0001193125-16-427026.txt : 20160725 0001193125-16-427026.hdr.sgml : 20160725 20160111214317 ACCESSION NUMBER: 0001193125-16-427026 CONFORMED SUBMISSION TYPE: N-14 8C PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 20160112 DATE AS OF CHANGE: 20160524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC. CENTRAL INDEX KEY: 0000910068 IRS NUMBER: 133735236 STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-14 8C SEC ACT: 1933 Act SEC FILE NUMBER: 333-208957 FILM NUMBER: 161337542 BUSINESS ADDRESS: STREET 1: 620 EIGHTH AVENUE STREET 2: 49TH FLOOR CITY: NEW YORK STATE: NY ZIP: 100018 BUSINESS PHONE: 888-777-0102 MAIL ADDRESS: STREET 1: 620 EIGHTH AVENUE STREET 2: 49TH FLOOR CITY: NEW YORK STATE: NY ZIP: 100018 FORMER COMPANY: FORMER CONFORMED NAME: HIGH INCOME OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19941230 FORMER COMPANY: FORMER CONFORMED NAME: SMITH BARNEY HIGH INCOME OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19930913 FORMER COMPANY: FORMER CONFORMED NAME: SMITH BARNEY HIGH INCOME FUND INC DATE OF NAME CHANGE: 19930802 N-14 8C 1 d109853dn148c.htm WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC. Western Asset High Income Opportunity Fund Inc.
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As filed with the Securities and Exchange Commission on January 12, 2016

Securities Act File No. 333-            

Investment Company Act File No. 811-07920

 

 

 

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.    

 

 

WESTERN ASSET HIGH INCOME

OPPORTUNITY FUND INC.

(Exact Name of Registrant as Specified in Charter)

 

 

620 Eighth Avenue

New York, New York 10018

(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)

1-888-777-0102

(Area Code and Telephone Number)

Jane E. Trust

Legg Mason & Co., LLC

100 International Drive

Baltimore, MD 21202

(Name and Address of Agent for Services)

 

 

with copies to:

 

Sarah E. Cogan, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

 

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Stamford, Connecticut 06902

 

 

Calculation of Registration Fee under the Securities Act of 1933:

 

 

Title of Securities Being Registered   Amount Being
Registered(1)
  Proposed
Maximum
Offering Price
per Unit(1)
  Proposed
Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee

Common Stock ($.001 par value)

 

45,553,786

  $5.15   $234,602,000   $23,624.42

 

 

(1) Estimated solely for the purpose of calculating the registration fee.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.


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WESTERN ASSET MANAGED HIGH INCOME FUND INC.

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.

620 Eighth Avenue

New York, New York 10018

            , 2016

Dear Stockholder:

A Joint Special Meeting of Stockholders (the “Meeting”) of Western Asset Managed High Income Fund Inc. (“MHY”) and Western Asset High Income Opportunity Fund Inc. (“HIO” and together with MHY, the “Funds”) will be held at 620 Eighth Avenue, 49th Floor, New York, New York, on Thursday, March 24, 2016 at 10:00 a.m., Eastern Time, for the purposes of considering and voting on a proposal to approve the merger of MHY with and into HIO in accordance with the Maryland General Corporation Law (the “Merger”). The attached Proxy Statement/Prospectus asks for your approval of the proposed Merger. After careful consideration, the Board of each Fund recommends that you vote “FOR” the proposed Merger.

As a result of the Merger, each share of common stock of MHY would convert into an equivalent dollar amount (to the nearest $0.001) of full shares of common stock of HIO, based on the net asset value of each Fund on the date preceding the Merger. HIO will not issue fractional shares to MHY stockholders. In lieu of issuing fractional shares, HIO will pay cash to each former holder of MHY common stock in an amount equal to the value of the fractional shares of HIO common stock that the investor would otherwise have received in the Merger. The currently issued and outstanding common stock of HIO will remain issued and outstanding.

Both MHY and HIO are closed-end, diversified management investment companies listed on the New York Stock Exchange. MHY’s primary investment objective is high current income. Capital appreciation is a secondary objective. Similarly, HIO’s primary investment objective is to seek high current income. As a secondary objective, HIO seeks capital appreciation. A more detailed comparison of the Funds’ investment objectives and policies appears in the attached Proxy Statement/Prospectus. The current investment objectives and policies of HIO will continue unchanged if the Merger occurs.

The Board believes that the Merger is in the best interests of both MHY stockholders and HIO stockholders. MHY and HIO have near identical investment objectives and substantially similar policies and strategies, which will allow MHY stockholders to continue to have exposure to high-yield fixed income securities. Moreover, the combined Fund will likely benefit from economies of scale, as one set of fixed expenses would be spread over a larger asset base, as well as from enhanced market liquidity and additional opportunities for diversification. Furthermore, the Merger will result in more streamlined high yield product offering, allowing for more focused marketing and stockholder servicing efforts.

Your vote is very important to us regardless of the number of shares you own. Whether or not you plan to attend the Meeting in person, please read the Proxy Statement/Prospectus and cast your vote promptly. To vote, simply date, sign and return the proxy card in the enclosed postage-paid envelope or follow the instructions on the proxy card for voting by touch-tone telephone or on the Internet.

If you have any questions about the proposal to be voted on, please call Georgeson Inc. at 1-800-891-3214.

It is important that your vote be received no later than the time of the Meeting.

Sincerely,

 

LOGO

Jane E. Trust

President and Chief Executive Officer

Western Asset Managed High Income Fund Inc.

Western Asset High Income Opportunity Fund Inc.


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WESTERN ASSET MANAGED HIGH INCOME FUND INC.

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.

 

 

IMPORTANT NEWS FOR STOCKHOLDERS

 

 

The enclosed combined Proxy Statement/Prospectus describes a proposal to merge Western Asset Managed High Income Fund Inc. (“MHY”) with and into Western Asset High Income Opportunity Fund Inc. (“HIO,” and together with MHY, the “Funds”) in accordance with the Maryland General Corporation Law (the “Merger”).

While we encourage you to read the full text of the enclosed combined Proxy Statement/Prospectus, here is a brief overview of the proposed Merger. Please refer to the more complete information contained elsewhere in the combined Proxy Statement/Prospectus about the Merger.

 

 

COMMON QUESTIONS ABOUT THE PROPOSED MERGER

 

  Q. Why am I receiving the Proxy Statement/Prospectus?

A.    As a stockholder of either MHY or HIO, you are being asked to vote in favor of a proposal to merge MHY with and into HIO in accordance with the Maryland General Corporation Law.

 

  Q. How will the Merger affect me?

A.    If the Merger is approved, MHY will be merged with and into HIO in accordance with the Maryland General Corporation Law. MHY’s assets and liabilities will be combined with the assets and liabilities of HIO, and stockholders of MHY will become stockholders of HIO.

As a result of the Merger, each share of common stock of MHY would convert into an equivalent dollar amount (to the nearest $0.001) of full shares of common stock of HIO, based on the net asset value of each Fund on the date preceding the merger. HIO will not issue fractional shares to MHY stockholders. In lieu of issuing fractional shares, HIO will pay cash to each former MHY stockholder in an amount equal to the value of the fractional shares of HIO common stock that the investor would otherwise have received in the merger. The currently issued and outstanding shares of HIO common stock will remain issued and outstanding. Stockholders of HIO will be stockholders in a larger fund.

 

  Q. Why is the Merger being recommended?

A.    The Board of Directors of each Fund believes that the Merger is in the best interests of both MHY stockholders and HIO stockholders. MHY and HIO have near identical investment objectives and substantially similar policies and strategies, which will allow MHY stockholders to continue to have exposure to high-yield fixed income securities. Moreover, the combined Fund will likely benefit from economies of scale, as one set of fixed expenses would be spread over a larger asset base, as well as from enhanced market liquidity and additional opportunities for diversification. Furthermore, the Merger will result in more streamlined high yield product offering, allowing for more focused marketing and stockholder servicing efforts.

At a meeting held on November 11 and 12, 2015, the Board of Directors of each Fund, including all of the Directors who are not “interested persons” of the Funds under the Investment Company Act of 1940, as amended (the “Independent Directors”), unanimously approved an Agreement and Plan of Merger with respect to both Funds.

 

  Q. Are HIO’s investment objectives and policies similar to those of MHY?

A.    MHY and HIO have near identical investment objectives and substantially similar policies and strategies.

MHY’s primary investment objective is high current income. Capital appreciation is a secondary objective. Similarly, HIO’s primary investment objective is to seek high current income. As a secondary objective, HIO seeks capital appreciation.


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Under normal market conditions, MHY will invest at least 80% of its assets in high-yield corporate bonds, debentures and notes. Up to 20% of its assets may be invested in common stock or other equity or equity-related securities, including convertible securities, preferred stock, warrants and rights. In addition, MHY may invest up to 20% of its assets in the securities of foreign issuers that are denominated in currencies other than the U.S. dollar and may invest without limitation in securities of foreign issuers that are denominated in U.S. dollars.

In seeking to fulfill its investment objectives, HIO invests, under normal market conditions, at least 80% of its net assets plus any borrowings for investment purposes in high-yielding corporate debt securities and preferred stocks and up to 20% in common stock equivalents, including options, warrants and rights. HIO does not use leverage for investment purposes. In addition, HIO may invest up to 20% of its total assets in the securities of foreign issuers that are denominated in currencies other than the U.S. dollar and may invest without limitation in securities of foreign issuers that are denominated in U.S. dollars. Furthermore, HIO may invest up to 15% of its assets in illiquid securities.

The current investment objectives and policies of HIO will continue unchanged if the Merger occurs.

Please see “Comparison of Investment Objectives, Strategies, and Principal Risks of Investing in the Funds” in the Proxy Statement/Prospectus for a more complete comparison of the Funds’ investment objectives, policies and a summary of the principal risks of investing in the Funds.

 

  Q. How will the Merger affect fees and expenses?

A.    Legg Mason Partners Fund Adviser, LLC (“LMPFA”) provides administrative and certain oversight services to MHY. MHY pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of MHY’s average daily net assets. Similarly, HIO currently pays LMPFA, which is also HIO’s investment manager, an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of average daily net assets.

Although HIO’s investment management fee is identical to MHY’s, MHY also pays 0.13% in other expenses based on its average daily net assets, whereas HIO only pays 0.09% in other expenses based on its average daily net assets. It is anticipated that MHY’s shareholders’ total expense ratio will decline by 0.05% and HIO’s shareholders’ total expense ratio will decline by 0.01% as a result of the Merger.

 

  Q. Will I have to pay any taxes as a result of the Merger?

A.    The Merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. Assuming the Merger qualifies for such treatment, you generally will not recognize a gain or loss for federal income tax purposes as a result of the Merger. MHY stockholders may, however, recognize gain or loss with respect to any cash those stockholders receive pursuant to the Merger in lieu of fractional shares. As a condition to the closing of the Merger, MHY and HIO will each receive an opinion of counsel to the effect that the Merger will qualify for such treatment. Opinions of counsel are not binding on the Internal Revenue Service or the courts. You should talk to your tax advisor about any state, local and other tax consequences of the Merger. See “Proposal 1—Information About the Proposed Merger—Federal Income Tax Consequences.”

 

  Q. Who will pay for the Merger?

A.    The costs of Merger, including the costs of preparing, printing, assembling and mailing material in connection with this solicitation of proxies are estimated to be approximately $474,600. LMPFA, or an affiliate thereof, will bear half the costs of the Merger, with the remaining costs shared equally by the Funds.

 

  Q. How does the Board of each Fund recommend that I vote on the Merger?

A.    After careful consideration, MHY’s Board of Directors, including all of the Independent Directors, and HIO’s Board of Directors, including all of the Independent Directors, unanimously recommend that you vote FOR the Merger.

 

  Q. What will happen if the Merger is not approved?

A.    If the Merger is not approved, MHY and HIO will continue as separate investment companies, and each Board will consider such alternatives as it determines to be in the best interests of such Fund’s stockholders, including reproposing the Merger.

 

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  Q. When is the Merger expected to happen?

A.    If each Fund’s stockholders approve the Merger, the Merger is expected to occur on or about April 29, 2016.

 

  Q. Will my vote make a difference?

A.    Your vote is very important and can make a difference in the governance of each Fund, no matter how many shares you own. Your vote can help ensure that the proposal recommended by the Board of Directors of each Fund can be implemented. We encourage all stockholders to participate in the governance of each Fund.

 

  Q. Whom do I call if I have questions?

A.    If you need more information, or have any questions about voting, please call Georgeson Inc., the proxy solicitor, at 1-800-891-3214.

 

  Q. How do I vote my shares?

A.    You can provide voting instructions by telephone by calling the toll-free number on the enclosed proxy card or electronically by going to the Internet address provided on the proxy card and following the instructions, using your proxy card as a guide. Alternatively, you can vote your shares by signing and dating the enclosed proxy card and mailing it in the enclosed postage-paid envelope.

You may also attend the Meeting and vote in person. However, even if you intend to attend the Meeting, we encourage you to provide voting instructions by one of the methods described above.

It is important that you vote promptly.

 

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WESTERN ASSET MANAGED HIGH INCOME FUND INC.

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.

620 Eighth Avenue

New York, New York 10018

 

 

NOTICE OF A JOINT SPECIAL MEETING OF STOCKHOLDERS

 

 

                , 2016

To the Stockholders:

A Joint Special Meeting of Stockholders (the “Meeting”) of Western Asset Managed High Income Fund Inc. (“MHY”) and Western Asset High Income Opportunity Fund Inc. (“HIO,” and together with MHY, the “Funds”) will be held at 620 Eighth Avenue, 49th Floor, New York, New York, on Thursday, March 24, 2016 at 10:00 a.m., Eastern Time, to consider and vote on a proposal to approve the merger of MHY with and into HIO in accordance with the Maryland General Corporation Law (the “Merger”).

The Board of each Fund recommends that you vote “FOR” the Merger upon which you are being asked to vote.

Stockholders of record at the close of business on February 1, 2016 are entitled to vote at the Meeting and at any adjournments or postponements thereof.

By order of the Board of Directors,

 

LOGO

Robert I. Frenkel

Secretary

Western Asset Managed High Income Fund Inc.

Western Asset High Income Opportunity Fund Inc.

            , 2016


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INSTRUCTIONS FOR SIGNING PROXY CARDS

The following general rules for signing proxy cards may be of assistance to you and avoid the time and expense to MHY involved in validating your vote if you fail to sign your proxy card properly.

1. Individual Accounts: Sign your name exactly as it appears in the registration on the proxy card.

2. Joint Accounts: Either party may sign, but the name of the party signing should conform exactly to a name shown in the registration.

3. All Other Accounts: The capacity of the individual signing the proxy card should be indicated unless it is reflected in the form of registration. For example:

 

Registration

  

Valid Signature

Corporate Accounts

  

(1) ABC Corp.

   ABC Corp. (by John Doe, Treasurer)

(2) ABC Corp.

   John Doe, Treasurer

(3) ABC Corp., c/o John Doe, Treasurer

   John Doe

(4) ABC Corp. Profit Sharing Plan

   John Doe, Trustee

Trust Accounts

  

(1) ABC Trust

   Jane B. Doe, Trustee

(2) Jane B. Doe, Trustee, u/t/d 12/28/78

   Jane B. Doe

Custodial or Estate Accounts

  

(1) John B. Smith, Cust., f/b/o John B. Smith, Jr. UGMA

   John B. Smith

(2) John B. Smith

   John B. Smith, Jr., Executor

 

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The information contained in this Proxy 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 Proxy Statement/Prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JANUARY 12, 2016

PROXY STATEMENT/PROSPECTUS

            , 2016

PROXY STATEMENT FOR:

WESTERN ASSET MANAGED HIGH INCOME FUND INC.

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.

620 Eighth Avenue

New York, New York 10018

888-777-0102

PROSPECTUS FOR:

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.

620 Eighth Avenue

New York, New York 10018

888-777-0102

This combined Proxy Statement and Prospectus (the “Proxy Statement/Prospectus”) is being furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of Western Asset Managed High Income Fund Inc. (“MHY”) and Western Asset High Income Opportunity Fund Inc. (“HIO,” and together with MHY, the “Funds”) for a Joint Special Meeting of Stockholders (the “Meeting”) for each Fund. The Meeting will be held Thursday, March 24, 2016 at 620 Eighth Avenue, 49th Floor, New York, New York at 10:00 a.m., Eastern Time. At the Meeting, stockholders of MHY and HIO will be asked to consider and act upon a proposal to approve the merger of MHY with and into HIO in accordance with the Maryland General Corporation Law (the “Merger”).

If the Merger is approved, each share of common stock, par value $0.001 per share, of MHY (the “MHY Common Shares”) would convert into an equivalent dollar amount (to the nearest $0.001) of full shares of common stock, par value $0.001 per share, of HIO (the “HIO Common Shares”), based on the net asset value of each Fund on the date preceding the Merger. HIO will not issue fractional HIO Common Shares to holders of MHY Common Shares. In lieu of issuing fractional shares, HIO will pay cash to each former holder of MHY Common Shares in an amount equal to the value of the fractional HIO Common Shares that the investor would otherwise have received in the Merger. Although the HIO Common Shares received in the Merger will have the same total net asset value as the MHY Common Shares held immediately before the Merger (disregarding fractional shares), their stock price on the New York Stock Exchange (“NYSE”) may be greater or less than that of the MHY Common Shares, based on current market prices persisting at the time of the Merger. All HIO Common Shares currently issued and outstanding will remain issued and outstanding following the Merger.

The Board believes that the Merger is in the best interests of both MHY stockholders and HIO stockholders. MHY and HIO have nearly identical investment objectives and substantially similar policies and strategies, which will allow MHY stockholders to continue to have exposure to high-yield fixed income securities. Moreover, the combined Fund will likely benefit from economies of scale, as one set of fixed expenses would be spread over a larger asset base, as well as from enhanced market liquidity and additional opportunities for diversification. Furthermore, the Merger will result in more streamlined high yield product offering, allowing for more focused marketing and stockholder servicing efforts.

 

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At a meeting held on November 11 and 12, 2015, the Board of Directors of each Fund, including all of the Directors who are not “interested persons” of the Funds under the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Directors”), unanimously approved an Agreement and Plan of Merger with respect to both Funds.

MHY was incorporated in Maryland on December 24, 1992; HIO was incorporated in Maryland on July 30, 1993. Both MHY and HIO are closed-end, diversified management investment companies listed on the NYSE.

MHY’s primary investment objective is high current income. Capital appreciation is a secondary objective. Similarly, HIO’s primary investment objective is to seek high current income. As a secondary objective, HIO seeks capital appreciation. The current investment policies of HIO, which differ from those of MHY, will continue unchanged if the Merger occurs. Please see “Proposal 1—Comparison of Investment Objectives, Strategies, and Principal Risks of Investing in the Funds” in the Proxy Statement/Prospectus for a more complete comparison of the Funds’ investment objectives and policies.

The Merger will be effected pursuant to an Agreement and Plan of Merger, a form of which is attached to this Proxy Statement/Prospectus as Appendix A. The material terms and conditions of the Agreement and Plan of Merger are summarized in this Proxy Statement/Prospectus. See “Proposal 1—Information About the Proposed Merger-The Agreement and Plan of Merger.”

This Proxy Statement/Prospectus serves as a prospectus for HIO Common Shares under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the issuance of HIO Common Shares in the Merger.

Assuming the holders of MHY Common Shares approve the Merger and all other conditions to the consummation of the Merger are satisfied or waived, the Funds will jointly file articles of merger (the “Articles of Merger”) with the State Department of Assessments and Taxation of Maryland (the “SDAT”). The Merger will become effective when the SDAT accepts for record the Articles of Merger or at such later time, which may not exceed 30 days after the Articles of Merger are accepted for record, as specified in the Articles of Merger. The date when the Articles of Merger are accepted for record, or the later date, is referred to in this Proxy Statement/Prospectus as the “Closing Date.” MHY, as soon as practicable after the Closing Date, will withdraw its registration under the 1940 Act.

The Merger is being structured as a tax-free reorganization for federal income tax purposes. See “Proposal 1— Information About the Proposed Merger—Federal Income Tax Consequences.” Stockholders should consult their tax advisors to determine the actual impact of the Merger on them in light of their individual tax circumstances.

You should retain this Proxy Statement/Prospectus for future reference as it sets forth concisely information about MHY and HIO that you should know before voting on the proposed Merger described below.

A Statement of Additional Information (“SAI”) dated             , 2016, which contains additional information about the Merger and the Funds, has been filed with the Securities and Exchange Commission (“SEC”). The SAI, as well as MHY’s Annual Report to Stockholders for the Fiscal Year Ended February 28, 2015, filed with the SEC on April 17, 2015 (accession no. 0001193125-15-135519) and HIO’s Annual Report to Stockholders for the Fiscal Year Ended September 30, 2015, filed with the SEC on November 24, 2015 (accession no. 0001193125-15-386792), and, which highlight certain important information such as investment performance and expense and financial information, are incorporated by reference into this Proxy Statement/Prospectus. In addition, stockholder reports, proxy materials and other information concerning HIO (File No. 811-07920) and MHY (File No. 811-07396) can be inspected at the NYSE. You may receive free of charge a copy of the SAI, or the annual report and semi-annual report for either Fund, by contacting MHY and HIO at 888-777-0102, by writing either Fund at the address listed above or by visiting our website at www.lmcef.com.

In addition, you can copy and review this Proxy Statement/Prospectus and the complete filing on Form N-14 containing the Proxy Statement/Prospectus (File No. 333-            ) 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 also 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.

 

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MHY Common Shares are listed on the NYSE under the symbol “MHY,” and HIO Common Shares are listed on the NYSE under the symbol “HIO.” After the Closing Date, HIO Common Shares will continue to be listed on the NYSE under the symbol “HIO.”

The information contained herein concerning MHY and HIO has been provided by, and is included herein in reliance upon, MHY and HIO, respectively.

The Securities and Exchange Commission has not approved or disapproved these securities nor passed upon the accuracy or adequacy of this Proxy Statement/Prospectus. Any representation to the contrary is a criminal offense.

 

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TABLE OF CONTENTS

 

      Page  

PROPOSAL 1—TO APPROVE THE MERGER OF MHY WITH AND INTO HIO IN ACCORDANCE WITH THE MARYLAND GENERAL CORPORATION LAW

     1   

Summary

     1   

Proposed Merger

     1   

Comparison of Investment Objectives, Principal Investment Strategies and Principal Risks

     2   

Effect on Expenses

     2   

Fee Table and Expense Example

     2   

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

     4   

Risk Factors

     15   

INFORMATION ABOUT THE PROPOSED MERGER

     29   

The Agreement and Plan of Merger

     29   

Reasons for the Merger and Board Considerations

     30   

Federal Income Tax Consequences

     31   

PORTFOLIO SECURITIES

     34   

INFORMATION ABOUT MANAGEMENT OF THE FUNDS

     35   

Information About Directors and Officers

     35   

Security Ownership of Management

     39   

Director Compensation

     39   

Officers

     43   

Section 16(a) Beneficial Ownership Reporting Compliance

     44   

Investment Manager and Sub-Advisers

     44   

Codes of Ethics

     46   

Proxy Voting Policies

     47   

Investment Professionals of the Funds

     47   

ADDITIONAL INFORMATION ABOUT THE FUNDS

     51   

Financial Highlights

     52   

Net Asset Value, Market Price and Premium/Discount

     53   

CAPITALIZATION

     54   

PORTFOLIO COMPOSITION

     55   

PORTFOLIO TRANSACTIONS

     55   

DIVIDENDS AND DISTRIBUTIONS

     56   

Distributions

     56   

HIO Dividend Reinvestment Plan

     57   

TAXATION

     58   

NET ASSET VALUE

     63   

DESCRIPTION OF THE FUNDS’ CAPITAL STOCK

     65   

FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     68   

5% BENEFICIAL OWNERSHIP

     69   

OTHER BUSINESS

     71   

VOTING INFORMATION

     71   

Adjournments and Postponements

     72   

Appraisal Rights

     73   

EXPENSES OF PROXY SOLICITATION

     73   

SERVICE PROVIDERS

     73   

INDEX OF APPENDICES

     74   

Appendix A Form of Agreement and Plan Of Merger

     A-1   

Appendix B Nominating Committee Charter

     B-1   

Appendix C Description of Moody’s and S&P Ratings

     C-1   

 

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      Page  

Appendix D Legg Mason Partners Fund Advisor, LLC Proxy Voting Policy

     D-1   

Appendix E Western Asset Management Company Proxy Voting Policy and Procedures

     E-1   

Appendix F Western Asset Management Company Limited Proxy Voting Policy and Procedures

     F-1   

 

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PROPOSAL 1—TO APPROVE THE MERGER OF MHY WITH AND INTO HIO IN ACCORDANCE WITH THE MARYLAND GENERAL CORPORATION LAW

Summary

This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Proxy Statement/Prospectus and the Agreement and Plan of Merger, a form of which is attached to this Proxy Statement/Prospectus as Appendix A.

Proposed Merger

The Board believes that the Merger is in the best interests of both MHY stockholders and HIO stockholders. MHY and HIO have nearly identical investment objectives and substantially similar policies and strategies, which will allow MHY stockholders to continue to have exposure to high-yield fixed income securities. Moreover, the combined Fund will likely benefit from economies of scale, as one set of fixed expenses would be spread over a larger asset base, as well as from enhanced market liquidity and additional opportunities for diversification. Furthermore, the Merger will result in more streamlined high yield product offering, allowing for more focused marketing and stockholder servicing efforts.

At a meeting held on November 11 and 12, 2015, the Boards of MHY and HIO, including all of the Independent Directors, unanimously approved the Agreement and Plan of Merger with respect to each Fund. As a result of the Merger:

 

   

each MHY Common Share will convert into an equivalent dollar amount (to the nearest $0.001) of full HIO Common Shares, based on the net asset value per share of each Fund calculated at 4:00 p.m. on the business day preceding the Closing Date;

 

   

each holder of MHY Common Shares will become a holder of HIO Common Shares and will receive, on the Closing Date, that number of HIO Common Shares having an aggregate net asset value (disregarding fractional shares) equal to the aggregate net asset value of such stockholder’s MHY Common Shares as of the close of business on the business day preceding the Closing Date; and

 

   

HIO will not issue any fractional HIO Common Shares to MHY stockholders. In lieu thereof, HIO will pay cash to each former holder of MHY Common Shares in an amount equal to the value of the fractional HIO Common Shares that the investor would otherwise have received in the Merger.

If the Merger is not approved, each Fund will continue as a separate investment company, and the Boards of MHY and HIO will consider such alternatives as they determine to be in the best interests of their respective stockholders, including reproposing the Merger.

For the reasons set forth below in “Information About the Proposed Merger-Reasons for the Merger and Board Considerations,” the Boards of MHY and HIO, including all of the Independent Directors, have concluded that the Merger would be in the best interests of each Fund, and that the interests of the holders of MHY Common Shares and HIO Common Shares would not be diluted as a result of the Merger. The Board of each Fund, therefore, is hereby submitting the Merger to the holders of MHY Common Shares and HIO Common shares and recommends that stockholders of MHY and HIO vote “FOR” the Merger.

Because the Merger has been approved by at least 75% of MHY’s “Continuing Directors” as that term is defined in MHY’s charter, approval of the Merger requires the affirmative vote of the holders of a majority of the outstanding MHY Common Shares. Similarly, because the Merger has been approved by at least 75% of HIO’s “Continuing Directors” (as that term is defined in HIO’s Bylaws) approval of the Merger requires the affirmative vote of the holders of a majority of the outstanding HIO Common Shares. See “Voting Information” below. If stockholders of each Fund approve the Merger, the Closing Date of the Merger is expected to be on or about April 29, 2016.

Prior to completion of the Merger, MHY and HIO will each have received an opinion of Simpson Thacher & Bartlett LLP to the effect that the Merger will qualify as a tax-free reorganization for federal income tax purposes. Accordingly, for federal income tax purposes, (i) no gain or loss will generally be recognized by MHY (except for consequences regularly attributable to a termination of MHY’s taxable year) or (subject to the following sentence) the holders of MHY Common Shares as a result of the Merger, (ii) the aggregate tax basis of the HIO Common Shares (including fractional HIO Common


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Shares purchased by HIO) received by the holders of MHY Common Shares will be the same as the aggregate tax basis of the holders’ MHY Common Shares immediately prior to the completion of the Merger and (iii) a holder’s holding period for HIO Common Shares (including that of fractional HIO Common Shares purchased by HIO) will generally be determined by including the period for which such stockholder held MHY Common Shares converted pursuant to the Merger, provided that such shares were held by such stockholder as capital assets. Holders of MHY Common Shares may, however, recognize gain or loss with respect to cash such holders receive pursuant to the Merger in lieu of fractional shares. For more information about the federal income tax consequences of the Merger, see “Information about the Proposed Merger—Federal Income Tax Consequences” below.

Comparison of Investment Objectives, Principal Investment Strategies and Principal Risks

MHY and HIO have nearly identical investment objectives and substantially similar policies and strategies.

MHY’s primary investment objective is high current income. Capital appreciation is a secondary objective. Similarly, HIO’s primary investment objective is to seek high current income. As a secondary objective, HIO seeks capital appreciation.

Under normal market conditions, MHY will invest at least 80% of its assets in high-yield corporate bonds, debentures and notes. Up to 20% of its assets may be invested in common stock or other equity or equity-related securities, including convertible securities, preferred stock, warrants and rights. In addition, MHY may invest up to 20% of its assets in the securities of foreign issuers that are denominated in currencies other than the U.S. dollar and may invest without limitation in securities of foreign issuers that are denominated in U.S. dollars.

In seeking to fulfill its investment objectives, HIO invests, under normal market conditions, at least 80% of its net assets plus any borrowings for investment purposes in high-yielding corporate debt securities and preferred stocks and up to 20% in common stock equivalents, including options, warrants and rights. In addition, HIO may invest up to 20% of its total assets in the securities of foreign issuers that are denominated in currencies other than the U.S. dollar and may invest without limitation in securities of foreign issuers that are denominated in U.S. dollars. Furthermore, HIO may invest up to 15% of its assets in illiquid securities.

