2/17       88,000,000       88,003,641  (a)(c) 

ASB Finance Ltd.

    1.170     5/16/17       130,000,000       130,082,863  (a)(c) 

ASB Finance Ltd.

    1.187     8/7/17       44,250,000       44,033,667  (b)(c) 

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   13


Schedule of investments (unaudited) (cont’d)

February 28, 2017

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

ASB Finance Ltd.

    1.187     8/8/17     $ 99,000,000     $ 98,512,089  (b)(c) 

Bank of Nova Scotia

    1.350     11/22/17       17,000,000       17,025,274  (a)(c) 

BNP Paribas Fortis SA

    0.550     3/1/17       100,000,000       99,998,297  (b) 

BNZ International Funding Ltd.

    1.390     3/1/17       235,000,000       235,004,886  (a)(c) 

BNZ International Funding Ltd.

    1.143     6/9/17       118,000,000       118,065,574  (a)(c) 

BPCE SA

    1.103     4/4/17       243,000,000       242,832,262  (b)(c) 

Caisse des Depots et Consignations

    0.983     3/14/17       135,000,000       134,969,130  (b)(d) 

Canadian Imperial Bank of Commerce

    1.162     7/10/17       242,000,000       242,121,673  (a)(c) 

Canadian Imperial Bank of Commerce

    1.215     8/8/17       365,000,000       365,248,974  (a)(c) 

Commonwealth Bank of Australia

    1.214     11/27/17       22,000,000       22,028,367  (a)(c) 

Credit Agricole Corporate and Investment Bank

    0.570     3/1/17       13,937,000       13,936,755  (b) 

Credit Suisse NY

    1.133     3/21/17       85,000,000       84,964,994  (b) 

Credit Suisse NY

    1.309     4/3/17       23,000,000       22,983,904  (b) 

Danske Corp.

    1.329     8/14/17       84,250,000       83,705,188  (b)(c) 

DBS Bank Ltd.

    0.952     3/6/17       160,000,000       159,982,160  (b)(c) 

DBS Bank Ltd.

    0.962     3/14/17       185,000,000       184,951,365  (b)(c) 

DBS Bank Ltd.

    1.013     5/3/17       95,000,000       94,870,969  (b)(c) 

DBS Bank Ltd.

    1.013     5/8/17       198,000,000       197,698,678  (b)(c) 

DnB NOR Bank ASA

    1.200     5/2/17       400,000,000       400,256,168  (a)(c) 

General Electric Co.

    0.550     3/1/17       64,879,000       64,878,018  (b) 

HSBC USA Inc.

    1.259     5/2/17       45,000,000       45,033,871  (a)(c) 

HSBC USA Inc.

    1.250     5/15/17       75,000,000       75,060,898  (a)(c) 

HSBC USA Inc.

    1.200     5/18/17       51,425,000       51,460,833  (a)(c) 

ING U.S. Funding LLC

    0.942     3/3/17       243,000,000       242,985,298  (b) 

ING U.S. Funding LLC

    1.350     5/3/17       156,625,000       156,767,465  (a) 

ING U.S. Funding LLC

    1.221     5/30/17       162,000,000       162,122,305  (a) 

ING U.S. Funding LLC

    1.266     8/7/17       125,000,000       125,111,365  (a) 

Johnson & Johnson

    0.530     3/3/17       155,000,000       154,992,315  (b)(c) 

JPMorgan Securities LLC

    0.771     3/28/17       49,000,000       48,973,780  (b) 

JPMorgan Securities LLC

    1.228     4/26/17       385,000,000       385,251,293  (a) 

JPMorgan Securities LLC

    1.197     7/5/17       99,025,000       99,086,036  (a) 

Landesbank Hessen-Thuringen

    0.952     3/6/17       97,000,000       96,988,780  (b)(c) 

Landesbank Hessen-Thuringen

    1.258     8/8/17       95,000,000       94,518,632  (b)(c) 

NRW Bank

    1.053     3/28/17       50,000,000       49,971,572  (b)(c) 

NRW Bank

    1.053     4/6/17       75,000,000       74,942,727  (b)(c) 

NRW Bank

    1.033     4/25/17       117,000,000       116,862,954  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.952     3/6/17       168,990,000       168,970,313  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    1.151     6/12/17       200,000,000       200,111,772  (a) 

 

See Notes to Financial Statements.

 

14    Liquid Reserves Portfolio 2017 Semi-Annual Report


Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

Societe Generale

    0.520-0.670     3/1/17     $ 1,107,000,000     $ 1,106,980,838  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.972     3/8/17       200,000,000       199,972,622  (b)(c) 

Swedish Export Credit

    1.177     8/8/17       96,000,000       95,526,875  (b) 

Toronto Dominion Holdings USA

    0.932     3/8/17       135,000,000       134,981,159  (b)(c) 

Unilever Capital Corp.

    0.530     3/1/17       55,000,000       54,999,050  (b)(c) 

United Overseas Bank Ltd.

    0.952     3/3/17       155,000,000       154,991,397  (b)(c) 

United Overseas Bank Ltd.

    0.952     3/7/17       170,000,000       169,977,852  (b)(c) 

United Overseas Bank Ltd.

    1.156     7/28/17       28,900,000       28,766,338  (b)(c) 

USAA Capital Corp.

    0.620     3/16/17       45,000,000       44,987,040  (b) 

Westpac Banking Corp.

    1.262     11/17/17       22,000,000       22,022,437  (a)(c) 

Total Commercial Paper

                            7,988,227,836  

Corporate Bonds & Notes — 0.0%

                               

UBS AG

    1.415     6/1/17       5,000,000       5,004,494  (a)  

Time Deposits — 29.1%

                               

Bank of Tokyo-Mitsubishi UFJ NY

    0.570     3/1/17       99,000,000       99,000,000  

BNP Paribas NY Branch

    0.550     3/1/17       178,000,000       178,000,000  

CIBC World Markets Corp.

    0.590     3/1/17       288,000,000       288,000,000  

CIBC World Markets Corp.

    0.600     3/1/17       215,000,000       215,000,000  

Credit Agricole CIB

    0.570     3/1/17       1,079,859,000       1,079,859,000  

DNB Bank ASA

    0.570     3/1/17       740,000,000       740,000,000  

National Bank of Canada

    0.550     3/1/17       95,000,000       95,000,000  

Natixis SA

    0.570     3/1/17       849,993,000       849,993,000  

Nordea Bank AB

    0.560     3/1/17       1,040,000,000       1,040,000,000  

Skandinaviska Enskilda Banken AB

    0.570     3/1/17       1,000,000,000       1,000,000,000  

Svenska Handelsbanken AB

    0.550     3/1/17       987,583,000       987,583,000  

Swedbank AB

    0.570     3/1/17       1,000,000,000       1,000,000,000  

Total Time Deposits

                            7,572,435,000  

Repurchase Agreements — 5.0%

                               

Bank of America Corp. tri-party repurchase agreement dated 10/17/16; Proceeds at maturity — $400,678,444; (Fully collateralized by various U.S. government agency obligations, corporate bonds and money market instruments, 2.723% to 9.000% due 3/15/17 to 5/1/40; Market value — $408,000,000)

    0.860     5/10/17       400,000,000       400,000,000  

Bank of America Corp. tri-party repurchase agreement dated 1/26/17; Proceeds at maturity — $350,593,639; (Fully collateralized by various U.S. government agency obligations, corporate bonds and money market instruments, 0.000% to 5.550% due 3/06/17 to 2/06/57; Market value — $366,588,199)