The current investment objectives and policies of HIO will continue unchanged if the Merger occurs.

Neither Fund is intended to be a complete investment program, and there is no assurance that either Fund will achieve its objectives.

The preceding summary of the Funds’ investment objectives and certain policies should be considered in conjunction with the discussion below under “Comparison of Investment Objectives, Strategies and Principal Risks of Investing in the Funds-Investment Objectives,” “-Principal Investment Strategies,” “-Fundamental Investment Restrictions” and “-Risk Factors.”

Effect on Expenses

LMPFA provides administrative and certain oversight services to MHY. MHY pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of MHY’s average daily net assets. Similarly, HIO currently pays LMPFA, which is also HIO’s investment manager, an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of average daily net assets. Although HIO’s investment management fee is identical to MHY’s, MHY also pays 0.13% in other expenses based on its average daily net assets, whereas HIO only pays 0.09% in other expenses based on its average daily net assets. It is anticipated that MHY’s shareholders’ total expense ratio will decline by 0.05% and HIO’s shareholders’ total expense ratio will decline by 0.01% as a result of the Merger.

Fee Table and Expense Example

The table below (1) compares the estimated fees and expenses of each Fund, as of September 30, 2015, and (2) shows the estimated fees and expenses of the combined Fund, on a pro forma basis, as if the Merger occurred on September 30, 2015.

 

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The estimates are based on the contracts and agreements in effect as of September 30, 2015 and reflect the operating expense accrual rates on that date, which are based on each Fund’s net assets as of September 30, 2015. Accordingly, the actual fees and expenses of each Fund and the combined Fund as of the Closing Date of the Merger may differ from those reflected in the tables below due to changes in net assets from those at September 30, 2015. No amount of any prior fee waiver or expense reimbursement to HIO or MHY may be recovered by any person.

Changes in net assets may result from market appreciation or depreciation and other factors occurring between December 31, 2015 and the Closing Date of the Merger. As a general matter, changes (positive or negative) in a Fund’s expense ratio resulting from fluctuations in the Fund’s net assets will be borne by the stockholders of that Fund and the combined Fund. For information concerning the net assets of each Fund as of November 30, 2015, please see “Capitalization.”

The estimated expenses of MHY and HIO as of September 30, 2015 and pro forma expenses following the proposed Merger are set forth below. The percentages in the table below are percentages of the Funds’ net assets attributable to Common Shares.

Fee Table

 

     Pre-Merger        
     MHY
(Target Fund)
    HIO
(Acquiring
Fund)
    Pro Forma
Combined Fund
 

Management Fee

     0.80     0.80     0.80

Other expenses

     0.13     0.09     0.08

Total Annual Fund Operating Expenses

     0.93     0.89     0.88

Example

The following example helps you compare the costs of investing in the Funds’ Common Shares with the costs of investing in other funds. The example assumes that you invest $1,000 in the Funds’ Common Shares for the periods shown, that your investment has a 5% return each year, that you reinvest all distributions and dividends and that the Funds’ operating expenses remain the same. 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  

MHY

   $ 9       $ 29       $ 51       $ 115   

HIO

   $ 9       $ 28       $ 49       $ 110   

Pro Forma Combined Fund

   $ 9       $ 28       $ 49       $ 108   

 

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

The following chart lists the investment objectives, principal investment policies and fundamental investment restrictions of MHY and HIO and describes the principal differences between the Funds’ respective policies. The chart provides MHY and HIO stockholders with a means of comparing the investment objectives, policies and strategies of MHY and HIO.

 

    

Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

Investment Objective(s)    MHY’s primary investment objective is high current income and MHY’s secondary investment objective is capital appreciation.    HIO’s primary investment objective is high current income and HIO’s secondary investment objective is capital appreciation.    No difference.
Principal Investment Policies and Strategies    Under normal market conditions, MHY will invest at least 80% of its assets in high-yield corporate bonds, debentures and notes. Up to 20% of its assets may be invested in common stock or other equity or equity-related securities, including convertible securities, preferred stock, warrants and rights.    Under normal market conditions, HIO will invest at least 80% of its net assets plus any borrowings for investment purposes in high-yield corporate debt securities and preferred stocks and up to 20% in common stock equivalents, including options, warrants and rights.    Substantively identical.
  

MHY may invest up to 20% of its assets in the securities of

foreign issuers that are denominated in currencies other than the U.S. dollar and may invest without limitation in securities of foreign issuers that are denominated in U.S. dollars.

   HIO may invest up to 20% of its total assets in the securities of foreign issuers that are denominated in currencies other than the U.S. dollar and may invest without limitation in securities of foreign issuers that are denominated in U.S. dollars.    No difference.
   During times when, in the judgment of MHY’s subadviser, conditions in securities markets would make pursuing MHY’s basic investment strategy inconsistent with the best interest of MHY’s stockholders, as a temporary defensive strategy, the subadviser may employ alternative strategies, including investment of all of MHY’s assets in securities rated investment grade by any nationally recognized statistical rating organization,   

If, in Western Asset Management Company (“Western Asset”) judgment, conditions in the securities markets would make pursuing the basic investment strategy inconsistent with the stockholders’ best interests, the investment manager may employ alternative strategies, including investment of all of HIO’s assets in securities rated investment grade by any nationally recognized statistical rating organization.

 

Money market instruments that HIO may acquire will be securities rated in the two

  

Substantively identical.

 

MHY may invest without limitation in short-term money market instruments to help defray operating expenses, to serve as collateral in connection with certain investment techniques and to hold as a reserve pending the payment of dividends to investors.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

  

or in unrated securities of comparable quality.

 

When economic conditions warrant a temporary defensive posture, MHY may invest without limitation in short-term money market instruments rated in the two highest ratings categories by a nationally recognized statistical ratings

organization, or in unrated instruments of comparable quality. MHY may also invest in money market instruments to help defray operating expenses, to serve as collateral in connection with certain investment techniques and to hold as a reserve pending the payment of dividends to investors. Money market instruments in which MHY typically expects to invest include U.S. government securities; bank obligations (including certificates of deposit, time deposits and bankers’ acceptances of U.S. or foreign banks); commercial paper; and repurchase agreements.

   highest short-term rating categories by Moody’s or S&P or the equivalent of such rating categories by another major rating service, or comparable unrated securities. Money market instruments in which HIO typically expects to invest include U.S. government securities; bank obligations (including certificates of deposit, time deposits and bankers’ acceptances of U.S. or foreign banks); commercial paper; and repurchase agreements.   
   In order to mitigate the effects of uncertainty in future exchange rates affecting the portfolio’s non-dollar investments, MHY may engage in currency exchange transactions and currency futures contracts and related options and purchase options on foreign currencies. MHY may also hedge against the effects of changes in the value of its investments by entering into interest rate futures contracts and related options.    HIO may, but is not required to, utilize various investment techniques to earn income, facilitate portfolio management and mitigate risk. These investment techniques utilize convertible securities, interest rate and currency futures contracts, put and call options on such futures contracts, currency exchange transactions, illiquid securities, securities of unseasoned issuers and securities of foreign governments and corporations including those of developing countries. Any or all of the investment techniques    Both MHY and HIO may engage in currency exchange transactions, currency futures contracts and related options and purchase options on foreign currencies.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

      available to the investment manager may be used at any time, and there is no particular strategy that dictates the use of one technique rather than another.   
  

MHY may invest in zero coupon, pay-in-kind and delayed interest securities as well as custodial receipts or certificates underwritten by securities dealers or banks

that evidence ownership of future interest payments, principal payments or both

on certain U.S. government securities.

   HIO may invest in zero coupon, pay-in-kind and delayed interest securities as well as custodial receipts or certificates underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain U.S. government securities.    No difference.
   MHY may invest up to 15% of its assets in corporate loans.    HIO may invest up to 15% of its assets in corporate loans.    No difference.
  

MHY may hold securities or use investment techniques that provide for payments based on or derived from the performance of an underlying asset, index or other economic benchmark.

 

MHY may use a variety of derivative instruments for investment purposes as well as for hedging or risk management purposes.

   HIO may use a variety of derivative instruments for investment purposes as well as for hedging or risk management purposes. These derivative instruments may include futures contracts, credit default swaps, credit default swap index securities, swap agreements and options on such instruments. As part of its strategies, HIO may purchase and sell futures contracts; purchase and sell (or write) exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts; enter into interest rate and currency transactions; and enter into other similar transactions which may be developed in the future to the extent Western Asset determines that they are consistent with the investment objectives and policies and applicable regulatory requirements.    Both MYH and HIO may utilize derivatives for investment and hedging purposes.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

      Western Asset will not use derivatives for the purpose of leverage but will instead maintain segregated accounts to cover its obligations relating to the purchase of derivatives or will otherwise comply with its investment restrictions regarding leverage in connection with such investments.   
      HIO may use any or all of these techniques at any time, and the use of any particular instrument or transaction will depend on market conditions.   
  

MHY may enter into interest rate and currency futures contracts and may purchase and sell put and call options on such futures contracts.

 

MHY may only enter into futures contracts traded on regulated commodity exchanges. MHY may purchase and write put and call options on futures contracts in order to hedge all or a portion of its investments and may enter into closing purchase transactions with respect to options written by MHY in order to terminate existing positions. With respect to options purchased by MHY, MHY will not make daily cash payments to reflect changes in the value of the underlying contracts; however, the value of such options would change daily and such change would be reflected in MHY’s net asset value.

  

HIO may enter into interest rate and currency futures contracts and may purchase and sell put and call options on such futures contracts.

 

HIO may only enter into futures contracts traded on regulated commodity exchanges. HIO may either accept or make delivery of cash or the underlying instrument specified at the expiration of a futures contract or, prior to expiration, enter into a closing transaction involving the purchase or sale of an offsetting contract. HIO may purchase and write put and call options on futures contracts in order to hedge all or a portion of its investments and may enter into closing purchase transactions with respect to options written by HIO in order to terminate existing positions. With respect to options purchased by HIO, HIO will not make daily cash payments to reflect changes in the value of the underlying contracts; however, the value of the options would change daily and that change would be reflected in HIO’s net asset value.

   Substantively identical.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

   MHY may enter into repurchase agreement transactions with certain member banks of the Federal Reserve System or with certain dealers listed on the Federal Reserve Bank of New York’s list of reporting dealers.    HIO may enter into repurchase agreement transactions with certain member banks of the Federal Reserve System or with certain dealers listed on the Federal Reserve Bank of New York’s list of reporting dealers.    No difference.
   MHY may purchase securities on a when-issued basis or for delayed delivery. MHY will not accrue income with respect to a when-issued or delayed delivery security prior to its stated delivery date and will establish with the Custodian a segregated account consisting of cash, U.S. government securities or other liquid high grade debt obligations in an amount equal to the amount of all when-issued and delayed delivery purchase commitments.    HIO may purchase securities on a when-issued basis or for delayed delivery. HIO will not accrue income with respect to a when-issued or delayed delivery security prior to its stated delivery date and will establish with the Custodian a segregated account consisting of cash, U.S. government securities or other liquid high grade debt obligations in an amount equal to the amount of all when-issued and delayed delivery purchase commitments.    No difference.
   MHY is authorized to lend securities it holds to brokers, dealers and other financial organizations. MHY’s loans of securities will be collateralized by cash, letters of credit or U.S. government securities that will be maintained at all times in a segregated account in an amount equal to the current market value of the loaned securities.    HIO is authorized to lend securities it holds to brokers, dealers and other financial organizations. The amount of such loans, if and when made, may not exceed 20% of the value of HIO’s assets. HIO’s loans of securities will be collateralized by cash, letters of credit or U.S. government securities that will be maintained at all times in a segregated account in an amount equal to the current market value of the loaned securities. From time to time, HIO may pay a part of the interest earned from the investment of collateral received for securities loaned to the borrower and/or a third party that is unaffiliated with HIO and that is acting as a finder.   

Loans of HIO’s securities, if and when made, may not exceed 20% of HIO’s assets taken at value. MHY has no such restriction.

 

HIO is bound by restrictive conditions whenever it lends its securities, while MHY is not bound by such restrictive conditions.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

      The portfolio will adhere to the following conditions whenever it lends its securities: (1) HIO must receive at least 100% cash collateral or equivalent securities from the borrower, which amount of collateral will be maintained by daily marking to market; (2) the borrower must increase the collateral whenever the market value of the securities loaned exceeds the value of the collateral; (3) HIO must be able to terminate the loan at any time; (4) HIO must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on, and any increase in value in, the loaned securities; (5) HIO may pay only reasonable custodian fees in connection with the loan; and (6) voting rights on the loaned securities may pass to the borrower, except that, if a material event adversely affecting the investment in the loaned securities occurs, HIO’s Board of Directors must terminate the loan and regain HIO’s right to vote the securities.   
   MHY may invest up to 15% of its assets in illiquid securities.    HIO may invest up to 15% of its assets in illiquid securities.    No difference.
   MHY may engage in currency exchange transactions and purchase exchange-traded put and call options on foreign currencies.    HIO may engage in currency exchange transactions and purchase exchange-traded put and call options on foreign currencies.    No difference.
   MHY will conduct its currency exchange transactions either on a spot (i.e. cash) basis at the rate prevailing in the currency exchange market or by entering into forward contracts to purchase or sell currencies. MHY’s dealings in forward    HIO will conduct its currency exchange transactions either on a spot (i.e. cash) basis at the rate prevailing in the currency exchange market or by entering into forward contracts to purchase or sell currencies. HIO will not position hedge with respect to    HIO is restricted from engaging in position hedging transactions with respect to a particular currency to an extent greater than the aggregate market value at any time of the security or securities held in its portfolio denominated or quoted in or

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

   currency exchange transactions will be limited to hedges involving either specific transactions or portfolio positions.    a particular currency to an extent greater than the aggregate market value at any time of the security or securities held in its portfolio denominated or quoted in or currently convertible (such as through the exercise of an option or the consummation of a forward currency contract) in that particular currency. If HIO enters into a transaction hedging or position hedging transaction with respect to a particular currency, it will cover the transaction through one or more of the following methods: (a) ownership of the underlying currency or an option to purchase such currency; (b) ownership of an option to enter into an offsetting forward currency contract; (c) entering into a forward contract to purchase currency being sold or to sell currency being purchased, provided that such covering contract is itself covered by any one of these methods unless the covering contract closes out the first contract; or (4) depositing into a segregated account with the custodian or a sub-custodian of HIO cash or readily marketable securities in an amount equal to the value of its total assets committed to the consummation of the forward currency contract and not otherwise covered. In the case of transaction hedging, any securities placed in such segregated account must be liquid debt securities. In any case, if the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account    currently convertible in that particular currency. MHY has no such restriction.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

      will equal the value of HIO’s total assets committed to the consummation of the forward currency contract and not otherwise covered. Hedging transactions may be made from any foreign currency into dollars or into other appropriate currencies.   
   MHY may purchase put options on a foreign currency in which securities held by MHY are denominated to protect against a decline in the value of such currency in relation to the currency in which the exercise price is denominated. MHY may purchase a call option on a foreign currency to hedge against an adverse exchange rate between the currency denominating a security that it anticipates purchasing and the currency denominating the exercise price. Although the purchase of an option on a foreign currency may constitute an effective hedge against fluctuations in exchange rates, in the event of rate movements adverse to a portfolio’s position, MHY may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies purchased by MHY may be traded on domestic and foreign exchanges or traded over-the-counter.    HIO may purchase put options on a foreign currency in which securities held by HIO are denominated to protect against a decline in the value of such currency in relation to the currency in which the exercise price is denominated. Options on foreign currencies purchased by HIO may be traded on domestic and foreign exchanges or traded over-the-counter.    HIO has no specific policy with respect to purchasing a call option on a foreign currency to hedge against an adverse exchange rate of the currency denominating a security that it anticipates purchasing in relation to the currency denominating the exercise price.
   MHY may make short sales of securities in order to reduce market exposure and/or to increase its income if, at all times when a short position is open, MHY owns an equal or greater amount of such securities or owns preferred stock, debt or warrants convertible or exchangeable into an equal or greater    HIO may make short sales of securities in order to reduce market exposure and/or to increase its income if, at all times when a short position is open, HIO owns an equal or greater amount of such securities or owns preferred stock, debt or warrants convertible or exchangeable into an equal or greater    No difference.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

   number of the shares of the securities sold short. Short sales of this kind are referred to as short sales “against the box.” MHY will segregate the securities against which short sales against the box have been made in a special account with its custodian. Not more than 10% of MHY’s total assets (taken at current value) may be held as collateral for such sales at any one time.    number of the shares of the securities sold short. Short sales of this kind are referred to as short sales “against the box.” HIO will segregate the securities against which short sales against the box have been made in a special account with its custodian. Not more than 10% of HIO’s total assets (taken at current value) may be held as collateral for such sales at any one time.   
   MHY may invest in direct obligations of the United States and obligations issued by U.S. government agencies and instrumentalities, which includes Treasury Bills, Treasury Notes and Treasury Bonds. Securities issued by U.S. government agencies and instrumentalities include: securities that are supported by the full faith and credit of the United States (such as Government National Mortgage Association certificates); securities that are supported by the right of the issuer to borrow from the U.S. Treasury (such as securities of Federal Home Loan Banks); and securities that are supported by the credit of the instrumentality (such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation bonds).    HIO may invest in direct obligations of the United States and obligations issued by U.S. government agencies and instrumentalities, which includes Treasury Bills, Treasury Notes and Treasury Bonds. Securities issued by U.S. government agencies and instrumentalities include: securities that are supported by the full faith and credit of the United States (such as Government National Mortgage Association certificates); securities that are supported by the right of the issuer to borrow from the U.S. Treasury (such as securities of Federal Home Loan Banks); and securities that are supported by the credit of the instrumentality (such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation bonds).    No difference.
   MHY may invest in asset-backed securities, real estate investment trusts (“REITs”), mortgage-backed securities and dollar rolls.    HIO may invest in dollar rolls, asset-backed securities and mortgage-backed securities.    Substantively identical.
   MHY may purchase Rule 144A Securities, which are unregistered securities restricted to purchase by “qualified institutional buyers” pursuant to Rule 144A under the 1933 Act.    N/A    HIO has no specific policy with respect to Rule 144A Securities.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

Fundamental Investment Restrictions    MHY may not purchase any securities which would cause more than 25% of the value of its total assets at the time of purchase to be invested in the securities of issuers conducting their principal business activities in the same industry, provided that there shall be no limit on the purchase of U.S. government securities.    HIO may not purchase any securities which would cause more than 25% of the value of its total assets at the time of purchase to be invested in the securities of issuers conducting their principal business activities in the same industry, provided that there shall be no limit on the purchase of U.S. government securities.    No difference.
   MHY may not invest in the securities of any issuer (other than U.S. government securities) if, as a result, more than 5% of the value of its total assets would be invested in the securities of the issuer, except that up to 25% of the value of its total assets may be invested without regard to this 5% limitation.    HIO may not purchase the securities of any issuer, other than U.S. government securities, if as a result more than 5% of the value of its total assets would be invested in the securities of the issuer, except that up to 25% of the value of its total assets may be invested without regard to this 5% limitation.    No difference.
  

MHY may not borrow money, except that (a) it may borrow from banks for temporary or emergency (not leveraging) purposes in an amount not exceeding 10% of the value of its total assets (including the amount borrowed) valued at the time the borrowing is made and (b) it may enter into futures contacts. Whenever borrowings described in (a) exceed 5% of the value of its total assets, it will not make any additional investments.

 

MHY may not pledge, hypothecate, mortgage or otherwise encumber more than 10% of the value of its total assets. For purposes of this restriction, the deposit of assets in escrow in connection with the writing of options, the purchase of securities on a when-issued or delayed-delivery basis, the entry into forward currency contracts and securities lending

   HIO may not (a) borrow money, except that (i) HIO may borrow from banks for temporary or emergency (not leveraging) purposes in an amount not exceeding 10% of the value of its total assets (including the amount borrowed) valued at market less liabilities (not including the amount borrowed) at the time the borrowing is made (provided that HIO will not make any additional investments while such borrowings exceed 5% of the value of its total assets) and (ii) HIO may enter into futures contracts, or (b) pledge, hypothecate, mortgage or otherwise encumber its assets except to secure borrowings and as margin for commodities transactions.   

Substantively identical.

 

MHY may hypothecate, mortgage or otherwise encumber up to 10% of the value of its total assets, while HIO may not pledge, hypothecate, mortgage or otherwise encumber its assets except to secure borrowings and as margin for commodities transactions.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

   transactions and collateral arrangements with respect to options transactions and margin for futures contracts and options on futures contracts, will not be deemed to be pledges of the portfolio’s assets.      
   MHY may not purchase more than 10% of the voting securities of any one issuer (other than U.S. government securities), except that up to 25% of the value of its total assets may be invested without regard to the 10% limitation.    HIO may not purchase more than 10% of the voting securities of any one issuer (other than U.S. government securities), except that up to 25% of the value of its total assets may be invested without regard to this 10% limitation.    No difference.
   MHY may not invest in commodities, except that it may invest in futures contracts and options on futures contracts and options on currencies.    HIO may not invest in commodities, except that it may invest in futures contracts, options on futures contracts and options on currencies.    No difference.
  

MHY may not make loans to others, except through the purchase of qualified debt obligations, the entry into repurchase agreements

and loans of portfolio securities consistent with its

investment objectives and policies.

   HIO may not make loans to others, except through the purchase of qualified debt obligations, the entry into repurchase agreements and loans of portfolio securities consistent with its investment objectives and policies.    No difference.
   MHY may not underwrite the securities of other issuers, except insofar as it may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities.    HIO may not underwrite the securities of other issuers, except insofar as it may be deemed an underwriter in the course of disposing of portfolio securities.    No difference.
  

MHY may not purchase or sell real estate or interests in real

estate, except that it may purchase and sell securities that are secured by real estate or interests in real estate and

may purchase securities issued by companies that invest or deal in real estate.

   HIO may not purchase or sell real estate or interests in real estate, except that it may purchase and sell securities that are secured by real estate or interests in real estate and may purchase securities issued by companies that invest or deal in real estate.    No difference.

 

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Western Asset Managed High
Income Fund Inc.

  

Western Asset High Income
Opportunity Fund Inc.

  

Differences between HIO and MHY

   MHY may not purchase securities on margin, except that it may obtain any short-term credits necessary for the clearance of purchases and sales of securities. For purposes of this restriction, the deposit or payment of initial or variation margin in connection with futures contracts or related options will not be deemed to be a purchase of securities on margin.    HIO may not purchase securities on margin, except that it may obtain any short-term credits necessary for the clearance of purchases and sales of securities. For purposes of this restriction, the deposit or payment of initial or variation margin in connection with futures contracts or related options will not be deemed to be a purchase of securities on margin.    No difference.
  

MHY may not make short sales of securities or maintain a short position, except that it may engage in short

sales against the box.

   HIO may not make short sales of securities, except that it may engage in short sales against the box.    No difference.
   MHY may not invest in securities of other investment companies registered or required to be registered under the 1940 Act, except as may be acquired as part of a merger, consolidation, reorganization, acquisition of assets or an offer of exchange or to the extent permitted by the 1940 Act.    HIO may not invest in securities of other investment companies registered or required to be registered under the 1940 Act, except as may be acquired as part of a merger, consolidation, reorganization, acquisition of assets or an offer of exchange, or to the extent permitted by the 1940 Act    No difference.

Risk Factors

There is no assurance that HIO or MHY will meet their investment objectives. You may lose money on your investment in either Fund. The value of each Fund’s shares may go up or down, sometimes rapidly and unpredictably. Market conditions, financial conditions of issuers represented in each Fund’s portfolio, investment strategies, portfolio management, and other factors affect the volatility of each Fund’s shares. An investment in HIO is not insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

The following section includes a summary of the principal risks of investing in HIO. Except as described below, your investment in MHY is subject to the same risks.

Investment and Market Risk. An investment in HIO is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in HIO Common Shares represents an indirect investment in the fixed income securities and other investments owned by HIO, most of which could be purchased directly. The value of HIO’s portfolio securities may move up or down, sometimes rapidly and unpredictably. If the current global economic downturn continues or deteriorates further, the ability of issuers to service their obligations could be materially and adversely affected. At any point in time, your HIO Common Shares may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.

 

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Fixed Income Securities Risk. In addition to the risks described elsewhere in this section with respect to valuations and liquidity, fixed income securities, including high-yield securities, are also subject to certain risks, including:

 

   

Issuer Risk. The value of fixed income securities may decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods and services.

 

   

Interest Rate Risk. The market price of HIO’s investments will change in response to changes in interest rates and other factors. During periods of declining interest rates, the market price of fixed income securities generally rises. Conversely, during periods of rising interest rates, the market price of such securities generally declines. The magnitude of these fluctuations in the market price of fixed income securities is generally greater for securities with longer maturities. Fluctuations in the market price of HIO’s securities will not affect interest income derived from securities already owned by HIO, but will be reflected in HIO’s net asset value. HIO may utilize certain strategies, including investments in structured notes or interest rate swap or cap transactions, for the purpose of reducing the interest rate sensitivity of the portfolio and decreasing HIO’s exposure to interest rate risk, although there is no assurance that it will do so or that such strategies will be successful.

 

   

Prepayment Risk. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing HIO to reinvest the proceeds from such prepayment in lower yielding securities, which may result in a decline in HIO’s income and distributions to stockholders. This is known as prepayment or “call” risk. Debt securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met. An issuer may choose to redeem a debt security if, for example, the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer.

 

   

Reinvestment Risk. Reinvestment risk is the risk that income from HIO’s portfolio will decline if and when HIO invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the portfolio’s current earnings rate. A decline in income could affect HIO’s Common Shares price or its overall return.

 

   

Credit Risk. Credit risk is the risk that one or more fixed income securities in HIO’s portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. If the recent adverse conditions in the credit markets continue to adversely affect the broader global economy, the credit quality of issuers of fixed income securities in which HIO may invest would be more likely to decline, all other things being equal. Changes by a nationally recognized statistical rating organization (“NRSRO”) in its rating of securities and in the ability of an issuer to make scheduled payments may also affect the value of HIO’s investments. Since HIO invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which invests solely in investment grade securities. The prices of lower grade securities generally are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. High-yield fixed income securities are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater risk of default.

Liquidity Risk. HIO may invest in illiquid securities. Illiquid securities are securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which HIO has valued the securities. Liquidity risk exists when particular investments are difficult to sell. Securities may become illiquid after purchase by HIO, particularly during periods of market turmoil. When HIO holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if HIO is forced to sell these investments in order to segregate assets or for other cash needs, HIO may suffer a loss.

Below Investment Grade (High-Yield or Junk) Securities Risk. HIO may invest in high-yield debt securities. Debt securities rated below investment grade are commonly referred to as “high-yield” securities or “junk bonds” and are regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. Debt securities rated C or lower by Moody’s, CCC or lower by S&P or CC or lower by Fitch or comparably rated by another NRSRO or, if unrated, determined by Western Asset to be of comparable quality are considered to have extremely poor prospects of ever attaining any real investment standing, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay

 

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interest and repay principal when due in the event of adverse business, financial or economic conditions and/or to be in default or not current in the payment of interest or principal. Ratings may not accurately reflect the actual credit risk associated with a corporate security.

Debt securities rated below investment grade generally offer a higher current yield than that available from higher grade issues, but typically involve greater risk. These securities are especially sensitive to adverse changes in general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, issuers of below investment grade instruments may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default. The secondary market for high-yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on HIO’s ability to dispose of a particular security. There are fewer dealers in the market for high-yield securities than for investment grade obligations. The prices quoted by different dealers may vary significantly, and the spread between the bid and asked price is generally much larger for high-yield securities than for higher quality instruments. Under continuing adverse market or economic conditions, the secondary market for high-yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer, and these securities may become illiquid. In addition, adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of below investment grade securities, especially in a market characterized by a low volume of trading.

Default, or the market’s perception that an issuer is likely to default, could reduce the value and liquidity of securities held by HIO, thereby reducing the value of your investment in HIO’s Common Shares. In addition, default may cause HIO to incur expenses in seeking recovery of principal or interest on its portfolio holdings. In any reorganization or liquidation proceeding relating to a portfolio company, HIO may lose its entire investment or may be required to accept cash or securities with a value less than its original investment. Among the risks inherent in investments in a troubled entity is the fact that it frequently may be difficult to obtain information as to the true financial condition of such issuer. Western Asset’s judgment about the credit quality of an issuer and the relative value of its securities may prove to be wrong. Investments in below investment grade securities may present special tax issues for HIO to the extent that the issuers of these securities default on their obligations pertaining thereto, and the U.S. federal income tax consequences to HIO as a holder of such distressed securities may not be clear.

Foreign Securities and Emerging Markets Risk. A fund that invests in foreign (non-U.S.) securities may experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies. The securities markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. Investments in foreign securities (including those denominated in U.S. dollars) are subject to economic and political developments in the countries and regions where the issuers operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country. Less information may be publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, HIO’s investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic developments. In addition, there may be difficulty in obtaining or enforcing a court judgment abroad. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S. withholding taxes, and special U.S. tax considerations may apply.

The risks of foreign investment are greater for investments in emerging markets. HIO considers a country to be an emerging market country if, at the time of investment, it is represented in the J.P. Morgan Emerging Markets Bond Index Global or categorized by the World Bank in its annual categorization as middle or low-income. Emerging market countries typically have economic and political systems that are less fully developed, and that can be expected to be less stable, than those of more advanced countries. Low trading volumes may result in a lack of liquidity and in price volatility. Emerging market countries may have policies that restrict investment by foreigners, that require governmental approval prior to investments by foreign persons, or that prevent foreign investors from withdrawing their money at will. An investment in emerging market securities should be considered speculative.

Non-U.S. Government, or Sovereign, Debt Securities Risk. HIO invests in non-U.S. government, or sovereign, debt securities. The ability of a government issuer, especially in an emerging market country, to make timely and complete

 

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payments on its debt obligations will be strongly influenced by the government issuer’s balance of payments, including export performance, its access to international credits and investments, fluctuations of interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. To the extent that a country receives payment for its exports in currencies other than U.S. dollars, its ability to make debt payments denominated in U.S. dollars could be adversely affected. If a government issuer cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks, and multinational organizations. There are no bankruptcy proceedings similar to those in the United States by which defaulted non-U.S. government debt may be collected. Additional factors that may influence a government issuer’s ability or willingness to service debt include, but are not limited to, a country’s cash flow situation, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, and the issuer’s policy towards the International Monetary Fund, the International Bank for Reconstruction and Development and other international agencies to which a government debtor may be subject.

Since 2010, the risks of investing in foreign sovereign debt have increased dramatically as a result of the ongoing European debt crisis which began in Greece and has begun to spread throughout various other European countries. These debt crises and the ongoing efforts of governments around the world to address these debt crises have also resulted in increased volatility and uncertainty in the United States and the global economy and securities markets, and it is impossible to predict the effects of these or similar events in the future on the United States and the global economy and securities markets or on HIO’s investments, though it is possible that these or similar events could have a significant adverse impact on the value and risk profile of HIO. Moreover, as the European debt crisis has progressed, the possibility of one or more Eurozone countries exiting the European monetary union, or even the collapse of the Euro as a common currency, has arisen. The effects of the collapse of the Euro, or of the exit of one or more countries from the European monetary union, on the United States and the global economy and securities markets are impossible to predict and any such events could have a significant adverse impact on the value and risk profile of HIO. See “—Risk Factors—Currency Risk.”

Currency Risk. If HIO invests directly in foreign (non-U.S.) currencies or in securities that trade in, and receive revenues in, foreign (non-U.S.) currencies, or in derivatives that provide exposure to foreign (non-U.S.) currencies, it will be subject to the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions intended to protect HIO from decline in the value of foreign (non-U.S.) currencies, that the U.S. dollar will decline in value relative to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United States or abroad. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by HIO. As a result, HIO’s investments in foreign currency denominated securities may reduce the returns of HIO. HIO will compute, and expects to distribute, its income in U.S. dollars, and the computation of income is made on the date that the income is earned by HIO at the foreign exchange rate in effect on that date. If the value of the foreign currencies in which HIO receives its income falls relative to the U.S. dollar between the earning of the income and the time at which HIO converts the foreign currencies to U.S. dollars, HIO may be required to liquidate securities in order to make distributions if HIO has insufficient cash in U.S. dollars to meet distribution requirements. See “Dividends and Distributions—Distributions” and “HIO Dividend Reinvestment Plan.” The liquidation of investments, if required, may have an adverse impact on HIO’s performance.

HIO may, from time to time, seek to protect the value of some portion or all of its portfolio holdings against currency risks by engaging in currency hedging transactions. In addition, there may be instances in which HIO’s portfolio contains synthetic exposure to a particular currency even though HIO does not own any bonds denominated in such a currency. Such transactions may include entering into forward currency exchange contracts, currency futures contracts and options on such futures contracts, the use of other derivatives, as well as purchasing put or call options on currencies, in U.S. or foreign markets. Currency hedging involves special risks, including possible default by the other party to the transaction, illiquidity and, to the extent Western Asset’s view as to certain market movements is incorrect, the risk that the use of hedging could result in losses greater than if they had not been used. In addition, in certain countries in which HIO may invest, currency hedging opportunities may not be available. See “—Risk Factors—Derivatives Risk.”

 

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In addition, realizations and drawdowns in HIO’s currency exposure may add to volatility to HIO’s distributable income. If HIO’s currency exposure results in a negative return to HIO, it may result in HIO making distributions, some or all of which consist of a return of capital.

U.S. Government Debt Securities Risk. U.S. government debt securities generally do not involve the credit risks associated with investments in other types of debt securities, although, as a result, the yields available from U.S. government debt securities are generally lower than the yields available from other securities. Like other debt securities, however, the values of U.S. government securities change as interest rates fluctuate. Fluctuations in the value of portfolio securities will not affect interest income on existing portfolio securities but will be reflected in HIO’s net asset value. Since the magnitude of these fluctuations will generally be greater at times when HIO’s average maturity is longer, under certain market conditions HIO may, for temporary defensive purposes, accept lower current income from short-term investments rather than investing in higher yielding long-term securities.

Derivatives Risk. HIO may utilize a variety of derivative instruments such as options, floors, caps and collars, futures contracts, forward contracts, options on futures contracts and indexed securities. Generally derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, reference rate or index, and may relate to individual debt or equity instruments, interest rates, currencies or currency exchange rates and related indexes. Derivatives are subject to a number of risks, such as liquidity risk, interest rate risk, credit risk and management risk. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. Changes in the credit quality of the companies that serve as HIO’s counterparties with respect to its derivative transactions will affect the value of those instruments. By using derivatives that expose HIO to counterparties, HIO assumes the risk that its counterparties could experience financial hardships that could call into question their continued ability to perform their obligations. In addition, in the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If HIO is owed this fair market value in the termination of the derivative transaction and its claim is unsecured, HIO will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. As a result, concentrations of such derivatives in any one counterparty would subject HIO to an additional degree of risk with respect to defaults by such counterparty. See “—Counterparty Risk”. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value of a derivative may not correlate perfectly with an underlying asset, interest rate or index. Suitable derivative transactions may not be available in all circumstances and there can be no assurance that HIO will engage in these transactions to reduce exposure to other risks when that would be beneficial. If HIO invests in a derivative instrument, it could lose more than the principal amount invested. Changes to the derivatives markets as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act and other government regulation may have an adverse effect on HIO’s ability to make use of derivative transactions.

Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large impact on HIO’s performance.

It is possible that government regulation of various types of derivative instruments, including interest rate swaps, interest rate options, credit linked notes, foreign currency forward contracts, credit default swaps and total return swaps on individual securities and groups or indexes of securities may limit or prevent HIO from using such instruments as part of its investment strategy, which could negatively affect HIO’s performance. For example, the U.S. Government recently enacted legislation that provides for new regulation of certain portions of the derivatives market, including clearing, margin, reporting, recordkeeping, and registration requirements. Although the CFTC has released final rules relating to clearing, reporting, recordkeeping and registration requirements, many of the provisions contained in the Dodd-Frank Act are subject to further final rulemaking. New regulations could, among other things, restrict HIO’s ability to engage in derivatives transactions (for example, by making certain types of derivatives transactions no longer available to HIO) and/or increase the costs of such derivatives transactions (for example, by increasing margin or capital requirements), and HIO may be unable to execute its investment strategy as a result. It is unclear how the regulatory changes will affect counterparty risk.

HIO is operated by persons who have claimed an exclusion, granted to operators of registered investment companies like HIO, from registration as a “commodity pool operator” with respect to HIO under the Commodity Exchange Act (the “CEA”), and who, therefore, are not subject to registration or regulation with respect to HIO under the CEA. As a result, effective December 31, 2012, HIO is limited in its ability to use commodity futures (which include futures on broad-based

 

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securities indexes and interest rate futures) or options on commodity futures, engage in swaps transactions or make certain other investments (whether directly or indirectly through investments in other investment vehicles) for purposes other than bona fide hedging. With respect to transactions other than for bona fide hedging purposes, either: (1) the aggregate initial margin and premiums required to establish HIO’s positions in such investments may not exceed 5% of the liquidation value of HIO’s portfolio (after accounting for unrealized profits and unrealized losses on any such investments); or (2) the aggregate net notional value of such instruments, determined at the time the most recent position was established, may not exceed 100% of the liquidation value of HIO’s portfolio (after accounting for unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, HIO may not market itself as a commodity pool or otherwise as a vehicle for trading in the futures, options or swaps markets.

Derivatives Regulation Risk. In connection with an ongoing review by the SEC and its staff of the regulation of investment companies’ use of derivatives, on August 31, 2011, the SEC issued a concept release to seek public comment on a wide range of issues raised by the use of derivatives by investment companies. The SEC noted that it intends to consider the comments to help determine whether regulatory initiatives or guidance are needed to improve the current regulatory regime for investment companies and, if so, the nature of any such initiatives or guidance. While the nature of any such regulations is uncertain at this time, it is possible that such regulations could limit the implementation of HIO’s use of derivatives, which could have an adverse impact on HIO. Neither LMPFA nor Western Asset can predict the effects of these regulations on HIO’s portfolio. LMPFA and Western Asset monitor developments and seek to manage HIO’s portfolio in a manner consistent with achieving HIO’s investment objectives, but there can be no assurance that they will be successful in doing so.

Repurchase Agreements Risk. Subject to its investment objectives and policies, HIO may invest in repurchase agreements for investment purposes. Repurchase agreements typically involve the acquisition by HIO of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that HIO will sell the securities back to the institution at a fixed time in the future. HIO does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, HIO could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which HIO seeks to enforce its rights thereto; possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. In addition, as described above, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, HIO generally will seek to liquidate such collateral. However, the exercise of HIO’s right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase are less than the repurchase price, HIO could suffer a loss.

Reverse Repurchase Agreements Risk. To the extent that HIO utilizes reverse repurchase agreements, such agreements are subject to many of the same risks involved in HIO’s use of leverage described above, as the proceeds from reverse repurchase agreements generally will be invested in additional securities. There is a risk that the market value of the securities sold by HIO in the reverse repurchase agreement may decline below the price at which HIO remains obligated to repurchase such securities. In addition, there is a risk that the market value of the securities retained by HIO may decline. If the buyer of securities under a reverse repurchase agreement were to file for bankruptcy or experience insolvency, HIO may be adversely affected. Also, in entering into reverse repurchase agreements, HIO would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the underlying securities. In addition, due to the interest costs associated with reverse repurchase agreement transactions, HIO’s net asset value (“NAV”) will decline, and, in some cases, HIO may be worse off than if it had not used such instruments.

Management Risk. HIO is subject to management risk because it is an actively managed investment portfolio. Western Asset, Western Asset Limited and each individual investment professional may not be successful in selecting the best performing securities or investment techniques, and HIO’s performance may lag behind that of similar funds.

Potential Conflicts of Interest Risk. LMPFA, Western Asset, Western Asset Management Company Limited (“Western Asset Limited” and together with LMPF and Western Asset, the “Managers”) and HIO’s investment professionals have interests which may conflict with the interests of HIO. In particular, the Managers also manage other closed-end funds listed on the NYSE that have investment objectives and investment strategies that are substantially similar to HIO. Further, the Managers may at some time in the future manage and/or advise other investment funds or accounts with the same investment

 

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objective and strategies as HIO. As a result, the Managers and HIO’s investment professionals may devote unequal time and attention to the management of HIO and those other funds and accounts, and may not be able to formulate as complete a strategy or identify equally attractive investment opportunities as might be the case if they were to devote substantially more attention to the management of HIO. The Managers and HIO’s investment professionals may identify a limited investment opportunity that may be suitable for multiple funds and accounts, and the opportunity may be allocated among these several funds and accounts, which may limit HIO’s ability to take full advantage of the investment opportunity. Additionally, transaction orders may be aggregated for multiple accounts for purpose of execution, which may cause the price or brokerage costs to be less favorable to HIO than if similar transactions were not being executed concurrently for other accounts. At times, an investment professional may determine that an investment opportunity may be appropriate for only some accounts for which he or she exercises investment responsibility, or may decide that certain accounts should take differing positions with respect to a particular security. In these cases, the investment professional may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and accounts. For example, an investment professional may determine that it would be in the interest of another account to sell a security that HIO holds, potentially resulting in a decrease in the market value of the security held by HIO.

Common Stock Risk. HIO may invest up to 20% of its assets in common stocks equivalents. Generally, HIO has a greater flexibility to invest in equity securities. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. In addition, the prices of common stocks are sensitive to general movements in the stock market, and a drop in the stock market may depress the prices of common stocks to which the Fund has exposure. Common stock prices fluctuate for several reasons including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events affecting an issuer occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. The value of the common stocks in which the Fund may invest will be affected by changes in the stock markets generally, which may be the result of domestic or international political or economic news, changes in interest rates or changing investor sentiment. At times, stock markets can be volatile and stock prices can change substantially. The common stocks of smaller companies are more sensitive to these changes than those of larger companies. Common stock risk will affect the Fund’s net asset value per share, which will fluctuate as the value of the securities held by the Fund change.

Preferred Stock Risk. HIO invests, under normal market conditions, at least 80% of its net assets plus any borrowings for investment purposes in high-yielding corporate debt securities and preferred stocks. Generally, HIO has a greater flexibility to invest in equity securities. Preferred stocks are unique securities that combine some of the characteristics of both common stocks and bonds. Preferred stocks generally pay a fixed rate of return and are sold on the basis of current yield, like bonds. However, because they are equity securities, preferred stock provides equity ownership of a company, and the income is paid in the form of dividends. Preferred stocks typically have a yield advantage over common stocks as well as comparably-rated fixed income investments. Preferred stocks are typically subordinated to bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to greater credit risk than those debt instruments. Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred stocks also may be subject to optional or mandatory redemption provisions.

Convertible Securities Risk. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. Before conversion, convertible securities have characteristics similar to nonconvertible income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. Similar to traditional fixed income securities, the market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, when the market price of the common stock underlying a convertible security exceeds the conversion price, the convertible security tends to reflect the market price of the underlying common stock. As the market price of the underlying common stock declines, the convertible security tends to trade increasingly on a yield basis and thus may not decline in price to the same extent as the underlying common stock. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. Convertible securities rank senior to common stock in a corporation’s capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument.

 

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Senior Loans Risk. HIO may invest in first lien senior secured loans (“Senior Loans”) issued by banks, other financial institutions, and other investors to corporations, partnerships, limited liability companies and other entities to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings and, to a lesser extent, for general operating and other purposes. An investment in Senior Loans involves risk that the borrowers under Senior Loans may default on their obligations to pay principal or interest when due. In the event a borrower fails to pay scheduled interest or principal payments on a Senior Loan held by HIO, HIO will experience a reduction in its income and a decline in the market value of the Senior Loan, which will likely reduce dividends and lead to a decline in the net asset value of HIO. If HIO acquires a Senior Loan from another lender, for example, by acquiring a participation, HIO may also be subject to credit risk with respect to that lender.

HIO will generally invest in Senior Loans that are secured with specific collateral. However, there can be no assurance that liquidation of collateral would satisfy the borrower’s obligation in the event of non-payment or that such collateral could be readily liquidated. In the event of the bankruptcy of a borrower, HIO could experience delays and limitations on its ability to realize the benefits of the collateral securing the Senior Loan. Senior Loans are typically structured as floating rate instruments in which the interest rate payable on the obligation fluctuates with interest rate changes. As a result, the yield on Senior Loans will generally decline in a falling interest rate environment causing HIO to experience a reduction in the income it receives from a Senior Loan. Senior Loans are generally of below investment grade quality and may be unrated at the time of investment; are generally not registered with the SEC or state securities commissions; and are generally not listed on any securities exchange. In addition, the amount of public information available on Senior Loans is generally less extensive than that available for other types of assets.

Second Lien Loans Risk. Second senior secured lien loans (“Second Lien Loans”) generally are subject to similar risks as those associated with investments in Senior Loans. Because Second Lien Loans are subordinated or unsecured and thus lower in priority of payment to Senior Loans, they are subject to the additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second Lien Loans generally have greater price volatility than Senior Loans and may be less liquid. There is also a possibility that originators will not be able to sell participations in Second Lien Loans, which would create greater credit risk exposure for the holders of such loans. Second Lien Loans share the same risks as other below investment grade securities.

Loan Participations and Assignments Risk. HIO may invest in participations in loans or assignments of all or a portion of loans from third parties. In connection with purchasing participations, HIO generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and HIO may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, HIO may be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, HIO may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. Certain participations may be structured in a manner designed to avoid purchasers of participations being subject to the credit risk of the lender with respect to the participation, but even under such a structure, in the event of the lender’s insolvency, the lender’s servicing of the participation may be delayed and the assignability of the participation impaired. HIO will acquire participations only if the lender interpositioned between HIO and the borrower is determined by Western Asset to be creditworthy.

Middle Market Companies Risk. HIO may invest in middle market securities. Investing in middle market companies involves a number of significant risks, including but not limited to:

 

   

companies may have limited financial resources and may be unable to meet their obligations under their debt securities that HIO may hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees HIO may have obtained in connection with an investment;

 

   

middle market companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns;

 

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middle market companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on the issuer;

 

   

middle market companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and

 

   

middle market companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.

Counterparty Risk. Changes in the credit quality of the companies that serve as HIO’s counterparties (whether a clearing corporation in the case of cleared instruments or another third party in the case of uncleared instruments) with respect to derivatives or other transactions supported by another party’s credit will affect the value of those instruments. Certain entities that have served as counterparties in the markets for these transactions have recently incurred significant financial hardships including bankruptcy and losses as a result of exposure to sub-prime mortgages and other lower quality credit investments that have experienced recent defaults or otherwise suffered extreme credit deterioration. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, HIO may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy dissolution, assignment for the benefit of creditors, liquidation, winding-up or analogous or other reorganization proceeding. HIO may obtain only a limited recovery or may obtain no recovery in such circumstances. Some, but not all, derivative transactions may be cleared, in which case a central clearing counterparty stands between the direct parties to the derivative transaction and effectively guarantees performance of each contract, to the extent of its available resources for such purpose. Uncleared derivative transactions have no such protection; each party bears the risk that its direct counterparty will default. Counterparty risk with respect to certain exchange-traded and over-the-counter derivatives may be further complicated by recently enacted U.S. financial reform legislation. See “Derivatives Risk” above for more information.

Credit Default Swap Risk. HIO may invest in credit default swap transactions for hedging or investment purposes. Credit default swap agreements involve greater risks than if HIO had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risk. The “buyer” in a credit default contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract, provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or “par value,” of the reference obligation through either physical settlement or cash settlement. HIO may be either the buyer or seller in a credit default swap transaction. If HIO is a buyer and no event of default occurs, HIO will have made a series of periodic payments and recover nothing of monetary value. However, if an event of default occurs, HIO (if the buyer) will receive the full notional value of the reference obligation either through a cash payment in exchange for the asset or a cash payment in addition to owning the reference assets. As a seller, HIO receives a fixed rate of income throughout the term of the contract, which typically is between six months and five years, provided that there is no event of default. The sale of a credit default swap is a form of leverage. HIO currently segregates assets on HIO’s records in the form of cash, cash equivalents or liquid securities in an amount equal to the notional value of the credit default swaps of which it is the seller or otherwise covers such obligations. If such assets are not fully segregated or otherwise covered by HIO, the use of credit default swap transactions could then be considered senior securities for purposes of the 1940 Act. Recent market developments related to credit default swaps have prompted increased scrutiny with respect to these instruments. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, credit default swaps may in the future be subject to increased regulation. Such regulation may limit HIO’s ability to use credit default swaps. Although HIO will seek to realize gains by writing credit default swaps that increase in value, to realize gains on writing credit default swaps, an active secondary market for such instruments must exist or HIO must otherwise be able to close out these transactions at advantageous times. If no such secondary market exists or HIO is otherwise unable to close out these transactions at advantageous times, writing credit default swaps may not be profitable for HIO.

The market for credit default swaps has become more volatile in recent years as the creditworthiness of certain counterparties has been questioned and/or downgraded. If a counterparty’s credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that HIO may not receive adequate collateral. As of the date of this prospectus, credit default swaps are not currently traded on any securities exchange, however certain

 

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credit default swaps will be cleared through swaps clearing houses. HIO may exit its obligations under a credit default swap only by terminating the contract and paying applicable breakage fees, or by entering into an offsetting credit default swap position, which may cause HIO to incur more losses.

Structured Notes and Related Instruments Risk. HIO may invest in “structured” notes and other related instruments, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an “embedded index”), such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Structured instruments may be issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.

Inflation/Deflation Risk. Inflation risk is the risk that the value of certain assets or income from HIO’s investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of HIO Common Shares and distributions on HIO Common Shares can decline. Deflation risk is the risk that prices throughout the economy decline over time—the opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the value of HIO’s portfolio.

Risks of Futures and Options on Futures. The use by HIO of futures contracts and options on futures contracts to hedge interest rate risks involves special considerations and risks, as described below.

 

   

Successful use of hedging transactions depends upon Western Asset’s ability to correctly predict the direction of changes in interest rates. There can be no assurance that any particular hedging strategy will succeed.

 

   

There might be imperfect correlation, or even no correlation, between the price movements of a futures or option contract and the movements of the interest rates being hedged. Such a lack of correlation might occur due to factors unrelated to the interest rates being hedged, such as market liquidity and speculative or other pressures on the markets in which the hedging instrument is traded.

 

   

Hedging strategies, if successful, can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable movements in the interest rates being hedged. However, hedging strategies can also reduce opportunity for gain by offsetting the positive effect of favorable movements in the hedged interest rates.

 

   

There is no assurance that a liquid secondary market will exist for any particular futures contract or option thereon at any particular time. If HIO were unable to liquidate a futures contract or an option on a futures contract position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. HIO would continue to be subject to market risk with respect to the position.

 

   

There is no assurance that HIO will use hedging transactions. For example, if HIO determines that the cost of hedging will exceed the potential benefit to HIO, HIO will not enter into such transactions.

When-Issued and Delayed-Delivery Transactions Risk. HIO may purchase fixed income securities on a when-issued basis, and may purchase or sell those securities for delayed delivery. When-issued and delayed-delivery transactions occur when securities are purchased or sold by HIO with payment and delivery taking place in the future to secure an advantageous yield or price. Securities purchased on a when-issued or delayed-delivery basis may expose HIO to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. HIO will not accrue income with respect to a when-issued or delayed-delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed-delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes place may not be as favorable as that obtained in the transaction itself.

 

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Portfolio Turnover Risk. Changes to the investments of HIO may be made regardless of the length of time particular investments have been held. A high portfolio turnover rate may result in increased transaction costs for HIO in the form of increased dealer spreads and other transactional costs, which may have an adverse impact on HIO’s performance. In addition, high portfolio turnover may result in the realization of net short-term capital gains by HIO which, when distributed to stockholders, will be taxable as ordinary income. A high portfolio turnover may increase HIO’s current and accumulated earnings and profits, resulting in a greater portion of HIO’s distributions being treated as a dividend to HIO’s stockholders. The portfolio turnover rate of HIO will vary from year to year, as well as within a given year.

Temporary Defensive Strategies Risk. When Western Asset anticipates unusual market or other conditions, HIO may temporarily depart from its principal investment strategies as a defensive measure and invest all or a portion of its assets in obligations of the U.S. government, its agencies or instrumentalities; other investment grade debt securities; investment grade commercial paper; certificates of deposit and bankers’ acceptances; repurchase agreements with respect to any of the foregoing investments or any other fixed income securities that Western Asset considers consistent with this strategy. To the extent that HIO invests defensively, it may not achieve its investment objectives.

Rating Agency Risk. Credit ratings are issued by rating agencies which are private services that provide ratings of the credit quality of debt obligations, including convertible securities. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risks or the liquidity of securities. Rating agencies may fail to make timely changes in credit ratings and an issuer’s current financial condition may be better or worse than a rating indicates. In addition, in recent years there have been instances in which the initial rating assigned by a rating agency to a security failed to take account of adverse economic developments which subsequently occurred, leading to losses that were not anticipated based on the initial rating. To the extent that the issuer of a security pays a rating agency for the analysis of its security, an inherent conflict of interest may exist that could affect the reliability of the rating. The ratings of a debt security may change over time. As a result, debt instruments held by HIO could receive a higher rating or a lower rating during the period in which they are held. HIO will not necessarily sell a security when its rating is reduced below its rating at the time of purchase.

Mortgage-Backed Securities Risks. Mortgage-backed securities include, among other things, participation interests in pools of residential mortgage loans purchased from individual lenders by a federal agency or originated and issued by private lenders and involve, among others, the following risks:

 

   

Credit and Market Risks of Mortgage-Backed Securities. Investments by HIO in fixed rate and floating rate mortgage-backed securities will entail credit risks (i.e., the risk of non-payment of interest and principal) and market risks (i.e., the risk that interest rates and other factors could cause the value of the instrument to decline). Many issuers or servicers of mortgage-backed securities may guarantee timely payment of interest and principal on the securities, whether or not payments are made when due on the underlying mortgages. This kind of guarantee generally increases the quality of a security, but does not mean that the security’s market value and yield will not change. The value of all mortgage-backed securities also may change because of changes in the market’s perception of the creditworthiness of the organization that issues or guarantees them. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments of principal or interest to HIO as a holder of such securities, reducing the values of those securities or in some cases rendering them worthless. HIO also may purchase securities that are not guaranteed or subject to any credit support.

Like bond investments, the value of fixed rate mortgage-backed securities will tend to rise when interest rates fall, and fall when rates rise. Floating rate mortgage-backed securities will generally tend to have more moderate changes in price when interest rates rise or fall, but their current yield will be affected.

In addition, the mortgage-backed securities market in general may be adversely affected by changes in governmental legislation or regulation. Factors that could affect the value of a mortgage-backed security include, among other things, the types and amounts of insurance which an individual mortgage or specific mortgage-backed security carries, the default and delinquency rate of the mortgage pool, the amount of time the mortgage loan has been outstanding, the loan-to-value ratio of each mortgage and the amount of overcollateralization or undercollateralization of the mortgage pool.

 

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Ongoing developments in the residential mortgage market may have additional consequences to the market for mortgage-backed securities. Delinquencies and losses generally have been increasing with respect to securitizations involving residential mortgage loans and may continue to increase as a result of the weakening housing market and the seasoning of securitized pools of mortgage loans. Many so-called “sub-prime” mortgage pools are currently distressed and in some cases may be trading at significant discounts to their face value.

Additionally, mortgage lenders recently have adjusted their loan programs and underwriting standards, which has reduced the availability of mortgage credit to prospective mortgagors. This has resulted in reduced availability of financing alternatives for mortgagors seeking to refinance their mortgage loans. The reduced availability of refinancing options for mortgagors has resulted in higher rates of delinquencies, defaults and losses on mortgage loans, particularly in the case of, but not limited to, mortgagors with adjustable rate mortgage loans or interest-only mortgage loans that experience significant increases in their monthly payments following the adjustment date or the end of the interest-only period (see “—Adjustable Rate Mortgages” below for further discussion of adjustable rate mortgage risks). These events, alone or in combination with each other and with deteriorating economic conditions in the general economy, may continue to contribute to higher delinquency and default rates on mortgage loans. The tighter underwriting guidelines for residential mortgage loans, together with lower levels of home sales and reduced refinance activity, also may have contributed to a reduction in the prepayment rate for mortgage loans generally and this trend may continue. The values of mortgage-backed securities may be substantially dependent on the servicing of the underlying mortgage pools, and therefore are subject to risks associated with the negligence or malfeasance by their servicers and to the credit risk of their servicers. In certain circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral.

The United States Government conservatorship of Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Corporation (“Fannie Mae”) in September 2008 may adversely affect the real estate market and the value of real estate assets generally. It is unclear as of the date of this prospectus what the ultimate resolution of the conservatorship arrangement will be and what impact that resolution will have on the financial markets.

The Federal Housing Finance Agent (“FHFA”), as conservator or receiver of Fannie Mae and Freddie Mac, has the power to repudiate any contract entered into by Fannie Mae or Freddie Mac prior to its appointment if it determines that performance of the contract is burdensome and repudiation of the contract promotes the orderly administration of Fannie Mae’s or Freddie Mac’s affairs. In the event the guaranty obligations of Fannie Mae or Freddie Mac are repudiated, payments of interest to holders of Fannie Mae or Freddie Mac mortgage-backed securities would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders.

Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or liability of Fannie Mae or Freddie Mac without any approval, assignment or consent. If FHFA were to transfer any such guaranty obligation to another party, holders of Fannie Mae or Freddie Mac mortgage-backed securities would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party.

 

   

Prepayment, Extension and Redemption Risks of Mortgage-Backed Securities. Mortgage-backed securities may reflect an interest in monthly payments made by the borrowers who receive the underlying mortgage loans. Although the underlying mortgage loans are for specified periods of time, such as 20 or 30 years, the borrowers can, and historically have, paid them off sooner. When a prepayment happens, a portion of the mortgage-backed security which represents an interest in the underlying mortgage loan will be prepaid. A borrower is more likely to prepay a mortgage which bears a relatively high rate of interest. This means that in times of declining interest rates, a portion of HIO’s higher yielding securities are likely to be redeemed and HIO will probably be unable to replace them with securities having as great a yield. Prepayments can result in lower yields to stockholders. The increased likelihood of prepayment when interest rates decline also limits market price appreciation of mortgage-backed securities. This is known as prepayment risk. Mortgage-backed securities also are subject to extension risk. Extension risk is the possibility that rising interest rates may cause prepayments to occur at a slower than expected rate. This particular risk may effectively change a security which was considered short or intermediate term into a long-term security. The values of long-term securities generally fluctuate more widely in response to changes in interest rates than short or intermediate-term securities. In addition, a mortgage-backed security may be subject to

 

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redemption at the option of the issuer. If a mortgage-backed security held by HIO is called for redemption, HIO will be required to permit the issuer to redeem or “pay-off” the security, which could have an adverse effect on HIO’s ability to achieve its investment objective.

 

   

Liquidity Risk of Mortgage-Backed Securities. The liquidity of mortgage-backed securities varies by type of security; at certain times HIO may encounter difficulty in disposing of such investments. Because mortgage-backed securities have the potential to be less liquid than other securities, HIO may be more susceptible to liquidity risks than funds that invest in other securities. In the past, in stressed markets, certain types of mortgage-backed securities suffered periods of illiquidity when disfavored by the market.