    0.860     5/10/17       350,000,000       350,000,000  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   15


Schedule of investments (unaudited) (cont’d)

February 28, 2017

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Repurchase Agreements — continued

                               

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 10/17/16; Proceeds at maturity — $200,358,944; (Fully collateralized by various corporate bonds and notes, municipal bonds and money market instruments, 0.000% to 9.750% due 6/15/17 to 10/15/46; Market value — $213,771,037)

    0.910     5/10/17     $ 200,000,000     $ 200,000,000  

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 10/17/16; Proceeds at maturity — $100,179,472; (Fully collateralized by various municipal bonds, 0.000% to 7.747% due 11/1/22 to 11/15/56; Market value — $105,000,004)

    0.910     5/10/17       100,000,000       100,000,000  

RBC Capital Markets; tri-party repurchase agreement dated 2/17/17; Proceeds at maturity — $100,179,472; (Fully collateralized by various U.S. government agency obligations, 2.125% to 6.000% due 6/1/22 to 3/1/47; Market value — $102,000,000)

    0.910     5/10/17       100,000,000       100,000,000  

RBC Capital Markets; tri-party repurchase agreement dated 2/8/17; Proceeds at maturity — $150,284,000; (Fully collateralized by various municipal bonds, 0.000% to 7.250% due 4/14/17 to 5/15/2115; Market value —$158,090,190)

    0.960     5/10/17       150,000,000       150,000,000  

Total Repurchase Agreements

                            1,300,000,000  

Total Investments — 100.0% (Cost — $26,038,067,390#)

 

            26,045,401,068  

Other Assets in Excess of Liabilities — 0.0%

 

            7,813,479  

Total Net Assets — 100.0%

 

          $ 26,053,214,547  

 

(a) 

Variable rate security. Interest rate disclosed is as of the most recent information available.

 

(b) 

Rate shown represents yield-to-maturity.

 

(c) 

Commercial paper exempt from registration under Section 4(2) of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

(d) 

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

# Aggregate cost for federal income tax purposes is substantially the same.

 

See Notes to Financial Statements.

 

16    Liquid Reserves Portfolio 2017 Semi-Annual Report


Statement of assets and liabilities (unaudited)

February 28, 2017

 

Assets:         

Investments, at value (Cost — $26,038,067,390)

   $ 26,045,401,068  

Cash

     419,224  

Interest receivable

     9,019,135  

Receivable for securities sold

     825  

Total Assets

     26,054,840,252  
Liabilities:         

Trustees’ fees payable

     119,136  

Accrued expenses

     1,506,569  

Total Liabilities

     1,625,705  
Total Net Assets    $ 26,053,214,547  
Represented by:         
Paid-in capital    $ 26,053,214,547  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   17


Statement of operations (unaudited)

For the Six Months Ended February 28, 2017

 

Investment Income:         

Interest

   $ 119,405,727  
Expenses:         

Investment management fee (Note 2)

     16,138,570  

Fund accounting fees

     1,047,502  

Trustees’ fees

     445,635  

Legal fees

     363,564  

Custody fees

     175,604  

Audit and tax fees

     22,776  

Miscellaneous expenses

     46,672  

Total Expenses

     18,240,323  

Less: Fee waivers and/or expense reimbursements (Notes 2)

     (16,138,570)  

Net Expenses

     2,101,753  
Net Investment Income      117,303,974  
Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 4):         

Net Realized Gain From Investment Transactions

     4,898,306  

Change in Net Unrealized Appreciation (Depreciation) From Investments

     7,333,678  
Net Gain on Investments      12,231,984  
Increase in Net Assets From Operations    $ 129,535,958  

 

See Notes to Financial Statements.

 

18    Liquid Reserves Portfolio 2017 Semi-Annual Report


Statements of changes in net assets

 

For the Six Months Ended February 28, 2017 (unaudited)
and the Year Ended August 31, 2016
   2017      2016  
Operations:                  

Net investment income

   $ 117,303,974      $ 245,409,790  

Net realized gain

     4,898,306        686,995  

Change in net unrealized appreciation (depreciation)

     7,333,678         

Increase in Net Assets From Operations

     129,535,958        246,096,785  
Capital Transactions:                  

Proceeds from contributions

     35,400,942,370        114,933,457,934  

Value of withdrawals

     (59,380,435,177)        (138,942,587,255)  

In-kind capital contributions (Note 3)

            10,124,686,062  

Decrease in Net Assets From Capital Transaction

     (23,979,492,807)        (13,884,443,259)  

Decrease in Net Assets

     (23,849,956,849)        (13,638,346,474)  
Net Assets:                  

Beginning of period

     49,903,171,396        63,541,517,870  

End of period*

   $ 26,053,214,547      $ 49,903,171,396  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   19


Financial highlights

 

For the years ended August 31, unless otherwise noted:  
     20171     2016     2015     2014     2013     2012  
Net assets, end of period (millions)     $26,053       $49,903       $63,542       $74,403       $73,576       $61,127  

Total return2

    0.43     0.48     0.22     0.10     0.17     0.23
Ratios to average net assets:            

Gross expenses

    0.11 %3      0.11     0.11     0.11     0.11     0.11

Net expenses4,5

    0.01 3      0.01       0.01       0.10       0.10       0.10  

Net investment income

    0.73 3      0.46       0.21       0.10       0.17       0.23  

 

1 

For the six months ended February 28, 2017 (unaudited).

 

2 

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

3 

Annualized.

 

4 

The investment manager has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time. Prior to August 18, 2014, as a result of a voluntary expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of the Portfolio did not exceed 0.10%.

 

5 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

20    Liquid Reserves Portfolio 2017 Semi-Annual Report


Notes to financial statements (unaudited)

 

1. Organization and significant accounting policies

Liquid Reserves Portfolio (the “Portfolio”) is a separate diversified investment series of Master Portfolio Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Declaration of Trust permits the Trustees to issue beneficial interests in the Portfolio. At February 28, 2017, all investors in the Portfolio were funds advised or administered by the manager of the Portfolio and/or its affiliates.

Effective October 11, 2016, the Portfolio sells and effects withdrawals of its interests at prices based on the current market value of the securities it holds. Therefore, the price of an interest in the Portfolio fluctuates along with changes in the market-based value of the holdings of the Portfolio. Because the price of an interest in the Portfolio fluctuates, it has what is called a “floating net asset value” or “floating NAV”. Under Rule 2a-7 of the 1940 Act (“Rule 2a-7”), the Portfolio must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Effective October 14, 2016, the Portfolio may impose a fee upon the withdrawal of investors’ interests or may temporarily suspend investors’ ability to withdraw interests if the Portfolio’s liquidity falls below required minimums because of market conditions or other factors.

The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. Prior to October 11, 2016, in accordance with Rule 2a-7, money market instruments were valued at amortized cost, which approximated market value. This method involved valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost was subject to its compliance with certain conditions as specified by Rule 2a-7.

Effective October 11, 2016, the valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. When the Portfolio holds securities or other assets that are denominated in a foreign currency, the Portfolio will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   21


Notes to financial statements (unaudited) (cont’d)

 

unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Portfolio calculates its net asset value, the Portfolio values these securities as determined in accordance with procedures approved by the Portfolio’s Board of Trustees.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Portfolio’s pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party pricing information for investments owned by the Portfolio, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Trustees quarterly.

The Portfolio uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

 

22    Liquid Reserves Portfolio 2017 Semi-Annual Report


GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

 

Level 1 — quoted prices in active markets for identical investments

 

 

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

 

Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Portfolio’s assets carried at fair value:

 

ASSETS  
Description  

Quoted Prices

(Level 1)

   

Other Significant

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

    Total  
Short-term investments†         $ 26,045,401,068           $ 26,045,401,068  

 

See Schedule of Investments for additional detailed categorizations.

(b) Repurchase agreements. The Portfolio may enter into repurchase agreements with institutions that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Portfolio acquires a debt security subject to an obligation of the seller to repurchase, and of the Portfolio to resell, the security at an agreed-upon price and time, thereby determining the yield during the Portfolio’s holding period. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian, acting on the Portfolio’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Portfolio generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Portfolio seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Portfolio may be delayed or limited.

(c) Interest income and expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   23


Notes to financial statements (unaudited) (cont’d)

 

(d) Method of allocation. Net investment income and net realized/unrealized gains and/or losses of the Portfolio is allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Prior to October 11, 2016, gross realized gains and/or losses of the Portfolio were allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation was closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders.

(e) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

(f) Compensating balance arrangements. The Portfolio has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Portfolio’s cash on deposit with the bank.

(g) Income taxes. The Portfolio is classified as a partnership for federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Therefore, no federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of Subchapter M of the Internal Revenue Code.

Management has analyzed the Portfolio’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Portfolio’s financial statements. The Portfolio’s federal and state income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(h) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.

 

24    Liquid Reserves Portfolio 2017 Semi-Annual Report


LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset monthly 70% of the net management fee it receives from the Portfolio.

LMPFA has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the six months ended February 28, 2017, fees waived and/or expenses reimbursed amounted to $16,138,570.

LMPFA is permitted to recapture amounts waived and/or reimbursed to the Portfolio during the same fiscal year under certain circumstances.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Investments

At February 28, 2017, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

Gross unrealized appreciation      $ 7,423,391  
Gross unrealized depreciation        (89,713)  
Net unrealized appreciation      $ 7,333,678  

On August 29, 2016, Western Asset Institutional Cash Reserves Fund transferred all of its investable assets (including cash and receivables), with a value of $10,124,686,062, to the Portfolio in exchange for an interest in the Portfolio.

4. Derivative instruments and hedging activities

During the six months ended February 28, 2017, the Portfolio did not invest in derivative instruments.

5. Recent accounting pronouncement

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, the “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Portfolio’s financial statements and related disclosures.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   25
EX-99.(17)(F) 11 d366715dex9917f.htm UNAUDITED FINANCIAL STATEMENTS OF THE SAR OF WA INSTIT. LIQUID RES. FYE 2/28/17 Unaudited Financial Statements of the SAR of WA Instit. Liquid Res. FYE 2/28/17

Exhibit 17(f)

Statement of assets and liabilities (unaudited)

February 28, 2017

 

Assets:         

Investment in Liquid Reserves Portfolio, at value

   $ 973,229,794  

Prepaid expenses

     73,589  

Total Assets

     973,303,383  
Liabilities:         

Distributions payable

     113,709  

Investment management fee payable

     67,781  

Trustees’ fees payable

     13,913  

Service and/or distribution fees payable

     1,045  

Accrued expenses

     122,642  

Total Liabilities

     319,090  
Total Net Assets    $ 972,984,293  
Net Assets:         

Par value (Note 5)

   $ 9,724  

Paid-in capital in excess of par value

     975,663,374  

Overdistributed net investment income

     (468,076)  

Accumulated net realized loss on investments allocated from Liquid Reserves Portfolio

     (2,428,993)  

Net unrealized appreciation on investments allocated from Liquid Reserves Portfolio

     208,264  
Total Net Assets    $ 972,984,293  
Net Assets:         

Institutional Shares

     $944,660,754  

Investor Shares

     $28,323,539  
Shares Outstanding:         

Institutional Shares

     944,056,579  

Investor Shares

     28,308,374  
Net Asset Value:         

Institutional Shares

     $1.00  

Investor Shares

     $1.00  

 

See Notes to Financial Statements.

 

Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report   1


Statement of operations (unaudited)

For the Six Months Ended February 28, 2017

 

Investment Income:         

Income from Liquid Reserves Portfolio

   $ 4,674,951  

Allocated expenses from Liquid Reserves Portfolio

     (767,412)  

Allocated waiver from Liquid Reserves Portfolio

     680,647  

Other income

     6,245  

Total Investment Income

     4,594,431  
Expenses:         

Investment management fee (Note 2)

     1,353,683  

Legal fees

     80,821  

Transfer agent fees (Note 3)

     53,756  

Service and/or distribution fees (Notes 2 and 3)

     41,523  

Insurance

     38,554  

Registration fees

     38,173  

Shareholder reports

     21,748  

Trustees’ fees

     21,717  

Audit and tax fees

     13,275  

Fund accounting fees

     3,129  

Miscellaneous expenses

     16,257  

Total Expenses

     1,682,636  

Less: Fee waivers and/or expense reimbursements (Notes 2 and 3)

     (771,054)  

Net Expenses

     911,582  
Net Investment Income      3,682,849  
Net Realized Gain on Investments From Liquid Reserves Portfolio      195,492  
Change in Net Unrealized Appreciation (Depreciation) From Investments in
Liquid Reserves Portfolio
     208,264  
Increase in Net Assets From Operations    $ 4,086,605  

 

See Notes to Financial Statements.

 

2    Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report


Statements of changes in net assets

 

For the Six Months Ended February 28, 2017 (unaudited)
and the Year Ended August 31, 2016
  2017     2016  
Operations:                

Net investment income

  $ 3,682,849     $ 22,880,747  

Net realized gain

    195,492       218,229  

Change in net unrealized appreciation (depreciation)

    208,264        

Increase in Net Assets From Operations

    4,086,605       23,098,976  
Distributions to Shareholders From (Notes 1 and 4):                

Net investment income

    (4,176,604)       (22,880,747)  

Decrease in Net Assets From Distributions to Shareholders

    (4,176,604)       (22,880,747)  
Fund Share Transactions (Note 5):                

Net proceeds from sale of shares

    9,655,579,310       80,819,057,588  

Reinvestment of distributions

    1,640,079       8,970,953  

Cost of shares repurchased

    (14,861,464,240)       (80,197,245,487)  

Increase (Decrease) in Net Assets From Fund Share Transactions

    (5,204,244,851)       630,783,054  

Increase (Decrease) in Net Assets

    (5,204,334,850)       631,001,283  
Net Assets:                

Beginning of period

    6,177,319,143       5,546,317,860  

End of period*

  $ 972,984,293     $ 6,177,319,143  

*Includes (overdistributed) undistributed net investment income, respectively, of:

    $(468,076)       $25,679  

 

See Notes to Financial Statements.