 

   

Collateralized Mortgage Obligations. There are certain risks associated specifically with collateralized mortgage obligations (“CMOs”). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. The average life of CMOs is determined using mathematical models that incorporate prepayment assumptions and other factors that involve estimates of future economic and market conditions. These estimates may vary from actual future results, particularly during periods of extreme market volatility. Further, under certain market conditions, such as those that occurred in 1994, 2007, 2008 and 2009, the average weighted life of certain CMOs may not accurately reflect the price volatility of such securities. For example, in periods of supply and demand imbalances in the market for such securities and/or in periods of sharp interest rate movements, the prices of CMOs may fluctuate to a greater extent than would be expected from interest rate movements alone. CMOs issued by private entities are not obligations issued or guaranteed by the United States Government, its agencies or instrumentalities or by any government agency, although the securities underlying a CMO may be subject to a guarantee. Therefore, if the collateral securing the CMO, as well as any third party credit support or guarantees, is insufficient to make payments when due, the holder could sustain a loss.

 

   

Adjustable Rate Mortgages. Adjustable Rate Mortgages (“ARMs”) contain maximum and minimum rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, many ARMs provide for additional limitations on the maximum amount by which the mortgage interest rate may adjust for any single adjustment period. Alternatively, certain ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any excess interest is added to the principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is used to reduce the then-outstanding principal balance of the ARM.

In addition, certain ARMs may provide for an initial fixed, below-market or “teaser” interest rate. During this initial fixed-rate period, the payment due from the related mortgagor may be less than that of a traditional loan. However, after the “teaser” rate expires, the monthly payment required to be made by the mortgagor may increase dramatically when the interest rate on the mortgage loan adjusts. This increased burden on the mortgagor may increase the risk of delinquency or default on the mortgage loan and in turn, losses on the mortgage-backed security into which that loan has been bundled.

 

   

Interest and Principal Only Securities Risk. One type of stripped mortgage-backed security pays to one class all of the interest from the mortgage assets (the interest-only, or “IO” class), while the other class will receive all of the principal (the principal-only, or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on HIO’s yield to maturity from these securities. If the assets underlying the IO class experience greater than anticipated prepayments of principal, HIO may fail to recoup fully, or at all, its initial investment in these securities. Conversely, PO class securities tend to decline in value if prepayments are slower than anticipated.

Investments in mortgage-related securities may involve particularly high levels of risk under current market conditions.

Market Price Discount from Net Asset Value Risk. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk is separate and distinct from the risk that HIO’s net asset value could decrease as a result of its investment activities and may be a greater risk to investors expecting to sell their HIO Common Shares in a relatively short period. Whether investors will realize gains or losses upon the sale of HIO Common Shares will depend not

 

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upon HIO’s net asset value but upon whether the market price of HIO Common Shares at the time of sale is above or below the investor’s purchase price for HIO Common Shares. Because the market price of HIO Common Shares will be determined by factors such as relative supply of and demand for HIO Common Shares in the market, general market and economic conditions and other factors beyond the control of HIO, HIO cannot predict whether HIO Common Shares will trade at, above or below net asset value. HIO Common Shares are designed primarily for long-term investors and you should not view HIO as a vehicle for trading purposes.

Anti-Takeover Provisions. HIO’s Charter and Bylaws include provisions that could limit the ability of other entities or persons to acquire control of HIO or convert HIO to an open-end fund. These provisions could have the effect of depriving common stockholders of opportunities to sell their HIO Common Shares at a premium over the then-current market price of HIO Common Shares.

Market Disruption and Geopolitical Risk. Instability in the Middle East and terrorist attacks in the United States and around the world may have a substantial impact on the U.S. and world economies and securities markets. Terrorist attacks closed some of the U.S. securities markets in 2001, and similar events cannot be ruled out in the future. War, occupation, terrorism and related geopolitical risks have led, and may in the future lead to, increased short-term market volatility and adverse long-term effects on the U.S. and world economies and markets generally. These risks may adversely affect individual issuers and securities markets, interest rates, secondary trading, ratings, investor psychology, credit risk, inflation and other factors relating to HIO Common Shares. High-yield securities tend to be more volatile than higher-rated securities, so these or similar events may have a greater impact on the prices and volatility of high-yield securities than on higher rated securities.

Current Economic Conditions—Credit Crisis Liquidity and Volatility Risk. The markets for credit instruments, including fixed income securities, have experienced periods of extreme illiquidity and volatility since the latter half of 2007. Tightening of credit conditions occurred just as a record amount of corporate bonds (as measured by transaction volume) were scheduled to enter the markets in the third quarter of 2007. This imbalance has caused a significant dislocation in the markets, marked by sharply widened credit spreads, delayed high-yield bond offerings and a general reduction in liquidity. General market uncertainty and consequent repricing risk have led to market imbalances of sellers and buyers, which in turn have also resulted in significant valuation uncertainties in a variety of debt securities, including certain fixed income securities. In addition, during 2008, several major dealers of fixed income securities exited the market via acquisition or bankruptcy. These conditions resulted, and in many cases continue to result in greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many debt securities remaining illiquid and of uncertain value. During times of reduced market liquidity, HIO may not be able to sell securities readily at prices reflecting the values at which the securities are carried on HIO’s books. Sales of large blocks of securities by market participants, such as HIO, that are seeking liquidity can further reduce security prices in an illiquid market. These market conditions may make valuation of some of HIO’s securities uncertain and/or result in sudden and significant valuation increases or decreases in its holdings. Illiquidity and volatility in the credit markets may directly and adversely affect the setting of dividend rates on HIO Common Shares.

Furthermore, because of the current conditions in the credit markets, issuers of fixed income securities may be subject to increased costs associated with incurring debt, tightening underwriting standards and reduced liquidity generally. The worsening general economic conditions have materially and adversely impacted the broader financial and credit markets and have reduced the availability of debt and equity capital for the market as a whole. The reduced willingness of some lenders to extend credit, in general, may make it more difficult for issuers of Senior Loans and Second Lien Loans to finance their operations. These developments have adversely affected the broader economy, and may continue to do so, which in turn may adversely affect the ability of issuers of securities owned by HIO to make payments of principal and interest when due, lead to lower credit ratings and increased defaults. Such developments could, in turn, reduce the value of securities owned by HIO and adversely affect the net asset value of HIO Common Shares.

 

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INFORMATION ABOUT THE PROPOSED MERGER

The Agreement and Plan of Merger

The following is a summary of the material terms and conditions of the Agreement and Plan of Merger. This summary is qualified in its entirety by reference to the form of Agreement and Plan of Merger attached as Appendix A to this Proxy Statement/Prospectus. Under the Agreement and Plan of Merger, MHY will merge with and into HIO on the Closing Date. As a result of the Merger and on the Closing Date:

 

   

MHY will no longer exist, and

 

   

HIO will be the surviving corporation

MHY will then:

 

   

deregister as an investment company under the 1940 Act,

 

   

cease its separate existence under Maryland law,

 

   

remove its Common Shares from listing on the NYSE, and

 

   

withdraw from registration under the Securities Exchange Act of 1934, as amended.

Each outstanding MHY Common Share will be converted into an equivalent dollar amount (to the nearest one tenth of one cent) of full HIO Common Shares, based on the net asset value per share of each of the parties at 4:00 p.m. Eastern Time on the business day prior to the Closing Date. No fractional HIO Common Shares will be issued to the holders of MHY Common Shares. In lieu thereof, HIO will pay cash to each former holder of MHY Common Shares in an amount equal to the value of the fractional HIO Common Shares that the investor would otherwise have received in the Merger.

No sales charge or fee of any kind will be charged to holders of MHY Common Shares in connection with their receipt of HIO Common Shares in the Merger.

From and after the Closing Date, HIO will possess all of the properties, assets, rights, privileges and powers and shall be subject to all of the restrictions, liabilities, obligations, disabilities and duties of MHY, all as provided under Maryland law.

Under Maryland law, stockholders of a corporation whose shares are traded publicly on a national securities exchange, such as the Funds’ Common Shares, are not entitled to demand the fair value of their shares upon a merger; therefore, the holders of the Funds’ Common Shares will be bound by the terms of the Merger, if approved. However, any holder of either Fund’s Common Shares may sell his or her Common Shares on the NYSE at any time prior to the Merger.

The Agreement and Plan of Merger may be terminated and the Merger abandoned, whether before or after approval by MHY’s stockholders, at any time prior to the Closing Date by resolution of either Fund’s Board, if circumstances should develop that, in the opinion of that Board, make proceeding with the Merger inadvisable with respect to HIO or MHY, respectively.

Prior to the Merger, MHY shall have declared and paid a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to MHY’s stockholders substantially all of its net investment income that has accrued through the Closing Date, if any, and substantially all of its net capital gain realized through the Closing Date, if any.

The Agreement and Plan of Merger provides that either Fund may waive compliance with any of the terms or conditions made therein for the benefit of that Fund, other than the requirements that: (a) the Agreement and Plan of Merger be approved by stockholders of MHY; and (b) MHY and HIO receive the opinion of Simpson Thacher & Bartlett LLP that the transactions contemplated by the Agreement and Plan of Merger will constitute a tax-free reorganization for federal income tax purposes, if, in the judgment of the Fund’s Board, after consultation with Fund counsel, such waiver will not have a material adverse effect on the benefits intended to be provided by the Merger to the stockholders of the Fund.

Under the Agreement and Plan of Merger, each Fund, out of its assets and property, will indemnify and hold harmless the other Fund and the members of the Board and officers of the other Fund from and against any and all losses, claims,

 

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damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the other Fund and those board members 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 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 Fund or the members of the Board or officers of the Fund prior to the Closing Date, provided that such indemnification by the Fund 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. In no event will a Fund or the members of the Board or officers of a Fund be indemnified for any losses, claims, damages, liabilities or expenses arising out of or based on conduct constituting willful misfeasance, bad faith, gross negligence or the reckless disregard of duties.

The Board of each Fund, including the Independent Directors, has determined, with respect to its Fund, that the interests of the holders of that Fund’s Common Shares will not be diluted as a result of the Merger and that participation in the Merger is in the best interests of that Fund. LMPFA, or an affiliate thereof, will bear half the costs of the Merger, with the remaining costs shared equally by the Funds. Such expenses shall also include, but not be limited to, all costs related to the preparation and distribution of this Proxy Statement/Prospectus, proxy solicitation expenses, SEC registration fees and NYSE listing fees.

Approval of the Agreement and Plan of Merger requires the affirmative vote of a majority of the outstanding MHY Common Shares and HIO Common Shares. See “Voting Information” below.

Reasons for the Merger and Board Considerations

Board Considerations

The Merger was presented to the Board of each Fund for consideration at simultaneous meetings held on November 11-12, 2015, and was approved by both Boards at that meeting. In considering the Merger, with the advice of counsel to the Independent Members, the Boards considered a number of factors, including the following:

 

   

It is anticipated that MHY’s shareholders’ total expense ratio will decline by 0.05% and HIO’s shareholders’ total expense ratio will decline by 0.01% as a result of the Merger.

 

   

Half of the expense associated with the Merger will be paid by LMPFA, or an affiliate thereof.

 

   

MHY and HIO have virtually identical investment objectives and substantially similar investment policies.

 

   

MHY and HIO have identical investment management fees of 0.80%, for the 1-year, 3-year, 5-year and 10-year periods ended September 30, 2015, MHY and HIO had substantially similar investment performance, with MHY returning -7.00%, 2.66%, 5.51% and 6.00%, and HIO returning -6.90%, 2.67%, 5.61% and 6.02%.

 

   

The stockholders of each Fund may benefit from enhanced market liquidity, as well as economies of scale, as one set of fixed expenses would be spread over a larger asset base.

 

   

The combined Fund may benefit from potential cost savings from better trade executions as a result of increased trading liquidity and tighter spreads.

 

   

The stockholders of each Fund may benefit from a more streamlined high yield product offering, allowing for more focused marketing and stockholder servicing efforts.

 

   

The stockholders of each Fund may benefit from additional diversification from a larger pool of assets.

 

   

The Merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. Assuming the Merger qualifies for such treatment, MHY stockholders generally will not recognize a gain or loss for federal income tax purposes as a result of the Merger. MHY stockholders may, however, recognize gain or loss with respect to any cash those stockholders receive pursuant to the Merger in lieu of fractional shares.

 

   

The combined Fund will have a total tax loss carryforward of $123.5 million.

 

   

MHY stockholders may benefit from the capital loss carryforward of HIO.

 

   

HIO stockholders may benefit from the capital loss carryforward of MHY, as some of MHY’s capital loss carryforward will move to the combined Fund, although an estimated 69% of MHY’s capital loss carryforward

 

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will expire unutilized due to the tax limitations imposed by the reorganization. Additionally, any capital losses recognized after the reorganization attributable to depreciation in MHY’s portfolio at the time of the reorganization will also be subject to the annual limitation on losses and may result in a greater amount of the capital loss carryforward expiring unutilized.

 

   

HIO Common Shares may experience near term price volatility as a result of the Merger.

Following extensive discussions, based on its evaluation of all factors material to the Funds, including those described above, the Board of each Fund, including all of the Independent Directors, determined, with respect to each Fund, that: (1) the Merger would be in the best interests of such Fund; and (2) the Merger would not result in the dilution of the interests of such Fund or its stockholders. The Boards did not identify a single factor or piece of information as all determinative or controlling. As a result, each Board approved the Agreement and Plan of Merger, subject to approval by stockholders.

Federal Income Tax Consequences

The following is a summary of the material federal income tax consequences of the Merger applicable to a holder of MHY Common Shares that receives HIO Common Shares in the Merger. This discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations, judicial authorities, published positions of the Internal Revenue Service (the “IRS”) and other applicable authorities, all as currently in effect and all of which are subject to change or differing interpretations (possibly with retroactive effect). This discussion is limited to U.S. holders (as defined below) that hold their MHY Common Shares as capital assets for federal income tax purposes (generally, assets held for investment). This discussion does not address all of the tax consequences that may be relevant to a particular MHY stockholder or to MHY stockholders that are subject to special treatment under federal income tax laws.

This discussion does not address the tax consequences of the Merger under state, local or foreign tax laws. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below.

Holders of MHY Common Shares are urged to consult with their own tax advisors as to the tax consequences of the Merger in their particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.

For purposes of this section, the term “U.S. holder” means a beneficial owner of MHY Common Shares that for federal income tax purposes is:

 

   

an individual citizen or resident of the United States;

 

   

a corporation, or other entity treated as a corporation for federal income tax purposes, created or organized in or under the laws of the United States or any State or the District of Columbia;

 

   

an estate that is subject to federal income tax on its income regardless of its source; or

 

   

a trust, the substantial decisions of which are controlled by one or more U.S. persons and which is subject to the primary supervision of a court within the United States, or a trust that validly has elected under applicable Treasury regulations to be treated as a U.S. person for federal income tax purposes.

Tax Consequences of the Merger Generally

MHY and HIO intend the Merger to qualify as a tax-free reorganization within the meaning of Section 368(a)(1) of the Code. The Merger is conditioned upon the receipt by both MHY and HIO of an opinion from Simpson Thacher & Bartlett LLP to the effect that, based upon certain facts, assumptions and representations of the parties, for federal income tax purposes:

(i) the Merger will constitute a reorganization within the meaning of Section 368(a)(1) of the Code and that MHY and HIO will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code;

 

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(ii) except for consequences regularly attributable to a termination of MHY’s taxable year, no gain or loss will be recognized by MHY as a result of the Merger or upon the conversion of MHY Common Shares into HIO Common Shares;

(iii) no gain or loss will be recognized by HIO as a result of the Merger or upon the conversion of MHY Common Shares into HIO Common Shares;

(iv) no gain or loss will be recognized by the holders of MHY Common Shares upon the conversion of their MHY Common Shares into HIO Common Shares, except to the extent such holders are paid cash in lieu of fractional HIO Common Shares in the Merger;

(v) the tax basis of MHY assets in the hands of HIO will be the same as the tax basis of such assets in the hands of MHY immediately prior to the consummation of the Merger;

(vi) immediately after the Merger, the aggregate tax basis of the HIO Common Shares received by each holder of MHY Common Shares in the Merger (including that of fractional share interests purchased by HIO) will be equal to the aggregate tax basis of the MHY Common Shares owned by such holder immediately prior to the Merger;

(vii) a stockholder’s holding period for HIO Common Shares (including that of fractional share interests purchased by HIO) will be determined by including the period for which such stockholder held MHY Common Shares converted pursuant to the Merger, provided that such MHY Common Shares were held by such stockholder as capital assets;

(viii) HIO’s holding period with respect to the MHY assets transferred pursuant to the Merger will include the period for which such assets were held by MHY; and

(ix) the payment of cash to the holders of MHY Common Shares in lieu of fractional HIO Common Shares will be treated as though such fractional shares were distributed as part of the Merger and then redeemed by HIO with the result that the holder of MHY Common Shares will generally have a capital gain or loss to the extent the cash distribution differs from such stockholder’s basis allocable to the fractional HIO Common Shares.

Assuming that, in accordance with the opinion referred to above, the Merger qualifies as a reorganization within the meaning of Section 368(a)(1) of the Code, the Merger will result in the tax consequences described above in clauses (i) through (ix).

Information Reporting and Backup Withholding

Cash payments received in lieu of fractional HIO Common Shares by a U.S. holder will generally be subject to information reporting unless the holder is an exempt recipient. In addition, backup withholding at a rate of 28% may apply to the cash payable to a U.S. holder, unless the holder furnishes its taxpayer identification number (in the case of individuals, their social security number) and otherwise complies with applicable requirements of the backup withholding rules, or the holder otherwise establishes an exemption. Any amounts withheld from payments to a holder under the backup withholding rules are not additional tax and will be allowed as a refund or credit against the holder’s federal income tax liability, provided the required information is timely furnished to the IRS.

Reporting Requirements

A holder of MHY Common Shares who receives HIO Common Shares as a result of the Merger will be required to retain records pertaining to the Merger. Each holder of MHY Common Shares who is required to file a U.S. tax return and who is a “significant holder” that receives HIO Common Shares in the Merger will be required to file a statement with the holder’s federal income tax return setting forth certain information, including such holder’s basis in and the fair market value of such holder’s MHY Common Shares surrendered in the Merger. A “significant holder” is a holder of MHY Common Shares who, immediately before the Merger, owned (i) at least 5% of the outstanding stock of MHY or (ii) securities of MHY with a tax basis of $1,000,000 or more. Holders of MHY Common Shares should consult with their own tax advisors regarding the application of these reporting requirements.

 

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Other Tax Considerations

While neither HIO nor MHY is aware of any adverse state or local tax consequences of the Merger, they have not requested any ruling or opinion with respect to such consequences, and stockholders should consult their own tax advisor with respect to such matters.

Immediately prior to the Closing Date, MHY, to the extent necessary, will pay a dividend or dividends, which together with all previous dividends, are intended to have the effect of distributing to its stockholders substantially all of its net investment income that has accrued through the Closing Date, if any, and substantially all of its net capital gain, if any, realized through the Closing Date. Such dividends will be included in the taxable income of the stockholders of MHY.

Information Regarding Tax Capital Loss Carryforwards

Federal income tax law permits a regulated investment company to carry forward its net capital losses generated in taxable years beginning after December 22, 2010 (“Post-2010 Losses”) for an unlimited period. Federal income tax law also permits a regulated investment company to carry forward capital losses generated in taxable years beginning on or prior to December 22, 2010 (“Pre-2011 Losses”) for a period of up to eight taxable years, provided that such loss carryovers are utilized only after the full utilization of all Post-2010 Losses.

The Merger will cause the taxable year of MHY to close, which will accelerate the schedule for expiration of its carryovers of Pre-2011 Losses, and could also result in a net capital loss for the taxable year ending on the Closing Date. Because HIO has a carryover of Post-2010 Losses, the Merger may also delay the utilization of each Fund’s Pre-2011 Losses, which may only be utilized after the full utilization of all Post-2010 Losses. In addition, the Merger is expected to result in a limitation on HIO’s ability to use carryovers of MHY and, potentially, to use unrealized capital losses inherent in the tax bases of the assets acquired, if realized within five years following the Merger. Those limitations, imposed by Section 382 of the Code, will apply if, as expected, the stockholders of MHY own less than 50% of HIO immediately after the Merger, and will be imposed on an annual basis. The annual Section 382 limitation for periods following the Merger generally will equal the product of the net asset value of MHY immediately prior to the Merger and the “long-term tax-exempt rate,” published by the Internal Revenue Service, in effect at the time of the Merger.

As of their most recent fiscal year ends, the Funds are entitled to capital loss carryovers for federal income tax purposes in the amounts set forth below:

 

MHY (as of February 28, 2015)

        

HIO (as of September 30, 2015)

 
     Amount of
Carryforward
    Fiscal Year of
Expiration
Prior to
Merger
              Amount of
Carryforward
    Fiscal Year of
Expiration
Prior to
Merger
 
   $ (3,750,476     No Expiration (1)          $ (24,092,664     No Expiration (1) 
     (6,640,949     2/28/2017              (2,157,094     9/30/2016   
     (35,714,593     2/28/2018              (17,968,287     9/30/2017   
     (5,212,866     2/28/2019              (49,024,877     9/30/2018   
               (11,684,123     9/30/2019   
  

 

 

           

 

 

   

Total

   $ (51,318,884           $ (104,927,045  
  

 

 

           

 

 

   

 

(1) 

Both Funds are permitted to carry forward these capital losses for an unlimited period. However, these losses will be required to be utilized prior to their other capital losses with the expiration dates listed above. As a result of this ordering rule, the other capital losses may be more likely to expire unutilized. Additionally, these capital losses retain their character as either short-term or long-term capital losses rather than being considered all short-term as are the Funds’ other capital losses listed above.

 

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MHY

Based on the recent data referred to above, the Merger would impact the use of MHY’s capital loss carryovers in the following manner: (1) the expiration date of the Pre-2011 Losses would be accelerated by one year and realigned to the year of HIO; for example, the carryovers due to expire on February 28, 2018 would expire on September 30, 2016; (2) the Pre-2011 Losses would not be available to be utilized until all Post-2010 Losses of HIO have been used; (3) MHY’s carryovers would benefit the stockholders of the combined Fund, rather than only the stockholders of MHY; and (4) the aggregate amount of the carryovers that could be utilized in any taxable year would be limited to the product of the long-term tax-exempt rate at the time of the Merger and the net asset value of MHY at that time (approximately $5,963,493 per year based on data as of a recent date).

Based on such data, the combination of the above referenced limitations on the use of loss carryovers would result in some portion (approximately $42,400,000 based on data as of a recent date) of MHY’s loss carryovers expiring unused. It should be noted that there would be no assurances that MHY would be able to use such losses in the absence of the Merger. Additionally, MHY stockholders may benefit from the use of HIO’s capital loss carryovers by the combined Fund after the Merger.

HIO

Based on the recent data referred to above, the Merger would impact the use of HIO’s capital loss carryovers by benefiting the stockholders of the combined Fund, rather than only the stockholders of HIO.

Information Applicable to Both Funds

The capital loss carryovers and limitations described above may change significantly between now and the Closing Date. Further, the ability of each Fund to use loss carryovers (even in the absence of the Merger) depends on factors other than loss limitations, such as the future realization of capital gains or losses. The effect of the combination of these factors on the use of loss carryovers may result in some portion of the Pre-2011 Losses of either or both of the Funds expiring unused. This may result in stockholders paying more taxes or paying taxes sooner than they otherwise would if the Merger did not occur.

PORTFOLIO SECURITIES

The securities in which MHY may invest are permissible for investment under HIO’s investment objectives and strategies. Based on current market conditions which may change, LMPFA estimates that the Funds will not experience any significant portfolio turnover in connection with the Merger.

No securities of HIO need to be sold in order for HIO to comply with its investment restrictions or policies. The Funds may buy and sell securities in the normal course of their operations.

 

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INFORMATION ABOUT MANAGEMENT OF THE FUNDS

Information About Directors and Officers

The overall management of the business and affairs is vested in the Board of Directors of each Fund. In accordance with each Fund’s charter, each Board of Directors is divided into three classes: Class I, Class II and Class III. Each Board approves all significant agreements between such Fund and persons or companies furnishing services to the Fund. The day-to-day operation of the Fund is delegated to the officers of each Fund, LMPFA and Western Asset, subject always to the investment objectives, restrictions and policies of each Fund and to the general supervision of the Board. The following table provides information concerning the Directors of each Fund.

 

Name, Address and Age

  

Position(s)
Held with
the Funds

  

Length of
Term
Served

  

Principal Occupation(s)
During Past 5 Years

   Number of
Portfolios in
Fund Complex(1)
Overseen by
Nominee
(Including
the Fund)
    

Other
Directorships
Held by
Nominee

Robert D. Agdern

c/o Chairman of the Fund

Legg Mason & Co., LLC

(“Legg Mason & Co.”)

620 Eighth Avenue, 49th Floor

New York, NY 10018

Birth year: 1950

  

Director and Member of Nominating and Audit Committees; Class II (MHY),

Class I (HIO)

   Since 2015 (MHY), Since 2015 (HIO)    Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (since 2002); Deputy General Counsel responsible for western hemisphere matters for BP PLC from 1999 to 2001; Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments from 1993 to 1998 (Amoco merged with British Petroleum in 1998 forming BP PLC)      31       None

Carol L. Colman

c/o Chairman of the Fund

Legg Mason & Co.

620 Eighth Avenue

New York, NY 10018

Birth Year: 1946

  

Director and Member of Nominating and Audit Committees; Class I (MHY),

Class I (HIO)

   Since 2007 (MHY), Since 2007 (HIO)    President, Coleman Consulting Co.      31       None

 

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Name, Address and Age

  

Position(s)
Held with
the Funds

  

Length of
Term
Served

  

Principal Occupation(s)
During Past 5 Years

   Number of
Portfolios in
Fund Complex(1)
Overseen by
Nominee
(Including
the Fund)
    

Other
Directorships
Held by
Nominee

Daniel P. Cronin

c/o Chairman of the Fund

Legg Mason & Co., LLC

620 Eighth Avenue

New York, NY 10018

Birth Year: 1946

   Director and Member of Audit and Nominating Committees; Class II (MHY), Class I (HIO)    Since 2007 (MHY), Since 2007 (HIO)    Retired; formerly, Associate General Counsel, Pfizer, Inc.      31       None

Paolo M. Cucchi

c/o Chairman of the Fund

Legg Mason & Co.

620 Eighth Avenue

New York, NY 10018

Birth Year: 1941

  

Director and Member of Nominating and Audit Committees; Class III (MHY),

Class II (HIO)

  

Since 1993 (MHY),

Since 2007 (HIO)

   Emeritus Professor of French and Italian at Drew University (since 2014); formerly, Professor of French and Italian at Drew University (2009 to 2014); Vice President and Dean of College of Liberal Arts at Drew University (1984 to 2009)      31       None

Leslie H. Gelb

c/o Chairman of the Fund

Legg Mason & Co.

620 Eighth Avenue

New York, NY 10018

Birth Year: 1937

  

Director and Member of Nominating and Audit Committees; Class I (MHY),

Class III (HIO)

   Since 2008 (MHY), Since 2007 (HIO)    President Emeritus and Senior Board Fellow, The Council on Foreign Relations (since 2003); formerly, President, The Council on Foreign Relations (prior to 2003); formerly, Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New York Times      31       Director of two registered investment companies advised by Aberdeen Asset Management Asia Limited (since 1994); Director, Encyclopedia Brittanica; Director, Centre Partners IV and V, LP and Affiliates

William R. Hutchinson

c/o Chairman of the Fund

Legg Mason & Co.

620 Eighth Avenue

New York, NY 10018

Birth year: 1942

   Director and Member of Audit and Nominating Committees; Class III (MHY), Class III (HIO)    Since 2001 (MHY), Since 2007 (HIO)    President, W.R. Hutchinson & Associates Inc. (consulting)      31       Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc-Corp. (since 1994)

 

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Name, Address and Age

  

Position(s)
Held with
the Funds

  

Length of
Term
Served

  

Principal Occupation(s)
During Past 5 Years

   Number of
Portfolios in
Fund Complex(1)
Overseen by
Nominee
(Including
the Fund)
    

Other
Directorships
Held by
Nominee

Eileen Kamerick

c/o Chairman of the Fund

Legg Mason & Co.

620 Eighth Avenue

New York, NY 10018

Birth Year: 1958

  

Director and Member of Nominating and Audit Committees; Class III (MHY),

Class II (HIO)

   Since 2013 (MHY), Since 2013 (HIO)    Executive Vice President and Chief Financial Officer, ConnectWise, Inc. (software and services company) (since 2015) and Adjunct Professor, Washington University in St. Louis and University of Iowa law schools (since 2014); formerly, CFO, Press Ganey Associates (health care informatics company) (since 2012); formerly Managing Director and CFO, Houlihan Lokey (international investment bank) (2010 to 2012)      31       Director of Associated Banc-Corp (financial services company) (since 2007); Westell Technologies, Inc. (technology company) (since 2003)

Riordan Roett

c/o Chairman of the Fund

Legg Mason & Co.

620 Eighth Avenue

New York, NY 10018

Birth Year: 1938

  

Director and Member of Nominating and Audit Committees; Class I (MHY),

Class III (HIO)

   Since 2008 (MHY), Since 2007 (HIO)    The Sarita and Don Johnston Professor of Political Science and Director of Western Hemisphere Studies, Paul H. Nitze School of Advanced International Studies, The Johns Hopkins University (since 1973)      31       None

 

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Table of Contents

Name, Address and Age

  

Position(s)
Held with
the Funds

  

Length of
Term
Served

  

Principal Occupation(s)
During Past 5 Years

   Number of
Portfolios in
Fund Complex(1)
Overseen by
Nominee
(Including
the Fund)
    

Other
Directorships
Held by
Nominee

Jane E. Trust2

Legg Mason & Co.