 

Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report   3


Financial highlights

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31,
unless otherwise noted:
 
Institutional Shares   20171,2     20161     20151     20141     20131     2012  
Net asset value, beginning of period     $1.000       $1.000       $1.000       $1.000       $1.000       $1.000  
Income from operations:            

Net investment income

    0.003       0.004       0.001       0.001       0.001       0.002  

Net realized and unrealized gain3

    0.000       0.000       0.000       0.000       0.000       0.000  

Total income from operations

    0.003       0.004       0.001       0.001       0.001       0.002  
Less distributions from:            

Net investment income

    (0.003)       (0.004)       (0.001)       (0.001)       (0.001)       (0.002)  

Total distributions

    (0.003)       (0.004)       (0.001)       (0.001)       (0.001)       (0.002)  
Net asset value, end of period     $1.000       $1.000       $1.000       $1.000       $1.000       $1.000  

Total return4

    0.40     0.36     0.10     0.07     0.13     0.18
Net assets, end of period (millions)     $945       $5,953       $4,988       $3,729       $4,696       $5,362  
Ratios to average net assets:            

Gross expenses5

    0.35 %6,7      0.33 %7      0.33 %7      0.33 %7      0.33 %7      0.23

Net expenses5,8,9

    0.14 6      0.13       0.13       0.13       0.14       0.15  

Net investment income

    0.55 6      0.35       0.10       0.07       0.13       0.18  

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the six months ended February 28, 2017 (unaudited).

 

3 

Amount represents less than $0.0005 per share.

 

4 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

5 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

 

6 

Annualized.

 

7 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio.

 

8 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

9 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

4    Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report


Financial highlights (cont’d)

 

For a share of each class of beneficial interest outstanding throughout each year ended August 31,
unless otherwise noted:
 
Investor Shares1    20172      2016      2015      20143  
Net asset value, beginning of period      $1.000        $1.000        $1.000        $1.000  
Income from operations:            

Net investment income

     0.002        0.003        0.001        0.000 4 

Net realized and unrealized gain

     0.001        0.000 4       0.000 4       0.000 4 

Total income from operations

     0.003        0.003        0.001        0.000 4 
Less distributions from:            

Net investment income

     (0.003)        (0.003)        (0.001)        (0.000) 4 

Total distributions

     (0.003)        (0.003)        (0.001)        (0.000) 4 
Net asset value, end of period      $1.000        $1.000        $1.000        $1.000  

Total return5

     0.37      0.31      0.05      0.02
Net assets, end of period (millions)      $28        $224        $110        $79  
Ratios to average net assets:            

Gross expenses6,7

     0.50 %8       0.43      0.43      0.46 %8 

Net expenses7,9,10

     0.19 8       0.18        0.18        0.18 8 

Net investment income

     0.48 8       0.33        0.05        0.02 8 

 

1 

Per share amounts have been calculated using the average shares method.

 

2 

For the six months ended February 28, 2017 (unaudited).

 

3 

For the period September 3, 2013 (inception date) to August 31, 2014.

 

4 

Amount represents less than $0.0005 per share.

 

5 

Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

6 

The gross expenses do not reflect the reduction of the Fund’s management fee by the amount paid by the Fund for its allocable share of the management fee paid by Liquid Reserves Portfolio.

 

7 

Includes the Fund’s share of Liquid Reserves Portfolio’s allocated expenses.

 

8 

Annualized.

 

9 

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Investor Shares did not exceed 0.35%. This expense limitation arrangement cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

 

10 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report   5


Notes to financial statements (unaudited)

 

1. Organization and significant accounting policies

Western Asset Institutional Liquid Reserves (the “Fund”) is a separate diversified investment series of Legg Mason Partners Institutional Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund invests all of its investable assets in Liquid Reserves Portfolio (the “Portfolio”), a separate investment series of Master Portfolio Trust, that has the same investment objective as the Fund.

The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.

Effective October 11, 2016, the share price of the Fund fluctuates along with changes in the market-based value of fund assets. Because the share price of the Fund fluctuates, it has what is called a “floating net asset value” or “floating NAV”. Under Rule 2a-7 of the 1940 Act, the Fund must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Effective October 14, 2016, the Fund may impose fees upon the sale of shares or temporarily suspend the ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The Fund records its investment in the Portfolio at value. The value of such investment in the Portfolio reflects the Fund’s proportionate interest (3.74% at February 28, 2017) in the net assets of the Portfolio.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. The disclosure and valuation of securities held by the Portfolio are discussed in Note 1(a) of the Portfolio’s Notes to Financial Statements, which are included elsewhere in this report.

(b) Investment transactions and investment income. Net investment income and net realized/unrealized gains and losses of the Portfolio are allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Prior to October 11, 2016, gross realized gains and/or losses of the Portfolio were allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation was closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders. The Fund also pays certain other expenses which can be directly attributed to the Fund.

 

6    Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report


(c) Distributions to shareholders. Distributions from net investment income on the shares of the Fund are declared each business day and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(d) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

(e) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(f) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, in accordance with the following breakpoint schedule:

 

Average Daily Net Assets      Annual Rate  
First $5 billion        0.200
Next $5 billion        0.175  
Over $10 billion        0.150  

Since the Fund invests all of its investable assets in Liquid Reserves Portfolio, the investment management fee of the Fund will be reduced by the investment management fee allocated to the Fund by Liquid Reserves Portfolio.

 

Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report   7


Notes to financial statements (unaudited) (cont’d)

 

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset monthly 70% of the net management fee it receives from the Fund.

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Institutional Shares and Investor Shares did not exceed 0.20%, and 0.35%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2018 without the Board of Trustees’ consent. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the six months ended February 28, 2017, fees waived and/or expenses reimbursed amounted to $771,054.

LMPFA is permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will LMPFA recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Class specific expenses, waivers and/or expense reimbursements

The Fund has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Fund pays service and/or distribution fees with respect to its Investor Shares calculated at the annual rate not to exceed 0.10% of the average daily net assets. Service and/or distribution fees are accrued daily and paid monthly.

For the six months ended February 28, 2017, class specific expenses were as follows:

 

        Service and/or
Distribution Fees
       Transfer Agent
Fees
 
Institutional Shares               $ 37,121  
Investor Shares      $ 41,523 1         16,635  
Total      $ 41,523        $ 53,756  

 

1 

Amount shown is exclusive of waivers. For the six months ended February 28, 2017, the service and/or distribution fees waived amounted to $ 20,762 for Investor Shares. Such waivers are voluntarily and may be reduced or terminated at any time.

 

8    Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report


For the six months ended February 28, 2017, waivers and/or expense reimbursements by class were as follows:

 

        Waivers/Expense
Reimbursements
 
Institutional Shares      $ 683,412  
Investor Shares        87,642  
Total      $ 771,054  

4. Distributions to shareholders by class

 

        Six Months Ended
February 28, 2017
       Year Ended
August 31, 2016
 
Net Investment Income:                      
Institutional Shares      $ 3,938,460        $ 21,463,499  
SVB Securities Liquid Reserves Shares1                 3,415  
SVB Securities Institutional Liquid Reserves Shares2                 826,057  
Investor Shares        238,144          587,776  
Total      $ 4,176,604        $ 22,880,747  

 

1

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

2

On August 26, 2016, SVB Securities Institutional Liquid Reserves shares were fully redeemed.

5. Shares of beneficial interest

At February 28, 2017, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Funds have the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.

Transactions in shares of each class were as follows:

 

     Six Months Ended
February 28, 2017
     Year Ended
August 31, 2016
 
      Shares      Amount      Shares      Amount  
Institutional Shares                                    
Shares sold      9,647,849,043      $ 9,648,433,347        80,193,502,127      $ 80,193,502,127  
Shares issued on reinvestment      1,515,204        1,515,705        7,653,520        7,653,520  
Shares repurchased      (14,657,979,356)        (14,658,439,386)        (79,236,098,116)        (79,236,098,116)  
Net increase (decrease)      (5,008,615,109)      $ (5,008,490,334)        965,057,531      $ 965,057,531  
SVB Securities Liquid Reserves Shares1                    
Shares sold                    15,161,457      $ 15,161,457  
Shares issued on reinvestment                    2,940        2,940  
Shares repurchased                    (23,204,182)        (23,204,182)  
Net decrease                    (8,039,785)      $ (8,039,785)  

 

Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report   9


Notes to financial statements (unaudited) (cont’d)

 

     Six Months Ended
February 28, 2017
     Year Ended
August 31, 2016
 
      Shares      Amount      Shares      Amount  
SVB Securities Institutional Liquid Reserves Shares2                    
Shares sold                    295,281,497      $ 295,281,497  
Shares issued on reinvestment                    777,169        777,169  
Shares repurchased                    (736,575,512)        (736,575,512)  
Net decrease                    (440,516,846)      $ (440,516,846)  
Investor Shares                                    
Shares sold      7,143,551      $ 7,145,963        315,112,507      $ 315,112,507  
Shares issued on reinvestment      124,335        124,374        537,324        537,324  
Shares repurchased      (202,959,602)        (203,024,854)        (201,367,677)        (201,367,677)  
Net increase (decrease)      (195,691,716)      $ (195,754,517)        114,282,154      $ 114,282,154  

 

1 

On August 26, 2016, SVB Securities Liquid Reserves shares were fully redeemed.

 

2 

On August 26, 2016, SVB Securities Institutional Liquid Reserves shares were fully redeemed.

6. Capital loss carryforward

As of August 31, 2016, the Fund had the following net capital loss carryforward remaining:

 

Year of Expiration    Amount  
8/31/2017    $ (2,624,485)  

This amount will be available to offset any future taxable capital gains, except that under applicable tax rules, deferred capital losses, if any, which have no expiration date, must be used first to offset any such gains.

7. Recent accounting pronouncement

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, the “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Fund’s financial statements and related disclosures.

 

10    Western Asset Institutional Liquid Reserves 2017 Semi-Annual Report


Schedule of investments (unaudited)

February 28, 2017

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  
Short-Term Investments — 100.0%                                

Bank Notes — 0.4%

                               

Bank of America N.A.

    1.155     8/1/17     $ 100,000,000     $ 99,995,839  

Certificates of Deposit — 34.8%

                               

Abbey National Treasury Services PLC

    0.670     3/1/17       159,000,000       158,999,779  

Abbey National Treasury Services PLC

    0.670     3/2/17       110,000,000       109,999,688  

Abbey National Treasury Services PLC

    0.670     3/3/17       100,000,000       99,999,575  

Bank of Montreal

    1.080     3/16/17       107,500,000       107,518,076  

Bank of Montreal

    1.166     6/7/17       176,000,000       176,108,673  (a) 

Bank of Montreal

    1.216     8/7/17       243,000,000       243,091,844  (a) 

Bank of Montreal

    1.297     11/22/17       22,000,000       22,024,343  (a) 

Bank of Nova Scotia

    1.145     6/8/17       185,000,000       185,093,244  (a) 

Bank of Tokyo-Mitsubishi UFJ NY

    1.398     4/25/17       175,000,000       175,159,953  (a) 

BNP Paribas NY Branch

    1.281     5/15/17       187,900,000       188,063,195  (a) 

BNP Paribas NY Branch

    1.227     7/6/17       254,500,000       254,683,324  (a) 

BNP Paribas NY Branch

    1.397     11/22/17       22,000,000       22,039,919  (a) 

Chase Bank USA N.A.

    1.442     5/26/17       112,366,000       112,508,871  (a) 

Chase Bank USA N.A.

    1.152     7/10/17       100,000,000       100,046,682  (a) 

Credit Suisse NY

    1.480     3/3/17       50,000,000       50,003,464  

Credit Suisse NY

    1.472     4/10/17       82,000,000       82,066,873  (a) 

Credit Suisse NY

    1.478     5/1/17       138,000,000       138,154,140  (a) 

Credit Suisse NY

    1.477     5/22/17       315,000,000       315,423,363  (a) 

Credit Suisse NY

    1.472     7/10/17       168,500,000       168,582,252  (a) 

Credit Suisse NY

    1.792     11/17/17       22,000,000       22,041,200  (a) 

KBC Bank NV

    0.680     3/1/17       240,000,000       239,999,719  

KBC Bank NV

    1.050     3/2/17       97,000,000       97,001,747  

KBC Bank NV

    0.680     3/7/17       239,105,000       239,105,000  

Landesbank Hessen-Thuringen

    0.680     3/7/17       40,105,000       40,105,000  

Landesbank Hessen-Thuringen

    1.070     3/15/17       99,750,000       99,765,309  

Lloyds Bank PLC

    1.253     7/10/17       442,000,000       442,368,022  (a) 

Lloyds Bank PLC

    1.131     8/14/17       140,000,000       140,039,042  (a) 

Mitsubishi UFJ Trust & Banking NY

    1.393     6/9/17       242,000,000       242,223,211  (a) 

Mizuho Bank Ltd.

    1.409     4/21/17       215,000,000       215,189,073  (a) 

Mizuho Bank Ltd.

    1.372     5/17/17       25,000,000       25,021,945  (a) 

Mizuho Bank Ltd.

    1.379     5/18/17       22,000,000       22,019,259  (a) 

Mizuho Bank Ltd.

    1.377     5/22/17       375,000,000       375,315,499  (a) 

Mizuho Bank Ltd.

    1.359     7/24/17       150,000,000       150,099,231  (a) 

Mizuho Bank Ltd.

    1.222     8/17/17       180,000,000       180,028,114  (a) 

Mizuho Bank Ltd.

    1.300     8/24/17       18,450,000       18,450,434  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   11


Schedule of investments (unaudited) (cont’d)

February 28, 2017

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Certificates of Deposit — continued

                               

National Australia Bank of NY

    1.257     12/5/17     $ 47,000,000     $ 47,036,609  (a) 

Norinchukin Bank

    0.950     3/10/17       172,000,000       172,013,158  

Norinchukin Bank

    1.278     7/26/17       100,000,000       100,067,245  (a) 

Norinchukin Bank

    1.340     9/5/17       12,600,000       12,599,790  

Oversea-Chinese Banking Corp. Ltd.

    0.920     3/1/17       235,000,000       235,001,295  

Oversea-Chinese Banking Corp. Ltd.

    0.950     3/6/17       172,000,000       172,006,490  

Oversea-Chinese Banking Corp. Ltd.

    1.080     3/15/17       149,000,000       149,021,931  

Rabobank Nederland NY

    1.119     5/23/17       22,000,000       22,011,343  (a) 

Rabobank Nederland NY

    1.125     9/11/17       179,000,000       179,017,680  (a) 

Royal Bank of Canada

    1.151     6/12/17       77,000,000       77,043,906  (a) 

Royal Bank of Canada

    1.179     6/23/17       30,000,000       30,017,500  (a) 

Royal Bank of Canada

    1.217     8/4/17       258,025,000       258,211,490  (a) 

Societe Generale

    1.110     8/14/17       110,000,000       110,020,454  (a) 

Standard Chartered Bank

    1.391     5/18/17       17,000,000       17,018,924  

Standard Chartered Bank

    1.392     7/10/17       132,000,000       132,071,209  (a) 

Sumitomo Mitsui Banking Corp.