100 International Drive

Baltimore, MD 21202

Birth year: 1962

   Chairman, CEO, President and Director Class II (MHY), Class II (HIO)    Since 2015 (MHY), Since 2015 (HIO)    Managing Director of Legg Mason & Co. (since 2015); Officer and/or Trustee/Director of 157 funds associated with LMPFA or its affiliates (since 2015); Senior Vice President of LMPFA (since April 2015). Formerly, Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007)      147       None

 

(1) The term “Fund Complex” means two or more registered investment companies that:
  (a) hold themselves out to investors as related companies for purposes of investment and investor services; or
  (b) have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.
(2) Ms. Trust is an “interested person” as defined in the 1940 Act because she is an officer of LMPFA and certain of its affiliates.

The Directors were selected to join each Board based upon the following as to each Director: his or her character and integrity; such person’s service as a board member of other funds in the Legg Mason, Inc. fund complex; such person’s willingness to serve and willingness and ability to commit the time necessary to perform the duties of a Director; as to each Director other than Ms. Trust, his or her status as not being an “interested person” as defined in the 1940 Act; and, as to Ms. Trust, her role with Legg Mason, Inc. No factor, by itself, was controlling.

In addition to the information provided in the table included above, each Director possesses the following attributes: Mr. Agdern, experience in business and as a legal professional; Ms. Colman, experience as a consultant and investment professional; Mr. Cronin, legal and managerial experience; Mr. Cucchi, experience as a college professor and leadership experience as an academic dean; Mr. Gelb, academic and world affairs and foreign relations experience and service as a board member of other registered investment companies; Mr. Hutchinson, experience in accounting and working with auditors, consulting, business and finance and service as a board member of another highly regulated financial services company; Ms. Kamerick, experience in business and finance, including financial reporting, and service as a board member of another highly regulated financial services company; Dr. Roett, expertise in Latin and South American societies and economies and academic leadership 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 the Directors are pursuant to requirements of the Securities and Exchange Commission, do not constitute holding out of the Board or any Director 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.

 

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Security Ownership of Management

The following table provides information concerning the dollar range of equity securities owned beneficially by each Director and nominee for election as Director as of December 31, 2015:

 

Name of Director/Nominee

   Dollar Range(1) of  Equity
Securities in MHY
   Dollar Range(1) of  Equity
Securities in HIO
   Aggregate Dollar  Range(1)
of Equity Securities in all
Funds Overseen by
Director in Family of
Investment

Companies(2)
 

NON-INTERESTED DIRECTORS

        

Robert D. Agdern

           A   

Carol L. Colman

           E   

Daniel P. Cronin

           E   

Paolo M. Cucchi

           A   

Leslie H. Gelb

           A   

William R. Hutchinson

           E   

Eileen Kamerick

           C   

Riordan Roett

           C   

INTERESTED DIRECTOR

        

Jane E. Trust(3)

           A   

 

(1) 

The dollar ranges are as follows: “A” = None; “B” = $1-$10,000; “C” = $10,001-$50,000; “D” = $50,001-$100,000; “E” = Over $100,000.

 

(2) 

“Family of Investment Companies” means any two or more registered investment companies that share the same investment adviser or principal underwriter or hold themselves out to investors as related companies for purposes of investment and investor services.

 

(3) 

Ms. Trust became a Director of each Fund, effective August 1, 2015.

At December 31, 2015, the Directors and officers of the Funds as a group beneficially owned less than 1% of the outstanding shares of each Fund’s common stock.

No Director or nominee for election as Director who is not an “interested person” of the Funds as defined in the 1940 Act, nor any immediate family members, to the best of the Funds’ knowledge, had any interest in the Funds’ investment adviser, or any person or entity (other than the Funds) directly or indirectly controlling, controlled by, or under common control with Legg Mason as of December 31, 2015.

Director Compensation

Under the federal securities laws, and in connection with the Meeting, the Funds are required to provide to stockholders in connection with the Meeting information regarding compensation paid to the Directors by the Funds, as well as by the various other investment companies advised by LMPFA. The following table provides information concerning the compensation paid to each Director by the Funds and the Fund Complex during the calendar year ended December 31, 2014 and the total compensation paid to each Director during the fiscal years ended September 30, 2015 for HIO and February 28, 2015 for MHY. Certain of the Directors listed below are members of the Funds’ Audit and Nominating Committees, as well as other committees of the boards of certain other investment companies advised by LMPFA. Accordingly, the amounts provided in the table include compensation for service on all such committees. The Funds do not provide any pension or retirement benefits to Directors. In addition, no remuneration was paid during the fiscal years ended September 30, 2015 for HIO and February 28, 2015 for MHY, respectively, to Ms. Trust who is an “interested person” as defined in the 1940 Act.

 

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Name of Directors

   Aggregate
Compensation
from MHY
for Fiscal Year  Ended
02/28/15
     Aggregate
Compensation
from HIO
for Fiscal Year  Ended
09/30/15
     Total Pension or
Retirement
Benefits Paid as
Part of Fund
Expenses(1)
     Total Compensation
from the Funds and
Fund Complex(2) for
Calendar Year Ended
12/31/14
     Directorships(3)  

Robert D. Agdern(4)

   $ 1,361       $ 7,737       $ 0       $ 0         31   

Carol L. Colman

     5,920         11,722         0         258,816         31   

Daniel P. Cronin

     5,920         11,722         0         258,816         31   

Paolo M. Cucchi

     5,272         10,492         0         231,941         31   

Leslie H. Gelb

     5,272         10,492         0         231,941         31   

William R Hutchinson

     6,441         13,038         0         280,231         31   

Eileen Kamerick

     6,010         12,352         0         252,807         31   

Riordan Roett

     5,272         10,492         0         231,941         31   

 

(1) 

Pursuant to prior retirement plans, payments of $562 were made to former Directors for the fiscal year ended September 30, 2015.

 

(2) 

“Fund Complex” means two or more Funds (a registrant or, where the registrant is a series company, a separate portfolio of the registrant) that hold themselves out to investors as related companies for purposes of investment and investor services or have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other Funds.

 

(3) 

The numbers indicate the applicable number of investment companies in the Fund Complex overseen by that Director as of December 31, 2014.

 

(4) 

Robert D. Agdern was appointed a member of the Board of Directors of each Fund, effective January 1, 2015.

As of January 1, 2014, the Funds paid each of the Independent Trustees an annual fee of $120,000, plus $22,500 for each regularly scheduled Board meeting attended in person and $2,000 for each telephonic meeting of the Board. In addition to the payments described above, (a) the Lead Independent Director of the Board receives $35,000; (b) the chairperson of the Audit Committee receives $30,000; (c) the chairperson of the Nominating Committee receives $15,000; and (d) the chairperson of the Investment Committee receives $15,000. The following changes became effective January 1, 2015, (1) each Independent Director’s annual retainer increased to $150,000, (2) the Lead Independent Director received an additional annual fee of $50,000, and (3) each member of the Audit Sub-Committee received an additional annual fee of $15,000. The following change became effective January 1, 2016, the chairperson of the Compensation Committee receives $15,000. The annual compensation, fees and expenses are allocated among all the funds in the fund complex on the basis of average net assets.

Responsibilities of the Board of MHY and HIO

The Board of Directors is responsible under applicable state law for overseeing generally the management and operations of each Fund. The Directors oversee each Fund’s operations by, among other things, meeting at its regularly scheduled meetings and as otherwise needed with each Fund’s management and evaluating the performance of each Fund’s service providers including LMPFA, Western Asset, Western Asset Limited, the custodian and the transfer agent. As part of this process, the Directors consult with each Fund’s independent auditors and with their own separate independent counsel.

The Directors review each Fund’s financial statements, performance, net asset value and market price and the relationship between them, as well as the quality of the services being provided to each Fund. As part of this process, the Directors review the Fund’s fees and expenses in light of the nature, quality and scope of the services being received while also seeking to ensure that each Fund continues to have access to high quality services in the future.

The Board of Directors has four regularly scheduled meetings each year, and additional meetings may be scheduled as needed. In addition, the Board has a standing Audit Committee, Nominating Committee, Investment, Performance and Pricing Committee (the “Investment Committee”) and Compensation Committee that meet periodically and whose responsibilities are described below. The Compensation Committee of each Fund was formed on January 1, 2016.

With respect to MHY, during the fiscal year ended February 28, 2015, the Board of Directors held four regular meetings and two special meetings. Each Director attended at least 75% of the aggregate number of meetings of the Board and the

 

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committees for which he or she was eligible. With respect to HIO, during the fiscal year ended September 30, 2015, the Board of Directors held four regular meetings and two special meetings. Each Director attended at least 75% of the aggregate number of meetings of the Board and the committees for which he or she was eligible. The Funds do not have a formal policy regarding attendance by Directors at annual meetings of stockholders.

Each of the Audit Committee, the Nominating Committee and the Investment Committee is composed of all Directors who have been determined not to be “interested persons” of each Fund, LMPFA, Western Asset or their affiliates within the meaning of the 1940 Act, and who are “independent” as defined in the New York Stock Exchange listing standards (“Independent Directors”), and is chaired by an Independent Director. The Board in its discretion from time to time may establish ad hoc committees.

The Board of Directors is currently comprised of nine directors, eight of whom are Independent Directors. Jane E. Trust currently serves as Chairman of the Board. Ms. Trust is an “interested person” of each Fund. The appointment of Ms. Trust as Chairman reflects the Board’s belief that her experience, familiarity with each Fund’s day-to-day operations and access to individuals with responsibility for each Fund’s management and operations provides the Board with insight into each Fund’s business and activities and, with her access to appropriate administrative support, facilitates the efficient development of meeting agendas that address each Fund’s business, legal and other needs and the orderly conduct of board meetings. Mr. Hutchinson serves as Lead Independent Director. The Chairman develops agendas for Board meetings in consultation with the Lead Independent Director and presides at all meetings of the Board. The Lead Independent Director, among other things, chairs executive sessions of the Independent Directors, serves as a spokesperson for the Independent Directors and serves as a liaison between the Independent Directors and each Fund’s management between Board meetings. The Independent Directors regularly meet outside the presence of management and are advised by independent legal counsel. The Board also has determined that its leadership structure, as described above, is appropriate in light of the size and complexity of each Fund, the number of Independent Directors (who constitute a super-majority of the Board’s membership) and the Board’s general oversight responsibility. The Board also believes that its leadership structure not only facilitates the orderly and efficient flow of information to the Independent Directors from management, including Western Asset and Western Asset Limited, each Fund’s subadvisers, but also enhances the independent and orderly exercise of its responsibilities.

Audit Committee

Each Fund’s Audit Committee is composed entirely of all of the Independent Directors: Mses. Colman and Kamerick and Messrs. Agdern, Cronin, Cucchi, Gelb, Hutchinson and Roett. Ms. Kamerick serves as the Chair of the Audit Committee and has been determined by the Board to be an “audit committee financial expert.” The principal functions of the Audit Committee are: to (a) oversee the scope of each Fund’s audit, each Fund’s accounting and financial reporting policies and practices and its internal controls and enhance the quality and objectivity of the audit function; (b) approve, and recommend to the Independent Board Members (as such term is defined in the Audit Committee Charter) for their ratification, the selection, appointment, retention or termination of each Fund’s independent registered public accounting firm, as well as approving the compensation thereof; and (c) approve all audit and permissible non-audit services provided to each Fund and certain other persons by each Fund’s independent registered public accounting firm. With respect to MHY, the Audit Committee met twice during the fiscal year ended February 28, 2015. In addition, the Board of Directors most recently reviewed and adopted an Audit Committee Charter at a meeting held on February 11, 2014, a copy of which was attached as Annex A to the Fund’s proxy statement dated May 22, 2014. With respect to HIO, the Audit Committee met two times during the fiscal year ended September 30, 2015. In addition, HIO’s Board of Directors most recently reviewed and adopted an Audit Committee Charter at a meeting held on February 14, 2013, a copy of which was attached as Annex A to the Fund’s proxy statement dated December 20, 2013.

Nominating Committee

Each Fund’s Nominating Committee, the principal function of which is to select and nominate candidates for election as Directors of each Fund, is composed of all of the Independent Directors: Mses. Colman and Kamerick and Messrs. Agdern, Cronin, Cucchi, Gelb, Hutchinson and Roett. Mr. Cronin serves as the Chair of the Nominating Committee. The Nominating Committee may consider nominees recommended by the stockholder as it deems appropriate. Stockholders who wish to recommend a nominee should send recommendations to the Fund’s Secretary that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of Directors. A recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board of Directors and to serve

 

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if elected by the stockholders. With respect to MHY, the Nominating Committee met twice during the fiscal year ended February 28, 2015. In addition, MHY’s Board of Directors most recently reviewed and adopted a Nominating Committee Charter at a meeting held on February 14, 2013, a copy of which was attached as Annex B to MHY’s proxy statement dated May 24, 2013. With respect to HIO, the Nominating Committee met three times during the fiscal year ended September 30, 2015. In addition, HIO’s Board of Directors most recently reviewed and adopted a Corporate Governance and Nominating Committee Charter at a meeting held on February 12, 2015, a copy of which was attached as Annex B to HIO’s proxy statement dated December 23, 2015.

The Nominating Committee identifies potential nominees through its network of contacts, and in its discretion may also engage a professional search firm. The Nominating Committee meets to discuss and consider such candidates’ qualifications and then chooses a candidate by majority vote. The Nominating Committee does not have specific, minimum qualifications for nominees and has not established specific qualities or skills that it regards as necessary for one or more of each Fund’s Directors to possess (other than any qualities or skills that may be required by applicable law, regulation or listing standard). However, as set forth in the Nominating Committee Charter, in evaluating a person as a potential nominee to serve as a Director of the Fund, the Nominee 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 Director of the Fund;

 

   

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 manager of the Fund, Fund service providers or their affiliates;

 

   

whether or not the person serves on boards of, or is otherwise affiliated with, competing financial service organizations or their related mutual fund complexes;

 

   

whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of a Director of the Fund;

 

   

the contribution which the person can make to the Board and the Fund (or, if the person has previously served as a Director of the Fund, 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;

 

   

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 Fund’s retirement policies.

The Nominating Committee does not have a formal diversity policy with regard to the identification of potential director nominees but may consider diversity of professional experience, education and skills when evaluating potential nominees for Board membership.

Investment Committee

Each Fund’s Investment Committee is composed entirely of all of the Independent Directors. The members of the Investment Committee are Mses. Colman and Kamerick and Messrs. Agdern, Cronin, Cucchi, Gelb, Hutchinson and Roett. Ms. Colman serves as Chair of each Fund’s Investment Committee. The principal functions of the Investment Committee are: (a) to review and revise, with LMPFA and/or Clearbridge, the investment performance data and related reports provided to the Board, (b) to review with LMPFA the investment performance benchmarks and peer groups used in reports delivered to the Board and (c) to perform other functions as the Board may delegate from time to time. With respect to MHY, the Investment Committee met four times during the fiscal year ended February 28, 2015. With respect to HIO, the Investment Committee met four times during the fiscal year ended September 30, 2015.

 

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Officers

Each Fund’s executive officers are chosen each year at a regular meeting of the Board of Directors of the Fund, to hold office until their respective successors are duly elected and qualified. The same individuals serve as officers of both MHY and HIO. In addition to Ms. Trust, each Fund’s Chairman, CEO and President, the executive officers of the Funds currently are:

 

Name, Address and Age

 

Position(s) Held with
Fund

 

Length of Time
Served

 

Principal Occupation(s)
During Past 5 Years

Richard F. Sennett

Legg Mason & Co.

100 International Drive,

Baltimore, MD 21202

Birth year: 1970

  Principal Financial Officer  

Since 2011 (MHY),

Since 2011 (HIO)

  Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and 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)

Ted P. Becker

Legg Mason & Co.

620 Eighth Avenue,

49th Floor

New York, NY 10018

Birth year: 1951

  Chief Compliance Officer  

Since 2006 (MHY),

Since 2006 (HIO)

  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) and Legg Mason & Co. predecessors (prior to 2006)

Steven Frank

Legg Mason & Co.

620 Eighth Avenue

49th Floor

New York, NY 10018

Birth year: 1967

  Treasurer  

Since 2010 (MHY),

Since 2010 (HIO)

  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)

 

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Name, Address and Age

 

Position(s) Held with
Fund

 

Length of Time
Served

 

Principal Occupation(s)
During Past 5 Years

Jenna Bailey

Legg Mason & Co.

100 First Stamford Place,

Stamford, CT 06902

Birth Year: 1978

 

Identity Theft Prevention Officer

 

Since 2015 (MHY),

Since 2015 (HIO)

  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); Associate Compliance Officer of Legg Mason & Co. (2011-2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Risk Manager of U.S. Distribution of Legg Mason & Co. (2007 to 2011).

Robert I. Frenkel

Legg Mason & Co.

100 First Stamford Place

Stamford, CT 06902

Birth year: 1954

  Secretary and Chief Legal Officer  

Since 2003 (MHY),

Since 2003 (HIO)

  Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, and Section 30(h) of the 1940 Act in combination require each Fund’s Directors and principal officers, persons who own more than 10% of the Funds’ common stock, LMPFA and certain of its affiliates, to file reports of ownership and changes in ownership with the SEC and the NYSE. Such persons and entities are required by SEC regulations to furnish each of the Funds with copies of all such filings. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, MHY believes that, during the fiscal year ended February 28, 2015, all such filing requirements were met with respect to MHY, except, due to an administrative oversight, a late filing of an initial Form 3 was made on behalf of each of the following persons: Amy Olmert, Manager of LMPFA (Form 3 was due in April 2011); Peter Nachtwey, Manager of LMPFA (Form 3 was due in April 2011); and Barry Bilson, Director of Western Asset (Form 3 was due in September 2013). In addition, with respect to HIO and based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, HIO believes that, during the fiscal year ended September 30, 2015, all such filing requirements were met with respect to HIO.

Investment Manager and Sub-Advisers

LMPFA has served as each Fund’s investment manager since August 1, 2006. LMPFA, located at 620 Eighth Avenue, New York, NY 10018, is a registered investment adviser that provides administrative and compliance oversight services to each Fund.

Under each Fund’s management agreement with LMPFA (the “Management Agreements”), subject to the supervision and direction of each Fund’s Board, LMPFA is delegated the responsibility of managing the Fund’s portfolio in accordance

 

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with the Fund’s stated investment objective and policies, making investment decisions for the Fund and placing orders to purchase and sell securities. LMPFA performs administrative and management services necessary for the operation of each Fund, such as (i) supervising the overall administration of the Fund, including negotiation of contracts and fees with and the monitoring of performance and billings of the Fund’s transfer agent, stockholder 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 stockholders; (iv) maintaining the Fund’s existence, and (v) maintaining the registration and qualification of the Fund’s shares under federal and state laws.

Each Fund’s Management Agreement will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Fund’s Board or by a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Directors with such Independent Directors casting votes in person at a meeting called for such purpose. Each Fund’s Management Agreement provides that LMPFA may render services to others. Each Fund’s Management Agreement is terminable without penalty on not more than 60 days’ nor less than 30 days’ written notice by the Fund when authorized either by a vote of holders of shares representing a majority of the voting power of the outstanding voting securities of the Fund (as defined in the 1940 Act) or by a vote of a majority of the Fund’s Directors, or by LMPFA on not less than 90 days’ written notice, and will automatically terminate in the event of its assignment. Each Fund’s Management Agreement provides that neither LMPFA nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties.

LMPFA does not provide day-to-day portfolio management services. Rather, portfolio management for each Fund is provided by Western Asset, located at 385 East Colorado Boulevard, Pasadena, California 91101.

Western Asset provides services to each Fund pursuant to a sub-advisory agreement between LMPFA and Western Asset (the “Western Asset Sub-Advisory Agreements”). Under each Western Asset Sub-Advisory Agreement, subject to the supervision and direction of each Fund’s Board and LMPFA, Western Asset will manage the Fund’s portfolio in accordance with the Fund’s stated investment objective and policies, assist in supervising all aspects of the Fund’s operations, make investment decisions for the Fund, place orders to purchase and sell securities, and employ professional portfolio managers and securities analysts who provide research services to the Fund.

The Western Asset Sub-Advisory Agreements will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act), and (b) in either event, by a majority of the Independent Directors with such Independent Directors casting votes in person at a meeting called for such purpose. The Board or a majority of the outstanding voting securities of each Fund (as defined in the 1940 Act) may terminate that Western Asset Sub-Advisory Agreement without penalty, in each case on not more than 60 days’ nor less than 30 days’ written notice to Western Asset. Western Asset may terminate each Western Asset Sub-Advisory Agreement on 90 days’ written notice to each Fund and LMPFA. LMPFA and Western Asset may terminate each Western Asset Sub-Advisory Agreement upon their mutual written consent. Each Western Asset Sub-Advisory Agreement will terminate automatically in the event of assignment by Western Asset and shall not be assignable by LMPFA without the consent of Western Asset.

Western Asset Limited provides certain sub-advisory services to each Fund pursuant to a sub-advisory agreement dated October 9, 2006 (the “Limited Sub-Advisory Agreement” and, together with the Western Asset Sub-Advisory Agreements, the “Sub-Advisory Agreements”). Western Asset Limited was founded in 1984 and has offices at 10 Exchange Square, Primrose Street, London EC2A2EN. Western Asset Limited is responsible, generally, for managing Asian (excluding Japan), Japanese and global and non-U.S. dollar fixed income mandates including the related portions of Western Asset’s broader portfolios, as well as servicing these relationships. It undertakes all investment-related activities including investment management, research and analysis, securities settlement and client services. While Western Asset remains ultimately responsible for investment decisions relating to the Funds’ portfolio, Western Asset Limited provides certain sub-advisory services to the Funds relating to currency transactions and investments in non-U.S. dollar-denominated securities and related foreign currency instruments.

The Limited Sub-Advisory Agreements will continue in effect from year to year provided such continuance is specifically approved at least annually (a) by the Board or by a majority of the outstanding voting securities of the Fund (as

 

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defined in the 1940 Act), and (b) in either event, by a majority of the Independent Directors with such Independent Directors casting votes in person at a meeting called for such purpose. The Board or a majority of the outstanding voting securities of each Fund (as defined in the 1940 Act) may terminate each Limited Sub-Advisory Agreement without penalty, in each case on not more than 60 days’ nor less than 30 days’ written notice to Western Asset Limited. Western Asset Limited may terminate the Limited Sub-Advisory Agreement on 90 days’ written notice to the Fund and Western Asset. Western Asset and Western Asset Limited may terminate the Limited Sub-Advisory Agreement upon their mutual written consent. The Limited Sub-Advisory Agreement will terminate automatically in the event of assignment by Western Asset Limited and shall not be assignable by Western Asset without the consent of Western Asset Limited.

MHY currently pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of MHY’s average daily net assets. HIO currently pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of HIO’s average daily net assets. The total dollar amounts paid to LMPFA under the Management Agreements with each Fund for the last three fiscal years are as follows:

 

     MHY      HIO  

2013

     2,270,844.00         3,984,540.00   

2014

     2,351,174.00         4,338,092.00   

2015

     2,312,721.00         4,014,605.00   
  

 

 

    

 

 

 

Total

   $ 6,934,739.00       $ 12,337,237.00   
  

 

 

    

 

 

 

With respect to each Fund, LMPFA pays sub-advisory fees to Western Asset at the rate of 70% of the management fee paid to LMPFA.

Western Asset pays Western Asset Limited a fee for its services at no additional expense to the Funds. The fee is based upon a percentage of the management fee equal to the amount of the Funds’ assets Western Asset allocates to Western Asset Limited to manage.

LMPFA, Western Asset and Western Asset Limited are wholly-owned subsidiaries of Legg Mason. Legg Mason, whose principal executive offices are at 100 International Drive, Baltimore, Maryland 21202, is a global asset management company.

Additional information about the factors considered by the Board of HIO in approving its Management Agreement and Sub-Advisory Agreements is set forth in HIO’s Semi-Annual Report to Stockholders for the Semi-Annual Period ending March 31, 2015. Additional information about the factors considered by the Board of MHY in approving its Management Agreement and Sub-Advisory Agreements is set forth in MHY’s Annual Report to Stockholders for the Fiscal Year ended February 28, 2015.

Codes of Ethics

Pursuant to Rule 17j-1 under the 1940 Act, each of the Funds, LMPFA, Western Asset and Western Asset Limited have adopted codes of ethics that permit their respective personnel to invest in securities for their own accounts, including securities that may be purchased or held by the Funds (the “Codes of Ethics”). 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 applicable Codes of Ethics and must be conducted in such a manner as to avoid any actual or potential conflict of interest, the appearance of such a conflict, or the abuse of an employee’s position of trust and responsibility.

When personnel covered by either Fund’s Code of Ethics are employed by more than one of the managers affiliated with Legg Mason, those employees may be subject to such affiliate’s Code of Ethics adopted pursuant to Rule 17j-1, rather than the Codes of Ethics of the Funds.

Copies of the Codes of Ethics of the Funds, LMPFA, Western Asset and Western Asset Limited are on file with the SEC.

 

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Proxy Voting Policies

Although individual Directors may not agree with particular policies or votes by LMPFA, Western Asset, or Western Asset Limited, each Fund’s Board has delegated proxy voting discretion to LMPFA and/or Western Asset, believing that LMPFA and/or Western Asset should be responsible for voting because it is a matter relating to the investment decision making process.

LMPFA delegates the responsibility for voting proxies for each Fund to Western Asset through its contracts with Western Asset. Western Asset will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the Funds. Should LMPFA become responsible for voting proxies for any reason, such as the inability of Western Asset to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained. In the case of a material conflict between the interests of LMPFA (or its affiliates if such conflict is known to persons responsible for voting at LMPFA) and either Fund, the Board of Directors of LMPFA shall consider how to address the conflict and/or how to vote the proxies. LMPFA shall maintain records of all proxy votes in accordance with applicable securities laws and regulations, to the extent that LMPFA votes proxies. LMPFA shall be responsible for gathering relevant documents and records related to proxy voting from Western Asset and providing them to the relevant Fund as required for the Fund to comply with applicable rules under the 1940 Act.

LMPFA’s, Western Asset’s and Western Asset Limited’s Proxy Voting Policies and Procedures govern in determining how proxies relating to each Fund’s portfolio securities are voted and are attached as Appendix D, Appendix E and Appendix F, respectively, to this Proxy Statement/Prospectus. Information regarding how each Fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-777-0102, (2) on the Fund’s website at http://www.lmcef.com and (3) on the SEC’s website at http://www.sec.gov.

Investment Professionals of the Funds

Below is summary information for the Funds’ investment professionals. Certain employees of Western Asset listed below are members of the management teams of both MHY and HIO; others are involved in the management of only one of the Funds.

 

Name and Address

  

Length of Time Served

  

Principal Occupation(s)
During Last Five Years

S. Kenneth Leech

Western Asset

385 East Colorado Blvd.

Pasadena, CA 91101

  

Since 2014 (MHY),

Since 2014 (HIO)

   Responsible for the day-to-day management with other members of the Funds’ portfolio management team; Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013; Co- Chief Investment Officer of Western Asset from 2013-2014.

Christopher F. Kilpatrick

Western Asset

385 East Colorado Blvd.

Pasadena, CA 91101

  

Since 2012 (MHY)

Since 2012 (HIO)

   Responsible for the day-to-day management with other members of the Funds’ portfolio management team; employed by Western Asset Management as an investment professional for at least the past five years.

Michael C. Buchanan

Western Asset

385 East Colorado Blvd.

Pasadena, CA 91101

  

Since 2006 (MHY),

Since 2006 (HIO)

   Responsible for the day-to-day management with other members of the Funds’ portfolio management team; employed by Western Asset Management as an investment professional for at least the past five years and currently Deputy Chief Investment Officer of Western Asset; formerly, Managing Director and head of U.S. Credit Products from 2003-2005 at Credit Suisse Asset Management.

 

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Other Accounts Managed by Investment Professionals

The table below identifies the number of accounts (other than the Funds) for which the each Fund’s investment professionals have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles and other accounts. Data for registered investment companies is based on the specific investment professionals that are named in the applicable disclosure documents. Data for other pooled investment vehicles and other accounts is based on Western Asset’s practice of naming a particular individual to maintain oversight responsibility for each vehicle/account. Where the named individual has been assigned primary responsibility for oversight of another pooled investment vehicle or other account, that vehicle/account has been allocated exclusively to that individual for disclosure purposes. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated as of November 30, 2015.

 

Investment Professional

  

Registered Investment
Companies

   Other Pooled Investment
Vehicles
   Other Accounts

S. Kenneth Leech(1)

   109 registered investment companies with $186.3 billion in total assets under management    272 other pooled
investment vehicles with
$86.03 billion in assets
under management
   624 other accounts with
$173.7 billion in total
assets under management
      8 other pooled investment
vehicles that charge a
performance fee with
approximately $1.49
billion in total assets
under management
   57 other accounts that
charge a performance fee
with approximately
$17.97 billion in total
assets under management

Christopher F. Kilpatrick

   9 registered investment companies with $3.3 billion in total assets under management    None    None

Michael Buchanan

   43 registered investment companies with $39.9 billion in total assets under management    77 other pooled
investment vehicles with
$35.76 billion in assets
under management
   190 other accounts with
$51.2 billion in total
assets under management
      4 other pooled investment
vehicles that charge a
performance fee with
approximately $1.15
billion in total assets
under management
   21 other accounts that
charge a performance fee
with approximately $7.87
billion in total assets
under management

 

(1) 

The numbers above reflect the overall number of portfolios managed by employees of Western Asset. Mr. Leech is involved in the management of all the Firm’s portfolios, but he is not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. He is responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.

Investment Professional Compensation

With respect to the compensation of the investment professionals, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

 

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In addition, Western Asset’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of Western Asset, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. Western Asset may also measure an investment professional’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated based on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to Western Asset, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to Western Asset’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.