    1.369     5/2/17       100,000,000       100,082,254  (a) 

Sumitomo Mitsui Banking Corp.

    1.377     7/5/17       50,000,000       50,047,593  (a) 

Sumitomo Mitsui Banking Corp.

    1.377     7/6/17       95,000,000       95,089,725  (a) 

Sumitomo Mitsui Banking Corp.

    1.278     7/25/17       100,000,000       100,036,267  (a) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.680     3/1/17       70,000,000       70,000,169  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.810     4/17/17       100,000,000       100,007,965  

Sumitomo Mitsui Trust & Banking Co., Ltd.

    1.357     7/6/17       447,000,000       447,383,745 (a) 

Toronto Dominion Bank NY

    1.080     3/15/17       190,000,000       190,034,314  

Toronto Dominion Bank NY

    1.161     7/11/17       323,000,000       323,167,078  (a) 

UBS AG

    1.309     4/21/17       342,000,000       342,252,714 (a) 

Wells Fargo Bank N.A.

    0.950     3/8/17       100,000,000       100,007,236  

Wells Fargo Bank N.A.

    1.248     4/26/17       190,000,000       190,130,752  (a) 

Total Certificates of Deposit

                            9,079,737,899  

Commercial Paper — 30.7%

                               

ABN AMRO Funding USA LLC

    1.268     4/3/17       119,550,000       119,448,721  (b)(c) 

ABN AMRO Funding USA LLC

    1.278     4/7/17       73,000,000       72,930,419  (b)(c) 

ABN AMRO Funding USA LLC

    1.227     8/7/17       42,390,000       42,139,428  (b)(c) 

ANZ New Zealand International Ltd.

    1.120     6/1/17       17,000,000       17,008,522  (a)(c) 

ANZ New Zealand International Ltd.

    1.147     6/6/17       135,000,000       135,076,352  (a)(c) 

ANZ New Zealand International Ltd.

    1.143     6/9/17       93,000,000       93,051,681  (a)(c) 

ASB Finance Ltd.

    1.390     3/2/17       88,000,000       88,003,641  (a)(c) 

ASB Finance Ltd.

    1.170     5/16/17       130,000,000       130,082,863  (a)(c) 

ASB Finance Ltd.

    1.187     8/7/17       44,250,000       44,033,667  (b)(c) 

 

See Notes to Financial Statements.

 

12    Liquid Reserves Portfolio 2017 Semi-Annual Report


 

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

ASB Finance Ltd.

    1.187     8/8/17     $ 99,000,000     $ 98,512,089  (b)(c) 

Bank of Nova Scotia

    1.350     11/22/17       17,000,000       17,025,274  (a)(c) 

BNP Paribas Fortis SA

    0.550     3/1/17       100,000,000       99,998,297  (b) 

BNZ International Funding Ltd.

    1.390     3/1/17       235,000,000       235,004,886  (a)(c) 

BNZ International Funding Ltd.

    1.143     6/9/17       118,000,000       118,065,574  (a)(c) 

BPCE SA

    1.103     4/4/17       243,000,000       242,832,262  (b)(c) 

Caisse des Depots et Consignations

    0.983     3/14/17       135,000,000       134,969,130  (b)(d) 

Canadian Imperial Bank of Commerce

    1.162     7/10/17       242,000,000       242,121,673  (a)(c) 

Canadian Imperial Bank of Commerce

    1.215     8/8/17       365,000,000       365,248,974  (a)(c) 

Commonwealth Bank of Australia

    1.214     11/27/17       22,000,000       22,028,367  (a)(c) 

Credit Agricole Corporate and Investment Bank

    0.570     3/1/17       13,937,000       13,936,755  (b) 

Credit Suisse NY

    1.133     3/21/17       85,000,000       84,964,994  (b) 

Credit Suisse NY

    1.309     4/3/17       23,000,000       22,983,904  (b) 

Danske Corp.

    1.329     8/14/17       84,250,000       83,705,188  (b)(c) 

DBS Bank Ltd.

    0.952     3/6/17       160,000,000       159,982,160  (b)(c) 

DBS Bank Ltd.

    0.962     3/14/17       185,000,000       184,951,365  (b)(c) 

DBS Bank Ltd.

    1.013     5/3/17       95,000,000       94,870,969  (b)(c) 

DBS Bank Ltd.

    1.013     5/8/17       198,000,000       197,698,678  (b)(c) 

DnB NOR Bank ASA

    1.200     5/2/17       400,000,000       400,256,168  (a)(c) 

General Electric Co.

    0.550     3/1/17       64,879,000       64,878,018  (b) 

HSBC USA Inc.

    1.259     5/2/17       45,000,000       45,033,871  (a)(c) 

HSBC USA Inc.

    1.250     5/15/17       75,000,000       75,060,898  (a)(c) 

HSBC USA Inc.

    1.200     5/18/17       51,425,000       51,460,833  (a)(c) 

ING U.S. Funding LLC

    0.942     3/3/17       243,000,000       242,985,298  (b) 

ING U.S. Funding LLC

    1.350     5/3/17       156,625,000       156,767,465  (a) 

ING U.S. Funding LLC

    1.221     5/30/17       162,000,000       162,122,305  (a) 

ING U.S. Funding LLC

    1.266     8/7/17       125,000,000       125,111,365  (a) 

Johnson & Johnson

    0.530     3/3/17       155,000,000       154,992,315  (b)(c) 

JPMorgan Securities LLC

    0.771     3/28/17       49,000,000       48,973,780  (b) 

JPMorgan Securities LLC

    1.228     4/26/17       385,000,000       385,251,293  (a) 

JPMorgan Securities LLC

    1.197     7/5/17       99,025,000       99,086,036  (a) 

Landesbank Hessen-Thuringen

    0.952     3/6/17       97,000,000       96,988,780  (b)(c) 

Landesbank Hessen-Thuringen

    1.258     8/8/17       95,000,000       94,518,632  (b)(c) 

NRW Bank

    1.053     3/28/17       50,000,000       49,971,572  (b)(c) 

NRW Bank

    1.053     4/6/17       75,000,000       74,942,727  (b)(c) 

NRW Bank

    1.033     4/25/17       117,000,000       116,862,954  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    0.952     3/6/17       168,990,000       168,970,313  (b)(c) 

Oversea-Chinese Banking Corp. Ltd.

    1.151     6/12/17       200,000,000       200,111,772  (a) 

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   13


Schedule of investments (unaudited) (cont’d)

February 28, 2017

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Commercial Paper — continued

                               

Societe Generale

    0.520-0.670     3/1/17     $ 1,107,000,000     $ 1,106,980,838  (b)(c) 

Sumitomo Mitsui Trust & Banking Co., Ltd.

    0.972     3/8/17       200,000,000       199,972,622  (b)(c) 

Swedish Export Credit

    1.177     8/8/17       96,000,000       95,526,875  (b) 

Toronto Dominion Holdings USA

    0.932     3/8/17       135,000,000       134,981,159  (b)(c) 

Unilever Capital Corp.

    0.530     3/1/17       55,000,000       54,999,050  (b)(c) 

United Overseas Bank Ltd.

    0.952     3/3/17       155,000,000       154,991,397  (b)(c) 

United Overseas Bank Ltd.