Potential Conflicts of Interest

Conflicts of Interest. The Managers and investment professionals have interests which may conflict with the interests of the Fund. There is no guarantee that the policies and procedures adopted by the Managers and the Funds will be able to identify or mitigate these conflicts of interest.

Some examples of material conflicts of interest include:

Allocation of Limited Time and Attention. An investment professional who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. An investment professional may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those funds and accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. Such an investment professional may make general determinations across multiple funds, rather than tailoring a unique approach for each fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular investment professional have different investment strategies.

Allocation of Limited Investment Opportunities; Aggregation of Orders. If an investment professional identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s ability to take full advantage of the investment opportunity. Additionally, Western Asset or Western Asset Limited may aggregate transaction orders for multiple accounts for purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. In addition, Western Asset’s or Western Asset Limited’s trade allocation policies may result in a fund’s orders not being fully executed or being delayed in execution.

Pursuit of Differing Strategies. At times, an investment professional may determine that an investment opportunity may be appropriate for only some of a funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of a funds and/or accounts should take differing positions with respect to a particular security. In these cases, the investment professional may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts. For example, an investment professional may determine that it would be in the interest of another account to sell a security that a fund holds long, potentially resulting in a decrease in the market value of the security held by a fund.

Cross Trades. Investment professionals may manage funds that engage in cross trades, where one of the manager’s funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.

 

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Selection of Broker/Dealers. Investment professionals may select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide Western Asset or Western Asset Limited with brokerage and research services. These services may be taken into account in the selection of brokers and dealers, in determination whether to select a dealer to effect a trade on a principal basis (as normally is the case for the funds) or determination whether to select a broker to effect a trade on an agency basis for a commission. This may result in the payment of higher brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the Managers’ funds or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits among the funds and/or accounts managed.

Variation in Financial and Other Benefits. A conflict of interest arises where the financial or other benefits available to an investment professional differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment manager’s management fee and/or an investment professional’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the investment professional might be motivated to help certain funds and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the investment professional’s performance record or to derive other rewards, financial or otherwise, could influence the investment professional in affording preferential treatment to those funds and/or accounts that could most significantly benefit the investment professional. An investment professional may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, an investment professional’s or the Managers’ desire to increase assets under management could influence the investment professional to keep a fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the investment professional might be motivated to favor funds and/or accounts in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if an investment professional does not personally hold an investment in a particular fund, the investment professional’s conflicts of interest with respect to such fund be more acute.

Related Business Opportunities. LMPFA or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, an investment professional may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the Manager and its affiliates.

An investment professional may also face other potential conflicts of interest in managing the Fund, and the description above is not a complete description of every conflict of interest that could be deemed to exist in managing both the Fund and the other funds and accounts listed above.

Investment Professional Securities Ownership

The table below identifies the dollar range of securities beneficially owned by the investment professionals of each Fund as of November 30, 2015.

 

Investment Professional

   Dollar Range(1)  of
HIO Securities
Beneficially
Owned
     Dollar Range(1)  of
MHY Securities
Beneficially
Owned
     Aggregate  dollar
Range(1) of Fund
Securities
Beneficially Owned
 

Kenneth Leech

     A         A         A   

Michael C. Buchanan

     A         A         A   

Christopher F. Kilpatrick

     A         A         A   

 

(1) 

The dollar ranges are as follows: “A” = None; “B” = $1-$10,000; “C” = $10,001-$50,000; “D” = $50,001-$100,000; “E” = Over $100,000.

 

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ADDITIONAL INFORMATION ABOUT THE FUNDS

Legg Mason, Western Asset and Western Asset Limited have a financial interest in the Merger because their respective fees under agreements with HIO generally are higher than under the agreement with MHY and increase as the assets of HIO increase. HIO’s assets will increase as a result of the Merger (although this increase in assets is expected to be offset by the concomitant loss of MHY’s assets and the related fees).

Further information about HIO is included in HIO’s Annual Report to Stockholders for the Fiscal Year Ended September 30, 2015, filed with the SEC on November 24, 2015 (accession no. 0001193125-15-386792), and MHY’s Annual Report to Stockholders for the Fiscal Year Ended February 28, 2015, filed with the SEC on April 17, 2015 (accession no. 0001193125-15-135519). Copies of these documents, the SAI related to this Proxy Statement/Prospectus and any subsequently released stockholder reports are available upon request and without charge, by writing to the Funds at 620 Eighth Avenue, New York, New York 10041, by visiting the Funds’ website at www.lmcef.com or by calling the Funds at 888-777-0102.

The 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 material, reports and charter documents 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. You may obtain information about the operation of the Public Reference Room by calling the SEC at 202-551-8090.

 

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Financial Highlights

The financial highlights tables are intended to help you understand the performance of each Fund for the past five years. Certain information reflects financial results for a single share. Total return represents the rate that a stockholder would have earned (or lost) on a Fund share assuming reinvestment of all dividends and distributions. The information in the following tables has been derived from the Funds’ financial statements. The financial statements of HIO for the fiscal years ended 2011, 2012, 2013, 2014 and 2015 and the financial statements of MHY for the fiscal years ended 2011, 2012, 2013, 2014 and 2015 have been audited by KPMG LLP (“KPMG”), an independent registered public accounting firm, whose reports, along with the Funds’ financial statements, are included in the Funds’ annual reports (available upon request).

Financial Highlights for HIO (Acquiring Fund)

For a share of capital stock outstanding throughout each year ended September 30:

 

      20151     20141     20131     20121     20111  

Net asset value, beginning of year

     $6.31        $6.36        $6.26        $5.76        $6.10   

Income (loss) from operations:

          

Net investment income

     0.41        0.43        0.45        0.49        0.50   

Net realized and unrealized gain (loss)

     (0.82     (0.04     0.13        0.52        (0.31

Total income (loss) from operations

     (0.41     0.39        0.58        1.01        0.19   

Less distributions from:

          

Net investment income

     (0.43     (0.44     (0.48     (0.51     (0.53

Total distributions

     (0.43     (0.44     (0.48     (0.51     (0.53

Net asset value, end of year

     $5.47        $6.31        $6.36        $6.26        $5.76   

Market price, end of year

     $4.69        $5.79        $5.97        $6.65        $5.78   

Total return, based on NAV2,3

     (6.90 )%      6.17     9.49     18.15     2.81

Total return, based on Market Price4

     (12.21 )%      4.28     (3.07 )%      25.00     0.37

Net assets, end of year (millions)

     $457        $528        $532        $473        $433   

Ratios to average net assets:

          

Gross expenses

     0.89     0.88     0.90     0.88     0.89

Net expenses

     0.89        0.88        0.90        0.88        0.89   

Net investment income

     6.88        6.68        7.04        8.17        7.98   

Portfolio turnover rate

     59     37     53     53     68

 

1. 

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

 

2.

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

3. 

The total return calculation assumes that distributions are reinvested at NAV. Prior to January 1, 2012, the total return calculation assumed the reinvestment of all distributions in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results.

 

4. 

The total return calculation assumes that distributions are reinvested in accordance with HIO’s dividend reinvestment plan. Past performance is no guarantee of future results.

 

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Financial Highlights for MHY (Target Fund)

For a share of capital stock outstanding throughout each year ended February 28, unless otherwise noted:

 

      20151     20141     20131     20121,2     20111  

Net asset value, beginning of year

     $6.30        $6.24        $5.94        $6.24        $5.77   

Income (loss) from operations:

          

Net investment income

     0.41        0.44        0.47        0.48        0.52   

Net realized and unrealized gain (loss)

     (0.42     0.07        0.32        (0.25     0.54   

Total income (loss) from operations

     (0.01     0.51        0.79        0.23        1.06   

Less distributions from:

          

Net investment income

     (0.42     (0.45     (0.49     (0.53     (0.59

Total distributions

     (0.42     (0.45     (0.49     (0.53     (0.59

Net asset value, end of year

     $5.87        $6.30        $6.24        $5.94        $6.24   

Market price, end of year

     $5.26        $5.83        $6.30        $6.21        $6.27   

Total return, based on NAV3,4

     (0.24 )%      8.47     13.94     4.12     19.31

Total return, based on Market Price5

     (2.74 )%      (0.05 )%      9.93     8.32     14.91

Net assets, end of year (millions)

     $277        $297        $294        $279        $291   

Ratios to average net assets:

          

Gross expenses

     0.92     0.93     0.91     0.92     0.92

Net expenses6

     0.92        0.93        0.91        0.92        0.92   

Net investment income

     6.69        7.03        7.76        8.15        8.75   

Portfolio turnover rate

     39     48     50     54     96

 

1 

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

 

2 

For the year ended February 29.

 

3 

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

4 

The total return calculation assumes that distributions are reinvested at NAV. Prior to January 1, 2012, the total return calculation assumed the reinvestment of all distributions in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results.

 

5 

The total return calculation assumes that distributions are reinvested in accordance with MHY’s dividend reinvestment plan. Past performance is no guarantee of future results.

 

6 

The impact of compensating balance arrangements, if any, was less than 0.01%.

Net Asset Value, Market Price and Premium/Discount

Common shares of closed-end investment companies, such as the Funds, have frequently traded at a discount from net asset value, but in some cases trade at a premium. Shares of closed-end investment companies investing primarily in fixed income securities tend to trade on the basis of income yield relative to the market price of the shares and the market price may also be affected by trading volume, general market and economic conditions and other factors beyond the control of the fund. As a result, the market price of each Fund’s Common Shares may be greater or less than the NAV per share. Since the commencement of each Fund’s operations, each Fund’s Common Shares have traded in the market at prices that were generally below NAV per share.

The following tables set forth the high and low sales prices for HIO Common Shares and MHY Common Shares on the NYSE, the NAV per share and the discount or premium to NAV per share represented by the quotation for each quarterly period during the last two calendar years.

 

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HIO (Acquiring Fund) Fiscal Year End is September 30

 

     Quarterly High Price     Quarterly Low Price  

Quarter Ended

   Net Asset
Value Per
Share
     NYSE
Price
     Premium/
(Discount)
    Net Asset
Value Per
Share
     NYSE
Price
     Premium/
(Discount)
 

March 31, 2014

   $ 6.52       $ 6.10         (6.442 )%    $ 6.45       $ 5.88         (8.84 )% 

June 30, 2014

     6.54         6.14         (6.116     6.53         5.96         (8.73

September 30, 2014

     6.55         6.10         (6.870     6.30         5.76         (8.57

December 31, 2014

     6.32         5.83         (7.753     5.93         5.22         (11.97

March 31, 2015

     6.06         5.42         (10.561     5.98         5.30         (11.37

June 30, 2015

     6.09         5.40         (11.330     5.94         5.10         (14.14

September 30, 2015

     5.95         5.21         (12.437     5.62         4.63         (17.62

MHY (Target Fund) Fiscal Year End is February 28

 

     Quarterly High Price     Quarterly Low Price  

Quarter Ended

   Net Asset
Value Per
Share
     NYSE
Price
     Premium/
(Discount)
    Net Asset
Value Per
Share
     NYSE
Price
     Premium/
(Discount)
 

March 31, 2014

   $ 6.30       $ 5.89         (6.508 )%    $ 6.23       $ 5.62         (9.79 )% 

June 30, 2014

     6.32         5.89         (6.804     6.30         5.74         (8.89

September 30, 2014

     6.34         5.82         (8.202     6.17         5.45         (11.67

December 31, 2014

     6.11         5.53         (9.493     5.73         5.04         (12.04

March 31, 2015

     5.84         5.28         (9.589     5.78         5.09         (11.94

June 30, 2015

     5.89         5.21         (11.545     5.74         4.90         (14.63

September 30, 2015

     5.74         4.97         (13.415     5.28         4.41         (16.48

As of November 30, 2015, the NAV per share of HIO was $5.38 and the closing price of HIO Common Shares on the NYSE was $4.575, meaning HIO Common Shares were trading at a (14.96)% discount to HIO’s NAV per share. Also as of November 30, 2015, the NAV per share of MHY was $5.19 and the closing price of MHY Common Shares on the NYSE was $4.37, meaning that MHY Common Shares were trading at a (15.80)% discount to MHY’s NAV per share. The trading premium/discount for HIO Common Shares may change after the issuance of additional HIO Common Shares in the Merger and the resulting increase in supply of HIO Common Shares in the market.

CAPITALIZATION

The following table sets forth the unaudited capitalization of each Fund as of the date set out below, and on a pro forma basis as of that date, giving effect to the proposed 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 HIO will be received by stockholders of MHY on the Closing Date, and the information should not be relied upon to reflect the number of shares of HIO that actually will be received.

 

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The following table sets out the effect of the proposed acquisition of assets at net asset value on a pro forma basis:

Pro Forma Combined Capitalization Table As of November 30, 2015 (Unaudited)

 

     MHY (Target Fund)      HIO (Acquiring
Fund)
     Pro Forma
Adjustments
    Pro Forma
Combined Fund
 

Total Net Assets

   $ 245,011,962       $ 450,177,301       $ (237,300 )(a)    $ 694,951,963   

Shares Outstanding

     47,203,436         83,688,580       $ (1,718,789 )(b)      129,173,227   

Net Asset Value

     $5.19         $5.38           $5.38   

 

(a) 

Reflects adjustments for estimated Merger costs of $237,300.

 

(b) 

Reflects adjustments to the number of common shares outstanding due to the Merger.

For more information about the Funds’ capital stock, see “Description of the Funds’ Capital Stock-Common Shares”

PORTFOLIO COMPOSITION

As of November 30, 2015, 95.38% of the market value of HIO’s portfolio was invested in long-term securities and 4.62% was invested in short-term securities.

 

S&P(1)

  

Moody’s(1)

   Number of
Issues
     Market Value      Percent  

AAA

   Aaa      9       $ 21,112,515         4.69

AA+, AA, AA

   Aal, Aa, Aa2, Aa3      0                 0.00   

A+, A, A-

   Al, A, A2, A3      7         9,781,575         2.17   

BBB+, BBB, BBB-

   Baal, Baa, Baa2, Baa3      34         41,759,199         9.28   

Below Investment Grade

   Below Investment Grade      291         366,336,843         81.38   

Not Rated

   Not Rated      15         11,175,071         2.48   
     

 

 

    

 

 

    

 

 

 

Total

        356       $ 450,165,203         100.00
     

 

 

    

 

 

    

 

 

 

 

(1) 

Ratings: using the lowest of S&P, Moody’s and Fitch rating.

As of November 30, 2015, 96.18% of the market value of MHY’s portfolio was invested in long-term securities and 3.82% was invested in short-term securities.

 

S&P(1)

  

Moody’s(1)

   Number of
Issues
     Market Value      Percent  

AAA

   Aaa      8       $ 11,025,419         4.50

AA+, AA, AA

   Aal, Aa, Aa2, Aa3      0                 0.00   

A+, A, A-

   Al, A, A2, A3      8         5,377,173         2.19   

BBB+, BBB, BBB-

   Baal, Baa, Baa2, Baa3      36         24,299,936         9.92   

Below Investment Grade

   Below Investment Grade      282         198,669,835         81.08   

Not Rated

   Not Rated      15         5,671,863         2.31   
     

 

 

    

 

 

    

 

 

 

Total

        349       $ 245,044,226         100.00
     

 

 

    

 

 

    

 

 

 

 

(1) 

Ratings: using the lowest of S&P, Moody’s and Fitch rating.

PORTFOLIO TRANSACTIONS

Neither Fund has an obligation to deal with any brokers or dealers in the execution of transactions in portfolio securities. Subject to policy established by the Boards of the Funds, the Managers are responsible for each Fund’s portfolio decisions and the placing of the Fund’s portfolio transactions.

 

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Portfolio securities normally will be purchased or sold from or to dealers serving as market makers for the securities at a net price, which may include dealer spreads and underwriting commissions. In placing orders, it is the policy of each Fund to obtain the best results, taking into account the general execution and operational facilities of the broker or dealer, the type of transaction involved and other factors, such as the risk of the broker or dealer in positioning the securities involved. While the Managers generally seek the best price in placing its orders, neither Fund may necessarily be paying the lowest price available. Subject to seeking the best price and execution, securities firms which provide supplemental research to the Managers may receive orders for transactions by the Fund. Information so received will be in addition to and not in lieu of the services required to be performed by the Manager under each Fund’s Management Agreement, and the expenses of the Managers will not necessarily be reduced as a result of the receipt of such supplemental information.

The aggregate amount of brokerage commissions paid during the three most recent fiscal years was $6,074 for MHY and $9,906 for HIO. To the extent a Fund does effect brokerage transactions, affiliated persons (as such term is defined in the 1940 Act) of the Fund, or affiliated persons of such persons, may from time to time be selected to perform brokerage services for the Fund, subject to the considerations discussed above, but are prohibited by the 1940 Act from dealing with the Fund as a principal in the purchase or sale of securities. In order for such an affiliated person to be permitted to effect any portfolio transactions for a Fund, the commissions, fees or other remuneration received by such affiliated person must be reasonable and fair compared to the commissions, fees or other remuneration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold during a comparable period of time. This standard would allow such an affiliated person to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm’s-length transaction.

Investment decisions for each Fund are made independently from those for other funds and accounts advised or managed by the Manager. Such other funds and accounts may also invest in the same securities as the Funds. When a purchase or sale of the same security is made at substantially the same time on behalf of a Fund and another fund or account, the transaction will be averaged as to price, and available investments allocated as to amount, in a manner which the Manager believes to be equitable to the Fund and such other fund or account. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold by the Fund. To the extent permitted by law, the Managers may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for other funds and accounts in order to obtain best execution.

Although neither Fund has any restrictions on portfolio turnover, it is neither Fund’s policy to engage in transactions with the objective of seeking profits from short-term trading. It is expected that the annual portfolio turnover rate of the Funds will not exceed 200%. The portfolio turnover rate is calculated by dividing the lesser of sales or purchases of portfolio securities by the average monthly value of a Fund’s portfolio securities. For purposes of this calculation, portfolio securities exclude all securities having a maturity when purchased of one year or less. A high rate of portfolio turnover involves correspondingly greater transaction costs than a lower rate, which costs are borne by the Funds and their stockholders.

DIVIDENDS AND DISTRIBUTIONS

Distributions

General

Each Fund intends to distribute its net investment (ordinary) income on a monthly basis. At least annually, each Fund intends to distribute all of its net long-term capital gains, if any. For each Fund, both monthly and annual distributions to holders of Common Shares will be made only after making interest and required principal payments on borrowings, if any, or paying any accrued dividends on, or redeeming or liquidating, any Fund Preferred Shares.

From time to time, each Fund may distribute less than the entire amount of net investment income earned in a particular period, which amount may be available to supplement future distributions As a result, the distributions paid by a Fund for any particular monthly period may be more or less than the amount of net investment income actually earned by the Fund during the period and the Fund may have to sell a portion of its investment portfolio to make a distribution at a time when independent investment judgment might not dictate such action. Undistributed net investment income is included in the net asset value of a Fund’s Common Shares and, correspondingly, distributions from net investment income will reduce the

 

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Common Shares’ net asset value. In addition, the terms of any borrowings or Fund Preferred Shares (if issued) may prohibit a Fund from making distributions in the amount or at the time that it otherwise would.

HIO Dividend Reinvestment Plan

Under HIO’s Dividend Reinvestment Plan (“Plan”), a stockholder whose shares of common stock are registered in his own name will have all distributions from HIO reinvested automatically by American Stock Transfer & Trust Company (“AST”), as purchasing agent under the Plan, unless the stockholder elects to receive cash. Distributions with respect to shares registered in the name of a broker-dealer or other nominee (that is, in “street name”) will be reinvested by the broker or nominee in additional shares under the Plan, unless the service is not provided by the broker or nominee or the stockholder elects to receive distributions in cash. Investors who own common stock registered in street name should consult their broker-dealers for details regarding reinvestment. All distributions to stockholders who do not participate in the Plan will be paid by check mailed directly to the record holder by or under the direction of AST as dividend paying agent.

The number of shares of common stock distributed to participants in the Plan in lieu of a cash dividend is determined in the following manner. When the market price of the common stock is equal to or exceeds the NAV per share of the common stock on the determination date (generally, the record date for the distribution), the Plan participants will be issued shares of common stock by HIO at a price equal to the greater of NAV determined as described below or 95% of the market price of the common stock.

If the market price of the common stock is less than the NAV of the common stock at the time of valuation (which is the close of business on the determination date), AST will buy common stock in the open market, on the stock exchange or elsewhere, for the participants’ accounts. If, following the commencement of the purchases and before AST has completed its purchases, the market price exceeds the NAV of the common stock as of the valuation time, AST will attempt to terminate purchases in the open market and cause HIO to issue the remaining portion of the dividend or distribution in shares at a price equal to the greater of (a) NAV as of the valuation time or (b) 95% of the then current market price. In this case, the number of shares received by a Plan participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which HIO issues the remaining shares. To the extent AST is unable to stop open market purchases and cause HIO to issue the remaining shares, the average per share purchase price paid by AST may exceed the NAV of the common stock as of the valuation time, resulting in the acquisition of fewer shares than if the distribution had been paid in common stock issued by HIO at such NAV. AST will begin to purchase common stock on the open market as soon as practicable after the determination date for distributions, but in no event shall such purchases continue later than 30 days after the payment date for such distribution, or the record date for a succeeding distribution, except when necessary to comply with applicable provisions of the federal securities laws.

AST maintains all stockholder accounts in the Plan and furnishes written confirmation of all transactions in each account, including information needed by a stockholder for personal and tax records. The automatic reinvestment of distributions will not relieve Plan participants of any income tax that may be payable on the distributions. Common stock in the account of each Plan participant will be held by AST in uncertificated form in the name of each Plan participant.

Plan participants are subject to no charge for reinvesting distributions under the Plan. AST’s fees for handling the reinvestment of distributions will be paid by HIO. No brokerage charges apply with respect to shares of common stock issued directly by HIO under the Plan. Each Plan participant will, however, bear a proportionate share of any brokerage commissions actually incurred with respect to any open market purchases made under the Plan.

Experience under the Plan may indicate that changes to it are desirable. HIO reserves the right to amend or terminate the Plan as applied to any distribution paid subsequent to written notice of the change sent to participants at least 30 days before the record date for the distributions. The Plan also may be amended or terminated by AST, with HIO’s prior written consent, on at least 30 days’ written notice to Plan participants. All correspondence concerning the Plan should be directed by mail to American Stock Transfer & Trust Company, 5201 15th Avenue, Brooklyn, New York 11219 or by telephone at 1-888-888-0151.

MHY Dividend Reinvestment Plan

Under MHY’s Dividend Reinvestment Plan (the “MHY Plan”), a shareholder whose shares of common stock are registered in his own name will have all distributions from the Fund reinvested automatically by AST, as purchasing agent

 

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under the MHY Plan, unless the shareholder elects to receive cash. Distributions with respect to shares registered in the name of a broker-dealer or other nominee (that is, in “street name”) will be reinvested by the broker or nominee in additional shares under the MHY Plan, unless the service is not provided by the broker or nominee or the shareholder elects to receive distributions in cash. Investors who own common stock registered in street name should consult their broker-dealers for details regarding reinvestment. All distributions to shareholders who do not participate in the MHY Plan will be paid by check mailed directly to the record holder by or under the direction of AST as dividend paying agent.

The number of shares of common stock distributed to participants in the MHY Plan in lieu of a cash dividend is determined in the following manner. When the market price of the common stock is equal to or exceeds the NAV per share of the common stock on the determination date (generally, the record date for the distribution), the MHY Plan participants will be issued shares of common stock by the Fund at a price equal to the greater of NAV determined as described below or 95% of the market price of the common stock.

If the market price of the common stock is less than the NAV of the common stock at the time of valuation (which is the close of business on the determination date) AST will buy common stock in the open market, on the stock exchange or elsewhere, for the participants’ accounts. If following the commencement of the purchases and before AST has completed its purchases, the market price exceeds the NAV of the common stock as of the valuation time, AST will attempt to terminate purchases in the open market and cause the Fund to issue the remaining portion of the dividend or distribution in shares at a price equal to the greater of (a) NAV as of the valuation time or (b) 95% of the then current market price. In this case, the number of shares received by a MHY Plan participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. To the extent AST is unable to stop open market purchases and cause the Fund to issue the remaining shares, the average per share purchase price paid by AST may exceed the NAV of the common stock as of the valuation time, resulting in the acquisition of fewer shares than if the distribution had been paid in common stock issued by the Fund at such net asset value. AST will begin to purchase common stock on the open market as soon as practicable after the determination date for distributions, but in no event shall such purchases continue later than 30 days after the payment date for such distribution, or the record date for a succeeding distribution, except when necessary to comply with applicable provisions of the federal securities laws.

AST maintains all shareholder accounts in the MHY Plan and furnishes written confirmation of all transactions in each account, including information needed by a shareholder for personal and tax records. The automatic reinvestment of distributions will not relieve MHY Plan participants of any income tax that may be payable on the distributions. Common stock in the account of each MHY Plan participant will be held by AST in uncertificated form in the name of each MHY Plan participant.

MHY Plan participants are subject to no charge for reinvesting distributions under the MHY Plan. AST’s fees for handling the reinvestment of distributions will be paid by the Fund. No brokerage charges apply with respect to shares of common stock issued directly by the Fund under the MHY Plan. Each MHY Plan participant will, however, bear a proportionate share of any brokerage commissions actually incurred with respect to any open market purchases made under the MHY Plan.

Experience under the MHY Plan may indicate that changes to it are desirable. The Fund reserves the right to amend or terminate the MHY Plan as applied to any distribution paid subsequent to written notice of the change sent to participants at least 30 days before the record date for the distributions. The MHY Plan also may be amended or terminated by AST, with the Fund’s prior written consent, on at least 30 days’ written notice to MHY Plan participants. All correspondence concerning the MHY Plan should be directed by mail to American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219 or by telephone at 1-888-888-0151.

TAXATION

Set forth below is a discussion of the material U.S. federal income tax aspects concerning HIO and the acquisition, ownership and disposition of HIO Common Shares. This discussion does not purport to be complete or to deal with all aspects of U.S. federal income taxation that may be relevant to stockholders in light of their particular circumstances. Unless otherwise noted, this discussion assumes you are a U.S. stockholder and that you hold your shares as a capital asset

 

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(generally, property held for investment). You will be a U.S. stockholder if you are an individual who is a citizen or resident of the United States, a U.S. domestic corporation, or any other person that is subject to U.S. federal income tax on a net income basis in respect of an investment in HIO Common Shares. This discussion is based upon the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, as of the date hereof, all of which are subject to change, or differing interpretations (possibly with retroactive effect). This discussion does not represent a detailed description of the U.S. federal income tax considerations relevant to special classes of taxpayers including, without limitation, financial institutions, insurance companies, partnerships or other pass-through entities (or investors therein), U.S. stockholders whose “functional currency” is not the United States dollar, tax-exempt organizations, dealers in securities or currencies, traders in securities or commodities that elect mark-to-market treatment, or persons that will hold HIO Common Shares as a position in a “straddle,” “hedge” or as part of a “constructive sale” for U.S. federal income tax purposes. In addition, this discussion does not address the application of the U.S. federal alternative minimum tax or the Medicare tax on net investment income, or the effects of any state, local or foreign tax laws. You should consult your own tax advisers with regard to the U.S. federal income tax consequences of the acquisition, ownership, or disposition of HIO Common Shares, as well as the tax consequences arising under the laws of any state, foreign country or other taxing jurisdiction.

Taxation of HIO

HIO has elected to be treated and intends to continue to qualify annually as a regulated investment company (“RIC”) under Subchapter M of the Code.

To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, HIO must, among other things: (i) derive in each taxable year at least 90% of its gross income from (a) dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (b) net income derived from interests in certain publicly traded partnerships that are treated as partnerships for U.S. federal income tax purposes and that derive less than 90% of their gross income from the items described in (a) above (each a “Qualified Publicly Traded Partnership”); and (ii) diversify its holdings so that, at the end of each quarter of the taxable year, (a) at least 50% of the value of HIO’s assets is represented by cash and cash items (including receivables), U.S. government securities, the securities of other RICs and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of HIO’s total assets and not greater than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or the securities of other RICs) of a single issuer, or two or more issuers that HIO controls and that are engaged in the same, similar or related trades or businesses, or any one or more Qualified Publicly Traded Partnerships.

As a RIC, HIO generally will not be subject to U.S. federal income tax on its investment company taxable income (as that term is defined in the Code, but determined without regard to the deduction for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes in each taxable year to its stockholders, provided that it distributes at least 90% of the sum of its investment company taxable income and its net tax-exempt income for such taxable year. HIO intends to distribute to its stockholders, at least annually, substantially all of its investment company taxable income and net capital gain.

Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% federal excise tax. To prevent imposition of the excise tax, HIO must distribute during each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (ii) 98.2% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (iii) any ordinary income and capital gains for previous years that were not distributed during those years. For these purposes, HIO will be deemed to have distributed any income or gains on which it paid corporate income tax.

A distribution by HIO will be treated as paid on December 31 of any calendar year if it is declared by HIO in October, November or December with a record date in such a month and paid by HIO during January of the following calendar year. Such distributions will be taxable to stockholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.

 

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If HIO failed to qualify as a RIC or failed to satisfy the 90% distribution requirement in any taxable year, HIO would be taxed as an ordinary corporation on its taxable income even if such income were distributed to its stockholders and all distributions out of earnings and profits (including distributions of net capital gain) would be taxed to stockholders as ordinary dividend income. Such distributions generally would be eligible (i) to be treated as “qualified dividend income” in the case of individual and other non-corporate stockholders and (ii) for the dividends received deduction in the case of corporate stockholders. In addition, HIO could be required to recognize unrealized gains, pay taxes and make distributions (which could be subject to interest charges) before re-qualifying for taxation as a RIC.

Distributions

Distributions to stockholders by HIO of ordinary income (including “market discount” realized by HIO on the sale of debt securities), and of net short-term capital gains, if any, realized by HIO will generally be taxable to stockholders as ordinary income to the extent that such distributions are paid out of HIO’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Distributions, if any, of net capital gains that are properly reported by HIO as capital gain dividends will be taxable as long-term capital gains, regardless of the length of time the stockholder has owned shares of HIO. A distribution of an amount in excess of HIO’s current and accumulated earnings and profits will be treated by a stockholder as a return of capital, which is applied against and reduces the stockholder’s basis in his or her shares. To the extent that the amount of any such distribution exceeds the stockholder’s basis in his or her shares, the excess will be treated by the stockholder as gain from a sale or exchange of the shares. Distributions paid by HIO generally will not be eligible for the dividends received deduction allowance to corporations or for the reduced rates applicable to “qualified dividend income” received by non-corporate stockholders.

Distributions will be treated in the manner described above regardless of whether such distributions are paid in cash or invested in additional HIO Common Shares pursuant to the Plan. Stockholders receiving distributions in the form of additional HIO Common Shares will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash, unless HIO issues new shares that are trading at or above net asset value, in which case, such stockholders will be treated as receiving a distribution in the amount of the fair market value of the distributed shares.

HIO may elect to retain its net capital gain or a portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate the retained amount as undistributed capital gains in a notice to its stockholders, who will be treated as if each received a distribution of his or her pro rata share of such gain, with the result that each stockholder will (i) be required to report his or her pro rata share of such gain on his or her tax return as long-term capital gain, (ii) receive a refundable tax credit for his or her pro rata share of tax paid by HIO on the gain and (iii) increase the tax basis for his or her shares by an amount equal to the deemed distribution less the tax credit.

Stockholders will be notified annually as to the U.S. federal tax status of distributions and stockholders receiving distributions in the form of additional shares will receive a report as to the net asset value of those shares.

Sale or Exchange of HIO Common Shares

Upon the sale or other disposition of HIO Common Shares, a stockholder will generally realize capital gain or loss in an amount equal to the difference between the amount realized and the stockholder’s adjusted tax basis in the shares sold. Such gain or loss will be long-term or short-term, depending upon the stockholder’s holding period for the shares. Generally, a stockholder’s gain or loss will be a long-term gain or loss if the shares have been held for more than one year. For non-corporate taxpayers, long-term capital gains are currently eligible for reduced rates of taxation.

No loss will be allowed on the sale or other disposition of shares if the owner acquires (including acquisitions of HIO Common Shares pursuant to the Plan) or enters into a contract or option to acquire securities that are substantially identical to such shares within 30 days before or after the disposition. In such a case, the basis of the securities acquired will be adjusted to reflect the disallowed loss. Losses realized by a stockholder on the sale or exchange of shares held for six months or less are treated as long-term capital losses to the extent of any distribution of long-term capital gain received (or amounts designated as undistributed capital gains) with respect to such shares.

 

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Under Treasury regulations, if a stockholder recognizes a loss with respect to shares of $2 million or more for an individual stockholder or $10 million or more for a corporate stockholder in any single taxable year (or a greater loss over a combination of years), the stockholder must file with the Internal Revenue Service a disclosure statement on Internal Revenue Service Form 8886. Direct stockholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, stockholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Stockholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.

Nature of HIO’s Investments

Certain of HIO’s hedging and derivatives transactions are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower-taxed long-term capital gain into higher-taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause HIO to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the intended characterization of certain complex financial transactions and (vii) produce income that will not be treated as qualifying income for purposes of the 90% gross income test described above. These rules could therefore affect the character, amount and timing of distributions to stockholders.

Below Investment Grade Securities

HIO may invest a portion of its assets in below investment grade (high-yield) securities, commonly known as “high-yield” securities or “junk bonds.” Investments in these types of securities may present special tax issues for HIO. U.S. federal income tax rules are not entirely clear about issues such as when HIO may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues will be addressed by HIO, in the event it invests in such debt securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or excise tax.

Original Issue Discount Securities

Investments by HIO in zero coupon or other discount securities will result in income to HIO equal to a portion of the excess of the stated redemption price at maturity of the securities over their issue price (the “original issue discount”) each year that the securities are held, even if HIO receives no cash interest payments. If HIO purchases debt instruments that are issued as part of a package of investments along with warrants and/or equity securities, HIO might also be required to accrue original issue discount in an amount equal to the value of such warrants and/or equity securities (even if the face amount of such debt instruments does not exceed HIO’s purchase price for such package of instruments). Original issue discount is included in determining the amount of income which HIO must distribute to maintain its qualification for the favorable U.S. federal income tax treatment generally accorded to RICs and to avoid the payment of U.S. federal income tax and the nondeductible 4% federal excise tax. Because such income may not be matched by a corresponding cash distribution to HIO, HIO may be required to borrow money or dispose of other securities to be able to make distributions to its stockholders.

Market Discount Securities

Gain derived by HIO from the disposition of any securities with market discount (i.e., an amount generally equal to the excess of the stated redemption price at maturity or revised issue price of the security over the basis of such security immediately after it was acquired) will be taxed as ordinary income to the extent of the accrued market discount, unless HIO makes an election to accrue market discount on a current basis. If this election is not made, all or a portion of any deduction for interest expense incurred to purchase or carry a market discount security may be deferred until such security is sold or otherwise disposed of.

 

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Currency Fluctuations

Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time HIO accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time HIO actually collects such income or receivables or pays such liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency, foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt securities denominated in foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

Foreign Taxes

Investment income that may be received by HIO from sources within foreign countries may be subject to foreign taxes withheld at the source. In that case, HIO’s yield on such investments would be decreased. The United States has entered into tax treaties with many foreign countries that entitle HIO to a reduced rate of, or exemption from, taxes on such income. If more than 50% of the value of HIO’s total assets at the close of the taxable year consists of stock or securities of foreign corporations, HIO may elect to “pass through” to its stockholders the amount of foreign taxes paid by HIO. If HIO so elects, each stockholder would be required to include in gross income, even though not actually received, his or her pro rata share of the foreign taxes paid by HIO, but would be treated as having paid his or her pro rata share of such foreign taxes and would therefore be allowed to either (i) deduct such amount in computing taxable income or (ii) use such amount (subject to various Code limitations) as a foreign tax credit against U.S. federal income tax (but not both). For purposes of the foreign tax credit limitation rules of the Code, each stockholder would treat as foreign source income his or her pro rata share of such foreign taxes plus the portion of dividends received from HIO representing income derived from foreign sources. No deduction for foreign taxes could be claimed by a non-corporate stockholder who does not itemize deductions. In certain circumstances, a stockholder that has held his or her HIO Common Shares for less than a specified minimum period during which it is not protected from risk of loss, or is obligated to make payments related to the dividends, will not be allowed a foreign tax credit for foreign taxes deemed imposed on dividends paid on such shares. Additionally, HIO must also meet this holding period requirement with respect to its foreign stocks and securities in order for “creditable” taxes to be passed through to its stockholders. Stockholders should consult their own tax advisers regarding the potential application of foreign tax credits.

Backup Withholding

HIO may be required to withhold from all distributions and redemption proceeds payable to stockholders who fail to provide HIO with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Certain stockholders specified in the Code generally are exempt from such backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the stockholder’s U.S. federal income tax liability, provided that the stockholder timely furnishes the Internal Revenue Service with the required information.

Foreign Stockholders

U.S. taxation of a stockholder who is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership (“foreign stockholder”) depends on whether the income from HIO is “effectively connected” with a U.S. trade or business carried on by the stockholder.

If the income from HIO is not “effectively connected” with a U.S. trade or business carried on by the foreign stockholder, distributions of investment company taxable income will be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions. However, dividends paid by HIO that are “interest-related dividends” or “short-term capital gain dividends” will generally be exempt from the withholding tax, in each case to the extent that HIO properly reports such dividends to stockholders. For these purposes, interest-related dividends and short-term capital gain dividends generally represent distributions of interest or short-term capital gains that would not have been subject to U.S. withholding tax at the source if they had been received directly by a foreign person, and that satisfy certain other requirements.

A foreign stockholder whose income from HIO is not “effectively connected” with a U.S. trade or business will generally be exempt from U.S. federal income tax on capital gain dividends, any amounts retained by HIO that are

 

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designated as undistributed capital gains and any gains realized upon the sale or exchange of HIO Common Shares. However, a foreign stockholder who is a non-resident alien individual and is physically present in the United States for 183 days or more during the taxable year and meets certain other requirements will nevertheless be subject to a U.S. tax of 30% on such capital gain dividends, undistributed capital gains and sale or exchange gains.

If the income from HIO is “effectively connected” with a U.S. trade or business carried on by a foreign stockholder, then distributions of investment company taxable income, any capital gain dividends, any amounts retained by HIO that are designated as undistributed capital gains and any gains realized upon the sale or exchange of HIO Common Shares will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens, residents or domestic corporations. Foreign corporate stockholders may also be subject to the branch profits tax imposed by the Code.

In the case of a non-exempt foreign stockholder, HIO may be required to withhold from distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless the foreign stockholder certifies his or her foreign status under penalties of perjury or otherwise establishes an exemption.

The tax consequences to a foreign stockholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Foreign stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in HIO.

Additional Withholding Requirements

Under Sections 1471 through 1474 of the Code (such Sections commonly referred to as “FATCA”), a 30% U.S. federal withholding tax may apply to any dividends paid on HIO Common Shares, and, beginning on January 1, 2019, certain capital gain dividends or the gross proceeds from the disposition of HIO Common Shares, in each case paid to (i) a “foreign financial institution” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) its compliance (or deemed compliance) with FATCA (which may alternatively be in the form of compliance with an intergovernmental agreement with the United States) in a manner that avoids withholding, or (ii) a “non-financial foreign entity” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) adequate information regarding certain substantial United States beneficial owners of such entity (if any). If a dividend payment is both subject to withholding under FATCA and subject to the 30% withholding tax discussed above under “—Foreign Stockholders,” the withholding under FATCA may be credited against, and therefore reduce, such other withholding tax. Foreign stockholders should consult their own tax advisers regarding these requirements and whether they may be relevant to the ownership and disposition of HIO Common Shares.

Other Taxation

HIO stockholders may be subject to state, local and foreign taxes on their HIO distributions. Stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in HIO.

NET ASSET VALUE

Each Fund determines the NAV of its Common Shares on each day the NYSE is open for business, as of the close of the customary trading session (normally 4:00 p.m. Eastern time), or any earlier closing time that day. Each Fund determines the NAV per Common Share by dividing the value of the Fund’s securities, cash and other assets (including interest accrued but not collected) less all its liabilities (including accrued expenses, the liquidation preference of any outstanding preferred shares and dividends payable) by the total number of Common Shares outstanding. Each Fund values portfolio securities for which market quotations are readily available at market value. Each Fund’s short-term investments are valued at amortized cost when the security has 60 days or less to maturity. Determination of the Common Shares’ NAV is made in accordance with generally accepted accounting principles.

Each Fund values all other securities and assets at their fair value. If events occur that materially affect the value of a security between the time trading ends on the security and the close of the customary trading session of the NYSE, a Fund

 

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may value the security at its fair value as determined in good faith by or under the supervision of the Board of Directors of the Fund. The effect of using fair value pricing is that the Common Shares’ NAV will be subject to the judgment of the Board of Directors or its designee instead of being determined by the market.

Any swap transaction that a Fund enters into may, depending on the applicable interest rate environment, have a positive or negative value for purposes of calculating NAV. Any cap transaction that a Fund enters into may, depending on the applicable interest rate environment, have no value or a positive value. In addition, accrued payments to a Fund under such transactions will be assets of the Fund and accrued payments by the Fund will be liabilities of the Fund.

 

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DESCRIPTION OF THE FUNDS’ CAPITAL STOCK

The authorized capital stock of HIO is 500,000,000 shares of capital stock, par value $0.001 per share, and the authorized capital stock of MHY is 500,000,000 shares of capital stock, par value $0.001 per share. The following table presents the number of shares of (i) capital stock authorized by each Fund, and (ii) capital stock outstanding for each class of authorized shares of each Fund as of November 30, 2015:

 

Fund

   Amount Authorized      Amount Outstanding
as of November 30, 2015
 

HIO (Common Shares)

     500,000,000         83,688,580   

MHY (Common Shares)

     500,000,000         47,203,436   

There are no material differences between the rights of holders of HIO Common Shares and the holders of MHY Common Shares.

As described above, the authorized capital stock of HIO is 500,000,000 shares of capital stock, $0.001 par value per share, all of which have been designated as HIO Common Shares. The outstanding HIO Common Shares are, and the HIO Common Shares to be issued in the Merger will be, when issued, fully paid and nonassessable. All MHY Common Shares are equal as to dividends, distributions and voting privileges. There are no conversion, preemptive or other subscription rights. In the event of liquidation, each HIO Common Share is entitled to its proportion of HIO’s assets after debts and expenses. There are no cumulative voting rights for the election of Directors.

Also as described above, the authorized capital stock of MHY is 500,000,000 shares of capital stock, $0.001 par value per share, all of which have been designated as MHY Common Shares. The outstanding MHY Common Shares are fully paid and nonassessable. All MHY Common Shares are equal as to dividends, distribution and voting privileges. There are no conversion, preemptive or other subscription rights. In the event of liquidation, each MHY Common Share is entitled to its proportion of MHY’s assets after debts and expenses are paid. There are no cumulative voting rights for the election of Directors.

Neither Fund has a present intention of offering additional Common Shares to the public except to the extent that HIO intends to issue new HIO Common Shares to holders of MHY Common Shares in the Merger. Other offerings of a Fund’s Common Shares, if made, will require approval of that Fund’s Board. Any additional offering will be subject to the requirements of the 1940 Act that shares of common stock may not be sold at a price below the then current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing stockholders or with the consent of a majority of the outstanding shares of common stock.

Special Voting Provisions

Each Fund has provisions in its charter and Bylaws that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund, to cause it to engage in certain transactions or to modify its structure. Each Fund’s Board is divided into three classes, each having terms of three years. At each Fund’s annual meeting of stockholders in each year, the term of one class expires and Directors are elected to serve in that class for terms of three years. This provision could delay for up to two years the replacement of a majority of the Board. An HIO Director may be removed from office only for cause and only by a vote of the holders of at least 75% of the shares of the Fund entitled to be cast for the election of Directors. An MHY Director may be removed with or without cause with the same vote.

The affirmative vote of 75% of the entire Board of the HIO Fund is required to authorize the conversion of HIO from a closed-end to an open-end investment company. The conversion also requires the affirmative vote of the holders of 75% of the votes entitled to be cast thereon by holders of the outstanding voting stock of HIO, unless it is approved by a vote of 75% of the Continuing Directors (as defined below), in which event such conversion requires the approval of the holders of a majority of the outstanding voting stock of HIO. A “Continuing Director” is any member of the Board of a Fund who (i) is not a person or affiliate of a person who enters or proposes to enter into a Business Combination (as defined below) with the Fund (an “Interested Party”) and has been a member of the Board of Directors for a period of at least 12 months, or (ii) has been a member of the Board since the commencement of the Fund’s operations, or is a successor of a Continuing Director who is unaffiliated with an Interested Party and is recommended to succeed a Continuing Director by a majority of the

Continuing Directors then on the Board of a Fund. On the other hand, the conversion of MHY from a closed-end to an

 

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open-end investment company requires a charter amendment. Such a charter amendment would require the approval of a majority of MHY’s directors present at a meeting at which a quorum is present and the affirmative vote of a majority of all the votes entitled to be cast by MHY stockholders.

The affirmative votes of 75% of the entire Board and the holders of 75% of the votes entitled to be cast thereon by the stockholders of HIO are required to adopt, approve, advise or authorize any of the following transactions:

(1) merger, consolidation or statutory share exchange of the Fund with or into any other person;

(2) issuance or transfer by the Fund (in one or a series of transactions in any 12 month period) of any securities of the Fund to any person or entity for cash, securities or other property (or combination thereof) having an aggregate fair market value of $1,000,000 or more, excluding issuances or transfers of debt securities of the Fund, sales of securities of the Fund in connection with a public offering, issuances of securities of the Fund pursuant to a dividend reinvestment plan adopted by the Fund, issuances of securities of the Fund upon the exercise of any stock subscription rights distributed by the Fund and portfolio transactions effected by the Fund in the ordinary course of its business;

(3) sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Fund (in one or a series of transactions in any 12 month period) to or with any person or entity of any assets of the Fund having an aggregate fair market value of $1,000,000 or more except for portfolio transactions (including pledges of portfolio securities in connection with borrowings) effected by the Fund in the ordinary course of its business;

(4) any proposal as to the voluntary liquidation or dissolution of the Fund or any amendment to the Fund’s Articles of Incorporation to terminate its existence; or

(5) unless the 1940 Act or federal law requires a lesser vote, any stockholder proposal as to specific investment decisions made or to be made with respect to the Fund’s assets as to which stockholder approval is required under federal or Maryland law.

However, the stockholder vote described above will not be required with respect to the foregoing transactions (other than those set forth in (5) above) if they are approved by a vote of 75% of the Continuing Directors. In that case, if Maryland law requires stockholder approval, the affirmative vote of a majority of the votes entitled to be cast shall be required.

The affirmative votes of 75% of the entire Board and the holders of 75% of the votes entitled to be cast thereon by the stockholders of MHY are required to effect any of the following actions:

(1) any stockholder proposal as to specific investment decisions made or to be made with respect to the Fund’s assets;

(2) any proposal as to the voluntary liquidation or dissolution of the Fund or any amendment of the Fund’s charter to terminate the existence of the Fund, unless approved by a vote of at least 75% of the “Continuing Directors” as that term is defined in MHY’s charter, in which case the affirmative vote of a majority of the votes entitled to be cast by stockholders shall be required to approve such transaction;

(3) any “Business Combination” as that term is defined in MHY’s charter, unless:

(A) the business combination is approved by 75% of the “Continuing Directors” as that term is defined in MHY’s charter, OR all of the conditions described in paragraphs (B) through (F) below are satisfied, no stockholder vote shall be required to approve such transaction UNLESS otherwise provided in MHY’s charter, required by law, the business combination constitutes any merger, consolidation or share exchange of the Fund with or into any other person, or if the transfer or other disposition in paragraph (B) constitutes a transfer of all or substantially all assets of the Fund with respect to which stockholder approval is required under Maryland Law

(B) The aggregate amount of cash and the fair market value as of the date of the consummation of the business combination, of consideration other than cash to be received per share by holders of any class of outstanding voting stock in such business combination shall be at least equal to the higher of

(x) the highest per share price paid by an “Interested Party” as that term is defined in MHY’s charter for any shares of such voting stock acquired by it within the two-year period immediately prior to the first public

 

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announcement of the proposal of the business combination, or in any period between the threshold transaction and the consummation of the business combination, whichever is higher; and

(y) the net asset value per share of such voting stock on the announcement date or on the date of the threshold transaction, whichever is higher.

(C) The consideration to be received by holders of the particular class of outstanding voting stock shall be in cash or in the same form as the interested party has previously paid for shares of any class of voting stock. If the interested party has paid for shares of any class of voting stock with varying forms of consideration, the form of consideration for such class of voting stock shall be either cash or the form used to acquire the largest number of shares of such class of voting stock previously acquired by it.

(D) After the occurrence of the “Threshold Transaction” as that term is defined in MHY’s charter, and prior to the consummation of such business combination, such interested party shall not have become the beneficial owner of any additional shares of voting stock except by virtue of the threshold transaction.

(E) After the occurrence of the threshold transaction, such interested party shall not have received the benefit, directly or indirectly (except proportionally as a stockholder of the Fund), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Fund, whether in anticipation of or in connection with such business combination or otherwise.

(F) A proxy or information statement describing the proposed business combination and complying with the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and the rules and regulations thereunder (or any subsequent provisions replacing such Acts, rules or regulations) shall be prepared and mailed by the interested party, at such interested party’s expense to the stockholders of the Fund at least 30 days prior to the consummation of such business combination (whether or not such proxy or information statement is required to be mailed pursuant to such Acts or subsequent provisions).

Each Fund’s Bylaws contain provisions the effects of which are to prevent matters, including nominations of Directors, from being considered at a stockholders’ meeting where the Fund has not received notice of the matters at least 60 days prior to the date of the meeting.

The Board of each Fund has determined that the foregoing voting requirements, which are generally greater than the minimum requirements under Maryland law and the 1940 Act, are in the best interests of stockholders generally.

Reference is made to the Charter and Bylaws of each Fund, on file with the SEC, for the full text of these provisions. These provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. However, these provisions offer several possible advantages. They may require persons seeking control of a Fund to negotiate with its management regarding the price to be paid for the shares required to obtain such control, they promote continuity and stability and they enhance the Fund’s ability to pursue long-term strategies that are consistent with its investment objectives.

In any event, holders of each Fund’s Common Shares are entitled to one vote per Common Share, and each Common Share of each Fund has equal voting rights with all other outstanding Common Shares of that Fund.

Board Recommendation and Required Vote

Because the Merger in Proposal 1 has been approved by at least 75% of MHY’s “Continuing Directors,” as that term is defined in MHY’s Charter, that Proposal must be approved by the holders of a majority of the outstanding MHY Common Shares. Similarly, because the Merger in Proposal 1 has been approved by at least 75% of HIO’s “Continuing Directors,” as that term is defined in HIO’s Bylaws, that Proposal must be approved by the holders of a majority of the outstanding HIO Common Shares. Approval of Proposal 1 will occur only if a sufficient number of votes at the Meeting are cast “FOR” that Proposal. Abstentions effectively result in a vote AGAINST Proposal 1. Any broker non-votes would effectively be treated as a vote “AGAINST” Proposal 1.

Each Fund’s Board of Directors, including the Independent Directors, unanimously recommends that stockholders of each Fund vote FOR the approval of the Merger of MHY with and into HIO in accordance with the Maryland General Corporation Law.

 

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FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (MHY)

Audit Fees. The aggregate fees billed in the fiscal years ended February 28, 2014 and February 28, 2015 for professional services rendered by KPMG for the audit of MHY’s annual financial statements, or services that are normally provided in connection with the statutory and regulatory filings or engagements (the “MHY Audit Fees”) in those fiscal years, were $49,450 and $49,950, respectively.

Audit-Related Fees. The aggregate fees billed by KPMG in connection with assurance and related services related to the annual audit of MHY and for review of MHY’s financial statements, other than the MHY Audit Fees described above (the “MHY Audit-Related Fees”), for the fiscal years ended February 28, 2014 and February 28, 2015 were $0 and $0, respectively.

In addition, there were no MHY Audit-Related Fees billed in the fiscal years ended February 28, 2014 and February 28, 2015 for assurance and related services by KPMG to LMPFA and any entity controlling, controlled by or under common control with LMPFA that provides ongoing services to MHY (LMPFA and such other entities together, the “MHY Service Affiliates”), that were related to the operations and financial reporting of MHY.

Tax Fees. The aggregate fees billed by KPMG for tax compliance, tax advice and tax planning services, which include the filing and amendment of federal, state and local income tax returns, timely regulated investment company qualification review and tax distribution and analysis planning to MHY (the “MHY Tax Fees”) for the fiscal years ended February 28, 2014 and February 28, 2015 were $4,500 and $4,550, respectively.

There were no fees billed by KPMG to the MHY Service Affiliates for tax services for the fiscal years ended February 28, 2014 and February 28, 2015 that were required to be approved by MHY’s Audit Committee.

All Other Fees. There were no aggregate fees billed for other non-audit services rendered by KPMG to MHY (“Other MHY Fees”) for the fiscal years ended February 28, 2014 and February 28, 2015.

There were no other non-audit services rendered by KPMG to the MHY Service Affiliates in the fiscal years ended February 28, 2014 and February 28, 2015.

Generally, the Audit Committee of MHY must approve (a) all audit and permissible non-audit services to be provided to MHY and (b) all permissible non-audit services to be provided to the MHY Service Affiliates that relate directly to the operations and financial reporting of MHY. The MHY Audit Committee may implement policies and procedures by which such services are approved other than by the full MHY Audit Committee but has not yet done so.

The MHY Audit Committee approved 100% of the MHY Audit Related Fees, MHY Tax Fees and Other MHY Fees, if any, for each of the fiscal years ended February 28, 2014 and February 28, 2015.

The MHY Audit Committee shall not approve non-audit services that the MHY Audit Committee believes may impair the independence of the registered public accounting firm. As of the date of the approval of the MHY Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to MHY by the independent registered public accounting firm, other than those provided to MHY in connection with an audit or a review of the financial statements of MHY. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of MHY; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the MHY Audit Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to MHY, LMPFA and any Covered Service Provider

 

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constitutes not more than 5% of the total amount of revenues paid to the independent registered public accounting firm during the fiscal year in which the permissible non-audit services are provided to (a) MHY, (b) LMPFA and (c) any entity partially controlled by or under common control with LMPFA that provides ongoing services to MHY during the fiscal year in which the services are provided that would not have to be approved by the MHY Audit Committee; (ii) the permissible non-audit services were not recognized by MHY at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the MHY Audit Committee and approved by the MHY Audit Committee (or its delegate(s)) prior to the completion of the audit.

The aggregate non-audit fees billed by KPMG for non-audit services rendered to MHY and MHY Service Affiliates for the fiscal years ended February 28, 2014 and February 28, 2015 were $0 and $0, respectively.

The MHY Audit Committee has considered whether the provision of non-audit services to the MHY Service Affiliates that were not pre-approved by the MHY Audit Committee (because they did not require pre-approval) is compatible with maintaining KPMG’s independence. All services provided by KPMG to MHY or to the MHY Service Affiliates that were required to be pre-approved by the Audit Committee were pre-approved.

A representative of KPMG, if requested by any stockholder, will be present via telephone at the Meeting to respond to appropriate questions from stockholders and will have an opportunity to make a statement if he or she chooses to do so.

5% BENEFICIAL OWNERSHIP (MHY)

At April 24, 2015, to the knowledge of management, the registered stockholders who owned of record or owned beneficially more than 5% of MHY’s capital stock outstanding is noted in the table below. As of the close of business on April 24, 2015, Cede & Co., a nominee for participants in the Depository Trust Company, held of record 47,067,697 shares, equal to approximately 99% of MHY’s outstanding shares including the shares shown below.

 

Percent

  

Name

   Address

9.29%(1)

   First Trust Portfolios L.P. and its affiliates    120 East Liberty Drive

Suite 400

Wheaton, IL 60187

9.14%(2)

   Saba Capital Management, L.P. and affiliates    405 Lexington Avenue

58th Floor

New York, NY 10174

 

(1) 

Based upon information obtained from Schedule 13G/A filed with the SEC on January 29, 2015.

(2) 

Based upon information obtained from Schedule 13G/A filed with SEC on February 17, 2015.

FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (HIO)

Audit Fees. The aggregate fees billed in the last two fiscal years ended September 30, 2014 and September 30, 2015 for professional services rendered by KPMG for the audit of HIO’s annual financial statements, or services that are normally provided in connection with the statutory and regulatory filings or engagements (the “HIO Audit Fees”) in those fiscal years, were $43,300 and $52,500, respectively.

Audit-Related Fees. The aggregate fees billed by KPMG in connection with assurance and related services related to the annual audit of HIO and for review of HIO’s financial statements, other than the Audit Fees described above (the “HIO Audit-Related Fees”), for the fiscal years ended September 30, 2014 and September 30, 2015 were $0 and $0, respectively.

In addition, there were no HIO Audit-Related Fees billed in the fiscal years ended September 30, 2014 and September 30, 2015 for assurance and related services by KPMG to LMPFA and any entity controlling, controlled by or under common control with LMPFA that provides ongoing services to HIO (LMPFA and such other entities together, the “HIO Service Affiliates”), that were related to the operations and financial reporting of HIO.

 

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Tax Fees. The aggregate fees billed by KPMG for tax compliance, tax advice and tax planning services, which include the filing and amendment of federal, state and local income tax returns, timely regulated investment company qualification review and tax distribution and analysis planning to HIO (the “HIO Tax Fees”) for the fiscal years ended September 30, 2014 and September 30, 2015 were $8,240 and $4,400, respectively.

There were no fees billed by KPMG to the Service Affiliates for tax services for the fiscal years ended September 30, 2014 and September 30, 2015 that were required to be approved by HIO’s Audit Committee.

All Other Fees. There were no other fees billed for other non-audit services rendered by KPMG to HIO (“Other HIO Fees”) for the fiscal years ended September 30, 2014 and September 30, 2015.

There were no other non-audit services rendered by KPMG to the Service Affiliates in the fiscal years ended September 30, 2014 and September 30, 2015.

Generally, the HIO Audit Committee must approve (a) all audit and permissible non-audit services to be provided to HIO and (b) all permissible non-audit services to be provided to the HIO Service Affiliates that relate directly to the operations and financial reporting of HIO. The HIO Audit Committee may implement policies and procedures by which such services are approved other than by the full HIO Audit Committee but has not yet done so.

The HIO Audit Committee approved 100% of the HIO Audit Related Fees, HIO Tax Fees and Other HIO Fees, if any, for each of the fiscal years ended September 30, 2014 and September 30, 2015.

The HIO Audit Committee shall not approve non-audit services that the HIO Audit Committee believes may impair the independence of the registered public accounting firm. As of the date of the approval of the HIO Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to HIO by the independent registered public accounting firm, other than those provided to HIO in connection with an audit or a review of the financial statements of HIO. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of HIO; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the HIO Audit Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to HIO, LMPFA and any Covered Service Provider constitutes not more than 5% of the total amount of revenues paid to the independent registered public accounting firm during the fiscal year in which the permissible non-audit services are provided to (a) HIO, (b) LMPFA and (c) any entity partially controlled by or under common control with LMPFA that provides ongoing services to HIO during the fiscal year in which the services are provided that would not have to be approved by the HIO Audit Committee; (ii) the permissible non-audit services were not recognized by HIO at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the HIO Audit Committee and approved by the Audit Committee (or its delegate(s)) prior to the completion of the audit.