    0.952     3/7/17       170,000,000       169,977,852  (b)(c) 

United Overseas Bank Ltd.

    1.156     7/28/17       28,900,000       28,766,338  (b)(c) 

USAA Capital Corp.

    0.620     3/16/17       45,000,000       44,987,040  (b) 

Westpac Banking Corp.

    1.262     11/17/17       22,000,000       22,022,437  (a)(c) 

Total Commercial Paper

                            7,988,227,836  

Corporate Bonds & Notes — 0.0%

                               

UBS AG

    1.415     6/1/17       5,000,000       5,004,494  (a)  

Time Deposits — 29.1%

                               

Bank of Tokyo-Mitsubishi UFJ NY

    0.570     3/1/17       99,000,000       99,000,000  

BNP Paribas NY Branch

    0.550     3/1/17       178,000,000       178,000,000  

CIBC World Markets Corp.

    0.590     3/1/17       288,000,000       288,000,000  

CIBC World Markets Corp.

    0.600     3/1/17       215,000,000       215,000,000  

Credit Agricole CIB

    0.570     3/1/17       1,079,859,000       1,079,859,000  

DNB Bank ASA

    0.570     3/1/17       740,000,000       740,000,000  

National Bank of Canada

    0.550     3/1/17       95,000,000       95,000,000  

Natixis SA

    0.570     3/1/17       849,993,000       849,993,000  

Nordea Bank AB

    0.560     3/1/17       1,040,000,000       1,040,000,000  

Skandinaviska Enskilda Banken AB

    0.570     3/1/17       1,000,000,000       1,000,000,000  

Svenska Handelsbanken AB

    0.550     3/1/17       987,583,000       987,583,000  

Swedbank AB

    0.570     3/1/17       1,000,000,000       1,000,000,000  

Total Time Deposits

                            7,572,435,000  

Repurchase Agreements — 5.0%

                               

Bank of America Corp. tri-party repurchase agreement dated 10/17/16; Proceeds at maturity — $400,678,444; (Fully collateralized by various U.S. government agency obligations, corporate bonds and money market instruments, 2.723% to 9.000% due 3/15/17 to 5/1/40; Market value — $408,000,000)

    0.860     5/10/17       400,000,000       400,000,000  

Bank of America Corp. tri-party repurchase agreement dated 1/26/17; Proceeds at maturity — $350,593,639; (Fully collateralized by various U.S. government agency obligations, corporate bonds and money market instruments, 0.000% to 5.550% due 3/06/17 to 2/6/57; Market value — $366,588,199)

    0.860     5/10/17       350,000,000       350,000,000  

 

See Notes to Financial Statements.

 

14    Liquid Reserves Portfolio 2017 Semi-Annual Report


 

 

Liquid Reserves Portfolio

 

Security   Rate     Maturity
Date
    Face
Amount
    Value  

Repurchase Agreements — continued

                               

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 10/17/16; Proceeds at maturity — $200,358,944; (Fully collateralized by various corporate bonds and notes, municipal bonds and money market instruments, 0.000% to 9.750% due 6/15/17 to 10/15/46; Market value — $213,771,037)

    0.910     5/10/17     $ 200,000,000     $ 200,000,000  

Mitsubishi UFJ Trust & Banking Corp. tri-party repurchase agreement dated 10/17/16; Proceeds at maturity — $100,179,472; (Fully collateralized by various municipal bonds, 0.000% to 7.747% due 11/1/22 to 11/15/56; Market value — $105,000,004)

    0.910     5/10/17       100,000,000       100,000,000  

RBC Capital Markets; tri-party repurchase agreement dated 2/17/17; Proceeds at maturity — $100,179,472; (Fully collateralized by various U.S. government agency obligations, 2.125% to 6.000% due 6/1/22 to 3/1/47; Market value — $102,000,000)

    0.910     5/10/17       100,000,000       100,000,000  

RBC Capital Markets; tri-party repurchase agreement dated 2/8/17; Proceeds at maturity — $150,284,000; (Fully collateralized by various municipal bonds, 0.000% to 7.250% due 4/14/17 to 5/15/2115; Market value — $158,090,190)

    0.960     5/10/17       150,000,000       150,000,000  

Total Repurchase Agreements

                            1,300,000,000  

Total Investments — 100.0% (Cost — $26,038,067,390#)

 

            26,045,401,068  

Other Assets in Excess of Liabilities — 0.0%

 

            7,813,479  

Total Net Assets — 100.0%

 

          $ 26,053,214,547  

 

(a) 

Variable rate security. Interest rate disclosed is as of the most recent information available.

 

(b) 

Rate shown represents yield-to-maturity.

 

(c) 

Commercial paper exempt from registration under Section 4(2) of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

(d) 

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted.

 

# Aggregate cost for federal income tax purposes is substantially the same.

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   15


Statement of assets and liabilities (unaudited)

February 28, 2017

 

Assets:         

Investments, at value (Cost — $26,038,067,390)

   $ 26,045,401,068  

Cash

     419,224  

Interest receivable

     9,019,135  

Receivable for securities sold

     825  

Total Assets

     26,054,840,252  
Liabilities:         

Trustees’ fees payable

     119,136  

Accrued expenses

     1,506,569  

Total Liabilities

     1,625,705  
Total Net Assets    $ 26,053,214,547  
Represented by:         
Paid-in capital    $ 26,053,214,547  

 

See Notes to Financial Statements.

 

16    Liquid Reserves Portfolio 2017 Semi-Annual Report


Statement of operations (unaudited)

For the Six Months Ended February 28, 2017

 

Investment Income:         

Interest

   $ 119,405,727  
Expenses:         

Investment management fee (Note 2)

     16,138,570  

Fund accounting fees

     1,047,502  

Trustees’ fees

     445,635  

Legal fees

     363,564  

Custody fees

     175,604  

Audit and tax fees

     22,776  

Miscellaneous expenses

     46,672  

Total Expenses

     18,240,323  

Less: Fee waivers and/or expense reimbursements (Notes 2)

     (16,138,570)  

Net Expenses

     2,101,753  
Net Investment Income      117,303,974  
Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 4):         

Net Realized Gain From Investment Transactions

     4,898,306  

Change in Net Unrealized Appreciation (Depreciation) From Investments

     7,333,678  
Net Gain on Investments      12,231,984  
Increase in Net Assets From Operations    $ 129,535,958  

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   17


Statements of changes in net assets

 

For the Six Months Ended February 28, 2017 (unaudited)
and the Year Ended August 31, 2016
   2017      2016  
Operations:                  

Net investment income

   $ 117,303,974      $ 245,409,790  

Net realized gain

     4,898,306        686,995  

Change in net unrealized appreciation (depreciation)

     7,333,678         

Increase in Net Assets From Operations

     129,535,958        246,096,785  
Capital Transactions:                  

Proceeds from contributions

     35,400,942,370        114,933,457,934  

Value of withdrawals

     (59,380,435,177)        (138,942,587,255)  

In-kind capital contributions (Note 3)

            10,124,686,062  

Decrease in Net Assets From Capital Transaction

     (23,979,492,807)        (13,884,443,259)  

Decrease in Net Assets

     (23,849,956,849)        (13,638,346,474)  
Net Assets:                  

Beginning of period

     49,903,171,396        63,541,517,870  

End of period*

   $ 26,053,214,547      $ 49,903,171,396  

 

See Notes to Financial Statements.

 

18    Liquid Reserves Portfolio 2017 Semi-Annual Report


Financial highlights

 

For the years ended August 31, unless otherwise noted:  
     20171     2016     2015     2014     2013     2012  
Net assets, end of period (millions)     $26,053       $49,903       $63,542       $74,403       $73,576       $61,127  

Total return2

    0.43     0.48     0.22     0.10     0.17     0.23
Ratios to average net assets:            

Gross expenses

    0.11 %3      0.11     0.11     0.11     0.11     0.11

Net expenses4,5

    0.01 3      0.01       0.01       0.10       0.10       0.10  

Net investment income

    0.73 3      0.46       0.21       0.10       0.17       0.23  

 

1 

For the six months ended February 28, 2017 (unaudited).

 

2 

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

3 

Annualized.

 

4 

The investment manager has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time. Prior to August 18, 2014, as a result of a voluntary expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of the Portfolio did not exceed 0.10%.

 

5 

Reflects fee waivers and/or expense reimbursements.

 

See Notes to Financial Statements.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   19


Notes to financial statements (unaudited)

 

1. Organization and significant accounting policies

Liquid Reserves Portfolio (the “Portfolio”) is a separate diversified investment series of Master Portfolio Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Declaration of Trust permits the Trustees to issue beneficial interests in the Portfolio. At February 28, 2017, all investors in the Portfolio were funds advised or administered by the manager of the Portfolio and/or its affiliates.

Effective October 11, 2016, the Portfolio sells and effects withdrawals of its interests at prices based on the current market value of the securities it holds. Therefore, the price of an interest in the Portfolio fluctuates along with changes in the market-based value of the holdings of the Portfolio. Because the price of an interest in the Portfolio fluctuates, it has what is called a “floating net asset value” or “floating NAV”. Under Rule 2a-7 of the 1940 Act (“Rule 2a-7”), the Portfolio must follow strict rules as to the credit quality, liquidity, diversification and maturity of its investments. Effective October 14, 2016, the Portfolio may impose a fee upon the withdrawal of investors’ interests or may temporarily suspend investors’ ability to withdraw interests if the Portfolio’s liquidity falls below required minimums because of market conditions or other factors.

The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. Prior to October 11, 2016, in accordance with Rule 2a-7, money market instruments were valued at amortized cost, which approximated market value. This method involved valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost was subject to its compliance with certain conditions as specified by Rule 2a-7.

Effective October 11, 2016, the valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. When the Portfolio holds securities or other assets that are denominated in a foreign currency, the Portfolio will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be

 

20    Liquid Reserves Portfolio 2017 Semi-Annual Report


unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Portfolio calculates its net asset value, the Portfolio values these securities as determined in accordance with procedures approved by the Portfolio’s Board of Trustees.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Portfolio’s pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party pricing information for investments owned by the Portfolio, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Trustees quarterly.

The Portfolio uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   21


Notes to financial statements (unaudited) (cont’d)

 

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

 

Level 1 — quoted prices in active markets for identical investments

 

 

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

 

Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Portfolio’s assets carried at fair value:

 

ASSETS  
Description  

Quoted Prices

(Level 1)

   

Other Significant

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

    Total  
Short-term investments†         $ 26,045,401,068           $ 26,045,401,068  

 

See Schedule of Investments for additional detailed categorizations.

(b) Repurchase agreements. The Portfolio may enter into repurchase agreements with institutions that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Portfolio acquires a debt security subject to an obligation of the seller to repurchase, and of the Portfolio to resell, the security at an agreed-upon price and time, thereby determining the yield during the Portfolio’s holding period. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian, acting on the Portfolio’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Portfolio generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Portfolio seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Portfolio may be delayed or limited.

(c) Interest income and expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.

 

22    Liquid Reserves Portfolio 2017 Semi-Annual Report


(d) Method of allocation. Net investment income and net realized/unrealized gains and/or losses of the Portfolio are allocated pro rata, based on respective ownership interests, among the Fund and other investors in the Portfolio (the “Holders”) at the time of such determination. Prior to October 11, 2016, gross realized gains and/or losses of the Portfolio were allocated to the Holders in a manner such that, the net asset values per share of each Holder, after each such allocation was closer to the total of all Holders’ net asset values divided by the aggregate number of shares outstanding for all Holders.

(e) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

(f) Compensating balance arrangements. The Portfolio has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Portfolio’s cash on deposit with the bank.

(g) Income taxes. The Portfolio is classified as a partnership for federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Therefore, no federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of Subchapter M of the Internal Revenue Code.

Management has analyzed the Portfolio’s tax positions taken on income tax returns for all open tax years and has concluded that as of August 31, 2016, no provision for income tax is required in the Portfolio’s financial statements. The Portfolio’s federal and state income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(h) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.

 

Liquid Reserves Portfolio 2017 Semi-Annual Report   23


Notes to financial statements (unaudited) (cont’d)

 

LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset monthly 70% of the net management fee it receives from the Portfolio.

LMPFA has voluntarily agreed to waive and/or reimburse 0.10% of Portfolio expenses. This arrangement may be reduced or terminated under certain circumstances. Additional amounts may be voluntarily waived and/or reimbursed from time to time.

During the six months ended February 28, 2017, fees waived and/or expenses reimbursed amounted to $16,138,570.

LMPFA is permitted to recapture amounts waived and/or reimbursed to the Portfolio during the same fiscal year under certain circumstances.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Investments

At February 28, 2017, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

Gross unrealized appreciation      $ 7,423,391  
Gross unrealized depreciation        (89,713)  
Net unrealized appreciation      $ 7,333,678  

On August 29, 2016, Western Asset Institutional Cash Reserves Fund transferred all of its investable assets (including cash and receivables), with a value of $10,124,686,062, to the Portfolio in exchange for an interest in the Portfolio.

4. Derivative instruments and hedging activities

During the six months ended February 28, 2017, the Portfolio did not invest in derivative instruments.

5. Recent accounting pronouncement

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, the “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Portfolio’s financial statements and related disclosures.

 

24    Liquid Reserves Portfolio 2017 Semi-Annual Report
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Morgan, Lewis & Bockius LLP

One Federal Street

Boston, Massachusetts 02110

May 17, 2017

VIA EDGAR

Securities and Exchange Commission

Division of Investment Management

100 F Street, NE

Washington, D.C. 20549

 

Re: Legg Mason Partners Institutional Trust
     Registration Statement on Form N-14
     (File No. 811-6740)

Ladies and Gentlemen:

On behalf of Legg Mason Partners Institutional Trust, a Maryland statutory trust (the “Trust”), we are hereby filing a combined information statement and registration statement on Form N-14, with exhibits (the “Registration Statement”).

The Registration Statement relates to a proposed Agreement and Plan of Reorganization whereby all of the assets and liabilities of Institutional Shares of Western Asset Institutional Cash Reserves, a series of the Trust, will be transferred to Western Asset Institutional Liquid Reserves, also a series of the Trust, in exchange for corresponding Institutional Shares.

The Registration Statement is being filed pursuant to Rule 488 under the Securities Act of 1933, as amended. It is proposed that this filing will become effective on June 17, 2017 pursuant to Rule 488.

Please call the undersigned at (617) 951-8458 with any comments or questions relating to the filing.

 

Sincerely,
/s/ Jeremy B. Kantrowitz
Jeremy B. Kantrowitz