The aggregate non-audit fees billed by KPMG for non-audit services rendered to HIO and Service Affiliates for the fiscal years ended September 30, 2014 and September 30, 2015 were $0 and $0, respectively.

The HIO Audit Committee has considered whether the provision of non-audit services to the HIO Service Affiliates that were not pre-approved by the HIO Audit Committee (because they did not require pre-approval) is compatible with maintaining KPMG’s independence. All services provided by KPMG to HIO or to the HIO Service Affiliates that were required to be pre-approved by the HIO Audit Committee were pre-approved.

A representative of KPMG, if requested by any stockholder, will be present via telephone at the Meeting to respond to appropriate questions from stockholders and will have an opportunity to make a statement if he or she chooses to do so.

 

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5% BENEFICIAL OWNERSHIP (HIO)

At November 30, 2015, to the knowledge of management, the registered stockholders who owned of record or owned beneficially more than 5% of HIO’s capital stock outstanding is noted in the table below. As of the close of business on November 30, 2015, Cede & Co., a nominee for participants in the Depository Trust Company, held of record 82,945,756 shares, equal to approximately 99% of HIO’s outstanding shares, including the shares shown below.

 

Percent

  

Name

  

Address

7.10%(1)

   Morgan Stanley and Morgan Stanley Smith Barney   

1585 Broadway

New York, NY 10036

6.45%(2)

   First Trust Advisors L.P. and affiliates    120 East Liberty Drive Suite 400 Wheaton, IL 60187

 

(1) 

Based upon information obtained from Schedule 13G filed with SEC on February 17, 2015.

(2) 

Based upon information obtained from Schedule 13G/A filed with SEC on January 21, 2015.

OTHER BUSINESS

The Funds’ Board of Directors does not know of any other matter that may come before the Meeting. If any other matter properly comes before the Meeting, it is the intention of the persons named in the proxy to vote the proxies in accordance with their judgment on that matter.

VOTING INFORMATION

This Proxy Statement/Prospectus is furnished in connection with a solicitation of proxies by the Funds’ Board of Directors to be used at the Meeting. This Proxy Statement/Prospectus, along with the Notice of Meeting and a proxy card, are first being mailed to MHY and HIO stockholders on or about             , 2016 or as soon as practicable thereafter.

Only stockholders of record of MHY and HIO at the close of business on February 1, 2016 are entitled to notice of and to vote at the Meeting and at any postponement or adjournment thereof. On             , 2016, there were              outstanding MHY Common Shares and              outstanding HIO Common Shares.

A quorum of MHY stockholders is required to take action at the Meeting. A majority of the outstanding MHY Common Shares entitled to vote at the Meeting, represented in person or by proxy, will constitute a quorum of stockholders at the Meeting. Similarly, a quorum of HIO stockholders is required to take action at the Meeting. A majority of the outstanding HIO Common Shares entitled to vote at the Meeting, represented in person or by proxy, will constitute a quorum of stockholders at the Meeting.

Votes cast by proxy or in person at the Meeting will be tabulated by the inspector of election appointed for the Meeting. The inspector of election, who is an employee of the proxy solicitor engaged by the Funds, will determine whether or not a quorum is present at the Meeting. The inspector of election will treat abstentions and “broker non-votes” (i.e., shares held by brokers or nominees, typically in “street name,” as to which proxies have been returned but (a) instructions have not been received from the beneficial owners or persons entitled to vote and (b) the broker or nominee does not have discretionary voting power on a particular matter) as present for purposes of determining a quorum.

If you hold shares directly (not through a broker-dealer, bank or other financial intermediary) and if you return a signed proxy card that does not specify how you wish to vote on a proposal, your shares will be voted “FOR” Proposal 1.

Broker-dealer firms holding MHY Common Shares or HIO Common Shares in “street name” for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares on the proposed Merger before the Meeting. The NYSE has taken the position that a broker-dealer that is a member of the NYSE and that has not received instructions from a customer or client prior to the date specified in the broker-dealer firm’s request for voting instructions may not vote such customer or client’s shares with respect to a proposal. If a service agent is not a member of the

 

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NYSE, it may be permissible for the service agent to vote shares with respect to which it has not received specific voting instructions from its customers on a proposal. A signed proxy card or other authorization by a beneficial owner of MHY Common Shares or HIO Common Shares that does not specify how the beneficial owner’s shares should be voted on the proposed Merger will be deemed an instruction to vote such shares in favor of the proposed Merger.

If you hold MHY Common Shares or HIO Common Shares through a service agent that has entered into a service agreement with either Fund, the service agent may be the record holder of your MHY Common Shares or HIO Common Shares. At the Meeting, a service agent will vote shares for which it receives instructions from its customers in accordance with those instructions. A signed proxy card or other authorization by a stockholder that does not specify how the stockholder’s shares should be voted on a proposal may be deemed to authorize a service agent to vote such shares in favor of the applicable proposal. Depending on its policies, applicable law or contractual or other restrictions, a service agent may be permitted to vote shares with respect to which it has not received specific voting instructions from its customers. In those cases, the service agent may, but may not be required to, vote such shares in the same proportion as those shares for which the service agent has received voting instructions. This practice is commonly referred to as “echo voting.”

If you beneficially own shares that are held in “street name” through a broker-dealer or that are held of record by a service agent and if you do not give specific voting instructions for your shares, they may not be voted at all or, as described above, they may be voted in a manner that you may not intend. Therefore, you are strongly encouraged to give your broker-dealer or service agent specific instructions as to how you want your shares to be voted.

A stockholder may revoke a proxy at any time on or before the Meeting by either (1) submitting to the applicable Fund a subsequently dated proxy, (2) delivering to the applicable Fund a written notice of revocation (addressed to the Secretary at the principal executive office of MHY at the address shown at the beginning of this Proxy Statement/Prospectus) or (3) otherwise giving notice of revocation at the Meeting, at all times prior to the exercise of the authority granted in the proxy card. Merely attending the Meeting, however, will not revoke any previously executed proxy. Unless revoked, all valid and executed proxies will be voted in accordance with the specifications thereon or, in the absence of such specifications, for approval of the proposed Merger.

Even if you plan to attend the Meeting, we ask that you return the enclosed proxy card or vote by telephone or through the internet. This will help us ensure that an adequate number of shares are present for the Meeting to be held.

Photographic identification will be required for admission to the Meeting.

Proposal 1:

Because the Merger in Proposal 1 (the “Proposal”) has been approved by at least 75% of MHY’s “Continuing Directors,” as that term is defined in MHY’s Charter, that Proposal must be approved by the holders of a majority of the outstanding MHY Common Shares. Similarly, because the Merger in Proposal 1 has been approved by at least 75% of HIO’s “Continuing Directors,” as that term is defined in HIO’s Bylaws, that Proposal must be approved by the holders of a majority of the outstanding HIO Common Shares.

Approval of Proposal 1 will occur only if a sufficient number of votes at the Meeting are cast “FOR” that Proposal. Abstentions and broker non-votes are not considered “votes cast” and, therefore, do not constitute a vote “FOR” Proposal 1. Abstentions effectively result in a vote AGAINST Proposal 1. Any broker non-votes would effectively be treated as a vote “AGAINST” Proposal 1.

Adjournments and Postponements

If the necessary quorum to transact business or the vote required to approve the Proposal is not obtained at the Meeting, the chairman of the Meeting or the persons named as proxies may propose one or more adjournments or postponements of the Meeting in accordance with applicable law to permit further solicitation of proxies. If in the judgment of the chairman of the Meeting or the persons named as proxies, it is advisable to defer action on the Proposal, the chairman of the Meeting or the persons named as proxies may propose one or more adjournments of the Meeting with respect to the Proposal for a reasonable period or periods. The Meeting may be adjourned up to 120 days after the original record date for the Meeting without further notice other than announcement at the Meeting.

 

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OTHER BUSINESS

The Board of each Fund does not intend to present any other business at the Meeting. If, however, any other matters are properly brought before the Meeting or any adjournment or postponement thereof, the persons named as proxies will vote thereon in accordance with their judgment.

Appraisal Rights

Under the Maryland General Corporation Law, holders of MHY Common Shares are not entitled to appraisal rights in connection with the Merger.

EXPENSES OF PROXY SOLICITATION

The costs of preparing, printing, assembling and mailing material in connection with this solicitation of proxies are estimated to be approximately $212,600, and will be borne half by the Funds, equally, and half by LMPFA, or an affiliate thereof. Any additional costs of the Merger, estimated to be $262,000, will be borne half by the Funds and half by LMPFA, or an affiliate thereof. Proxies may also be solicited in-person, by telephone or by use of the mails by officers of the Funds, by regular employees of LMPFA, Western Asset or their affiliates or by other representatives of the Funds. Brokerage houses, banks and other fiduciaries may be requested to forward proxy solicitation material to their principals to obtain authorization for the execution of proxies and will be reimbursed by the Funds for such out-of-pocket expenses. In addition, the Funds have retained Georgeson Inc. (“Georgeson”), 480 Washington Boulevard, 26th Floor, Jersey City, NJ 07310, a proxy solicitation firm, to assist in the solicitation of proxies. It is anticipated that Georgeson will be paid approximately $212,547 for such solicitation services (not including reimbursements of out-of-pocket expenses), which costs are to be borne by the Funds. Georgeson may solicit proxies personally and by telephone.

SERVICE PROVIDERS

State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts 02111, serves as the custodian of each Fund.

American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219, serves as each Fund’s transfer, stockholder services and dividend paying agent.

KPMG LLP, 345 Park Avenue, New York, New York 10154, has been selected as each Fund’s independent registered public accountants.

Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017, serves as counsel to the Funds.

Stradley Ronon Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia, PA 19103, serves as counsel to each Fund’s Independent Directors.

Certain legal matters concerning the issuance of HIO Common Shares will be passed upon by Foley & Lardner LLP, 3000 K Street, N.W., Suite 600, Washington, D.C. 20007.

 

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INDEX OF APPENDICES

 

Appendix A    Form of Agreement and Plan Of Merger    A-1
Appendix B   

Description of Moody’s and S&P Ratings

   B-1
Appendix C   

Legg Mason Partners Fund Advisor, LLC Proxy Voting Policy

   C-1
Appendix D   

Western Asset Management Company Proxy Voting Policy and Procedures

   D-1
Appendix E   

Western Asset Management Company Limited Proxy Voting Policy and Procedures

   E-1

 

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APPENDIX A

FORM OF AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (“Agreement”) is made as of this [            ] day of [            ], between Western Asset Managed High Income Fund Inc. (the “Acquired Fund”), a Maryland corporation with its principal place of business at 620 Eighth Avenue, 49th Floor, New York, New York 10018, and Western Asset High Income Opportunity Fund Inc. (the “Acquiring Fund”), a Maryland corporation with its principal place of business at 620 Eighth Avenue, 49th Floor, New York, New York 10018.

WHEREAS, each of the Acquired Fund and the Acquiring Fund is a closed-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 shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) that the Agreement shall constitute a “plan of reorganization” for purposes of the Code;

WHEREAS, the reorganization will consist of the merger of the Acquired Fund with and into the Acquiring Fund pursuant to the Maryland General Corporation Law (“MGCL”) as provided herein, and upon the terms and conditions hereinafter set forth in this Agreement;

WHEREAS, the Acquired Fund currently owns securities that are generally assets of the character in which the Acquiring Fund is permitted to invest;

WHEREAS, the Board of Directors of the Acquiring Fund (the “Acquiring Fund Board”) has determined, with respect to the Acquiring Fund, that the Merger (as hereinafter defined) is in the best interests of the Acquiring Fund and its stockholders and that the interests of the existing stockholders of the Acquiring Fund will not be diluted as a result of this transaction;

WHEREAS, the Board of Directors of the Acquired Fund (the “Acquired Fund Board”) has determined, with respect to the Acquired Fund, that the Merger (as hereinafter defined) is in the best interests of the Acquired Fund and its stockholders and that the interests of the existing stockholders of the Acquired Fund will not be diluted as a result of this transaction;

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto, intending to be legally bound, agree as follows:

 

  1. BASIC TRANSACTION

1.1 The Merger. On and subject to the terms and conditions of this Agreement, the Acquired Fund will merge with and into the Acquiring Fund (the “Merger”) at the Effective Date (as defined in paragraph 1.3 below) in accordance with the MGCL. The Acquiring Fund shall be the surviving corporation and investment company registered pursuant to the 1940 Act. The Acquired Fund shall cease to exist as a separate corporation and investment company.

Each share of Acquired Fund’s common stock, par value $0.001 per share (the “Acquired Fund Common Stock”), issued and outstanding immediately prior to the Effective Date will be converted into an equivalent dollar amount (to the nearest one tenth of one cent) of full shares of Acquiring Fund Common Stock (as defined in paragraph 2.1(p)), based on the net asset value per share of each of the parties at 4:00 p.m. Eastern Time on the Business Day prior to the Effective Date (the “Valuation Time”). No fractional shares of Acquiring Fund Common Stock will be issued to the holders of Acquired Fund Common Stock. In lieu thereof, the Acquiring Fund will purchase all fractional shares of Acquiring Fund Common Stock at the current net asset value per share of the Acquiring Fund Common Stock for the account of all holders of fractional interests, and each such holder will receive such holder’s pro rata share of the proceeds of such purchase. The Effective Date and the Business Day prior to it must each be a day on which the New York Stock Exchange is open for trading (a “Business Day”).

 

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From and after the Effective Date, the Acquiring Fund shall possess all of the properties, assets, rights, privileges and powers and shall be subject to all of the restrictions, liabilities, obligations, disabilities and duties of the Acquired Fund (other than the investment objectives, policies, strategies or limitations of the Acquired Fund, whether fundamental or non-fundamental), all as provided under Maryland law.

1.2 Actions at Closing. At the closing of the transactions contemplated by this Agreement (the “Closing”) on the date thereof (the “Closing Date”), (i) the Acquired Fund will deliver to the Acquiring Fund the various certificates and documents referred to in Article 6 below, (ii) the Acquiring Fund will deliver to the Acquired Fund the various certificates and documents referred to in Article 5 below, (iii) the Acquired Fund will file with the State Department of Assessments and Taxation of Maryland (the “Department”) articles of merger (the “Articles of Merger”) and make all other filings or recordings required by Maryland law in connection with the Merger.

1.3 Effect of Merger. Subject to the requisite approvals of the stockholders of the Acquired Fund, and to the other terms and conditions described herein, the Merger shall become effective at such time as the Articles of Merger are accepted for record by the Department or at such later time, not to exceed 30 days after such acceptance, as is specified in the Articles of Merger (the “Effective Date”), and the separate corporate existence of the Acquired Fund shall cease. As promptly as practicable after the Merger, the Acquired Fund shall delist the Acquired Fund Common Stock from the New York Stock Exchange (“NYSE”) and its registration under the 1940 Act shall be terminated. Any reporting responsibility of the Acquired Fund is, and shall remain, the responsibility of the Acquired Fund up to and including the Effective Date.

 

  2. REPRESENTATIONS AND WARRANTIES

2.1 Representations and Warranties of the Acquiring Fund. The Acquiring Fund represents and warrants to the Acquired Fund that the statements contained in this paragraph 2.1 are correct and complete in all material respects as of the execution of this Agreement on the date hereof. The Acquiring Fund represents and warrants to, and agrees with, the Acquired Fund that:

(a) The Acquiring Fund is a corporation duly organized, validly existing under the laws of the State of Maryland and is in good standing with the Department, and has the power to own all of its assets and to carry on its business as it is now being conducted and to carry out this Agreement.

(b) The Acquiring Fund is duly registered under the 1940 Act as a diversified, closed-end management investment company (File No. 811-07921) and such registration has not been revoked or rescinded and is in full force and effect. The Acquiring Fund is qualified as a foreign corporation in every jurisdiction where required, except to the extent that failure to so qualify would not have a material adverse effect on the Acquiring Fund.

(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 (i) such as have been obtained or applied for under the Securities Act of 1933, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934 Act”), and the 1940 Act, (ii) such as may be required by state securities laws and (iii) such as may be required under Maryland law for the acceptance for record of the Articles of Merger by the Department.

(d) The Acquiring Fund is not, and the execution, delivery and performance of this Agreement by the Acquiring Fund will not result, in violation of the laws of the State of Maryland or of the charter of the Acquiring Fund (the “Acquiring Fund Charter”) or the Bylaws, as amended (the “Acquiring Fund Bylaws”), of the Acquiring Fund, or of any material agreement, indenture, instrument, contract, lease or other undertaking to which the Acquiring Fund is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Acquiring Fund will not result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquiring Fund is a party or by which it is bound.

(e) The Acquiring Fund has been furnished with the Acquired Fund’s Annual Report to Stockholders for the year ended February 28, 2015.

 

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(f) The Acquired Fund has been furnished with the Acquiring Fund’s Annual Report to Stockholders for the year ended September 30, 2015.

(g) The Acquiring Fund has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of the Acquiring Fund Board, and, subject to stockholder approval, this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.

(h) No material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or to its knowledge threatened against the Acquiring Fund or any properties or assets held by it. The Acquiring Fund knows of no facts that might form the basis for the institution of such proceedings which would materially and adversely affect its business and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions herein contemplated.

(i) There are no material contracts outstanding to which the Acquiring Fund is a party that have not been disclosed in the Registration Statement (as defined in paragraph 2.1(n) below) or will not be otherwise disclosed to the Acquired Fund prior to the Effective Date.

(j) Since September 30, 2015 there has not been any material adverse change in the Acquiring Fund’s financial condition, assets, liabilities or business and the Acquiring Fund has no known liabilities of a material amount, contingent or otherwise, required to be disclosed in a balance sheet with GAAP other than those shown on the Acquiring Fund’s statements of assets, liabilities and capital referred to above, those incurred in the ordinary course of its business as an investment company since September 30, 2015, and those incurred in connection with the Merger. Prior to the Effective Date, the Acquiring Fund will advise the Acquired Fund in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued. For purposes of this paragraph 2.1(j), a decline in net asset value per share of the Acquiring Fund due to declines in market values of securities in the Acquiring Fund’s portfolio or the discharge of the Acquiring Fund liabilities will not constitute a material adverse change.

(k) All material federal and other tax returns and information reports of the Acquiring Fund required by law to have been filed shall have been timely filed (including any extensions) and are or will 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 Acquiring Fund’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns. All tax liabilities of the Acquiring Fund have been adequately provided for on its books, and no tax deficiency or liability of the Acquiring Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Effective Date occurs.

(l) The Acquiring Fund has elected to be treated as a regulated investment company (a “RIC”) for U.S. federal income tax purposes and for each taxable year of its operation, the Acquiring Fund has met the requirements of Subchapter M of the Code for qualification as a RIC and has been eligible to and has computed its federal income tax under Section 852 of the Code. The Acquiring Fund intends to continue to meet such requirements and to so compute its federal income tax for each subsequent taxable year.

(m) The Acquiring Fund has not taken any action and does not know of any fact or circumstance that could reasonably be expected to prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

(n) The registration statement has been filed with the Securities and Exchange Commission (the “SEC”) by the Acquiring Fund on Form N-14 relating to the Acquiring Fund Common Stock to be issued pursuant to this Agreement, and any supplement or amendment thereto or to the documents therein (as amended, the “Registration Statement”), on the effective date of the Registration Statement, at the time of the stockholders’ meeting referred to in Article 4 of this Agreement and at the Effective Date, insofar as it relates to the Acquiring Fund (i) shall have complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder

 

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and (ii) did not or will not contain 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 not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this paragraph 2.1(n) shall not apply to statements in, or omissions from, the Registration Statement made in reliance upon and in conformity with information furnished by the Acquired Fund for use in the Registration Statement.

(o) All issued and outstanding shares of Acquiring Fund Common Stock (i) have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws, (ii) are, and on the Effective Date will be, duly and validly issued and outstanding, fully paid and non-assessable, and (iii) will be held at the time of the Closing by the persons and in the amounts set forth in the records of the transfer agent. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any shares of Acquiring Fund Common Stock, nor is there outstanding any security convertible into, or exchangeable for, any shares of Acquiring Fund Common Stock.

(p) The Acquiring Fund is authorized to issue [            ] shares of capital stock, par value $0.001 per share, all of which shares are classified as Common Stock (the “Acquiring Fund Common Stock”); each outstanding share of which is fully paid, non-assessable and has full voting rights.

(q) The offer and sale of the shares of Acquiring Fund Common Stock to be issued pursuant to this Agreement will be in compliance with all applicable federal and state securities laws.

(r) At or prior to the Effective Date, the Acquiring Fund will have obtained any and all regulatory, board and stockholder approvals necessary to issue the shares of Acquiring Fund Common Stock to be issued pursuant to this Agreement.

(s) The books and records of the Acquiring Fund made available to the Acquired Fund are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Acquiring Fund.

(t) The Acquiring Fund Board has not adopted a resolution electing to be subject to the Maryland Business Combination Act or the Maryland Control Share Acquisition Act.

2.2 Representations and Warranties of the Acquired Fund. The Acquired Fund represents and warrants to the Acquiring Fund that the statements contained in this paragraph 2.2 are correct and complete in all material respects as of the execution of this Agreement on the date hereof. The Acquired Fund represents and warrants to, and agrees with, the Acquiring Fund that:

(a) The Acquired Fund is a corporation duly organized, validly existing under the laws of the State of Maryland and is in good standing with the Department, and has the power to own all of its assets and to carry on its business as it is now being conducted and to carry out this Agreement.

(b) The Acquired Fund is duly registered under the 1940 Act as a closed-end, diversified management investment company (File No. 811-07396), and such registration has not been revoked or rescinded and is in full force and effect. The Acquired Fund is qualified as a foreign corporation in every jurisdiction where required, except to the extent that failure to so qualify would not have a material adverse effect on the Acquired Fund.

(c) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated herein, except (i) such as have been obtained or applied for under the 1933 Act, the 1934 Act and the 1940 Act, (ii) such as may be required by state securities laws and (iii) such as may be required under Maryland law for the acceptance for record of the Articles of Merger by the Department.

(d) The Acquired Fund is not, and the execution, delivery and performance of this Agreement by the Acquired Fund will not result, in violation of the laws of the State of Maryland or of the charter of the Acquired Fund (the “Acquired Fund Charter”) or the Bylaws, as amended (the “Acquired Fund Bylaws”), of the Acquired Fund, or of any material agreement,

 

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indenture, instrument, contract, lease or other undertaking to which the Acquired Fund is a party or by which it is bound, and the execution, delivery and performance of this Agreement by the Acquired Fund will not result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquired Fund is a party or by which it is bound.

(e) The Acquired Fund has been furnished with the Acquiring Fund’s Annual Report to Stockholders for the year ended September 30, 2015.

(f) The Acquiring Fund has been furnished with the Acquired Fund’s Annual Report to Stockholders for the year ended February 28, 2015.

(g) The Acquired Fund has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of the Acquired Fund Board, and, subject to stockholder approval, this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.

(h) No material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending (in which service of process has been received) or to its knowledge threatened against the Acquired Fund or any properties or assets held by it. The Acquired Fund knows of no facts that might form the basis for the institution of such proceedings which would materially and adversely affect its business and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions herein contemplated.

(i) There are no material contracts outstanding to which the Acquired Fund is a party that have not been disclosed in the Registration Statement or will not be otherwise disclosed to the Acquiring Fund prior to the Effective Date.

(j) Since February 28, 2015, there has not been any material adverse change in the Acquired Fund’s financial condition, assets, liabilities or business and the Acquired Fund has no known liabilities of a material amount, contingent or otherwise, required to be disclosed in a balance sheet in accordance with GAAP other than those shown on the Acquired Fund’s statements of assets, liabilities and capital referred to above, those incurred in the ordinary course of its business as an investment company since February 28, 2015, and those incurred in connection with the Merger. Prior to the Effective Date, the Acquired Fund will advise the Acquiring Fund in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued. For purposes of this paragraph 2.2(j), a decline in net asset value per share of the Acquired Fund due to declines in market values of securities in the Acquired Fund’s portfolio or the discharge of the Acquired Fund liabilities will not constitute a material adverse change.

(k) All material federal and other tax returns and information reports of the Acquired Fund required by law to have been filed shall have been timely filed (including any extensions) and are or will 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 Acquired Fund’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns. All tax liabilities of the Acquired Fund have been adequately provided for on its books, and no tax deficiency or liability of the Acquired Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Effective Date occurs.

(l) The Acquired Fund has elected to be treated as a RIC for U.S. federal income tax purposes and for each taxable year of its operation, the Acquired Fund has met the requirements of Subchapter M of the Code for qualification as a RIC and has been eligible to and has computed its federal income tax under Section 852 of the Code. The Acquired Fund intends to continue to meet such requirements and to so compute its federal income tax the taxable year ending on the Effective Date.

(m) The Acquired Fund has not taken any action and does know of any fact or circumstance that could reasonably be expected to prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

 

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(n) The Registration Statement, on the effective date of the Registration Statement, at the time of the stockholders’ meetings referred to in Article 4 of this Agreement and at the Effective Date, insofar as it relates to the Acquired Fund (i) shall have complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain 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 not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this paragraph 2.2(n) shall only apply to statements in, or omissions from, the Registration Statement made in reliance upon and in conformity with information furnished by the Acquiring Fund for use in the Registration Statement.

(o) All issued and outstanding shares of Acquired Fund Common Stock (i) have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws, (ii) are, and on the Effective Date will be, duly and validly issued and outstanding, fully paid and non-assessable, and (iii) will be held at the time of the Closing by the persons and in the amounts set forth in the records of the transfer agent as provided in paragraph 4.7. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any shares of Acquired Fund Common Stock, nor is there outstanding any security convertible into, or exchangeable for, any shares of Acquired Fund Common Stock.

(p) The books and records of the Acquired Fund made available to the Acquiring Fund are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Acquired Fund.

(q) The Acquired Fund Board has not adopted a resolution electing to be subject to the Maryland Business Combination Act or the Maryland Control Share Acquisition Act.

 

  3. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE ACQUIRED FUND

3.1 Conversion of Acquired Fund Common Stock.

(a) Conversion. Subject to the requisite approval of the stockholders of the Acquired Fund, and the other terms and conditions contained herein, on the Effective Date, each share of Acquired Fund Common Stock will be converted into an equivalent dollar amount (to the nearest one tenth of one cent) of full shares of Acquiring Fund Common Stock, computed based on the net asset value per share of each of the parties at the Valuation Time (the “Common Stock Consideration”). No fractional shares of Acquiring Fund Common Stock will be issued to the holders of Acquired Fund Common Stock. In lieu thereof, the Acquiring Fund will purchase all fractional shares of Acquiring Fund Common Stock at the current net asset value per share of Acquiring Fund Common Stock for the account of all holders of fractional interests, and each such holder will receive such holder’s pro rata share of the proceeds of such purchase (the “Common Cash Consideration” and, together with Common Stock Consideration, the “Merger Consideration”).

(b) Computation of Net Asset Value. The net asset value per share of the Acquired Fund Common Stock and the Acquiring Fund Common Stock shall be determined as of the Valuation Time, and no formula will be used to adjust the net asset value per share so determined of either of the parties’ common stock to take into account differences in realized and unrealized gains and losses. The value of the assets of the Acquired Fund to be transferred to the Acquiring Fund shall be determined by the Acquiring Fund pursuant to the principles and procedures consistently utilized by the Acquiring Fund in valuing its own assets and determining its own liabilities for purposes of the Merger, which principles and procedures are substantially similar to those employed by the Acquired Fund when valuing its own assets and determining its own liabilities. Such valuation and determination shall be made by the Acquiring Fund in cooperation with the Acquired Fund and shall be confirmed in writing by the Acquiring Fund to the Acquired Fund. The net asset value per share of Acquiring Fund Common Stock shall be determined in accordance with such procedures, and the Acquiring Fund shall certify the computations involved.

(c) Cancellation of Acquired Fund Common Stock. On the Effective Date, all shares of the Acquired Fund Common Stock shall cease to be outstanding, shall automatically be cancelled and shall cease to exist and the holders of certificates (the “Common Certificates”) or book entry shares (“Common Book-Entry Shares”) which, immediately prior to the Effective

 

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Date, represented such shares of the Acquired Fund Common Stock shall cease to have any rights with respect thereto, except the right to receive, upon surrender of such Common Certificates or Common Book-Entry Shares in accordance with paragraph 3.2, the Merger Consideration.

3.2 Surrender of Shares.

(a) Paying Agent. Prior to the Effective Date, the Acquiring Fund shall designate American Stock Transfer & Trust Company as paying agent for the payment of the Merger Consideration (the “Paying Agent”) as provided in this Article 3. At or prior to the Closing, the Acquiring Fund shall deposit (or cause to be deposited) with the Paying Agent, for the benefit of the holders of Certificates or Book-Entry Shares, cash in an amount sufficient to make all payments of Common Cash Consideration pursuant to paragraph 3.1(a) (the “Cash Consideration”). Such funds may be invested by the Paying Agent as directed by the Acquiring Fund; provided that (a) no such investment or losses thereon shall affect the Cash Consideration payable to the holders of Acquired Fund Common Stock, and following any losses, the Acquiring Fund shall promptly deposit (or cause to be deposited) additional funds to the Paying Agent for the benefit of the stockholders of the Acquired Fund in the amount of any such losses and (b) such investments shall be in short-term obligations of the United States of America with maturities of no more than 30 days or guaranteed by the United States of America and backed by the full faith and credit of the United States of America or in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively. Any interest or income produced by such investments will be payable to the Acquiring Fund, as the Acquiring Fund directs.

(b) Payment Procedures.

(i) As promptly as practicable after the Effective Date, the Acquiring Fund shall cause to be mailed to each record holder, as of the Effective Date, of a Certificate or a Book-Entry Share a letter of transmittal (which shall be in customary form and shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent or, in the case of Book-Entry Shares, upon adherence to the procedures set forth in the letter of transmittal) and instructions for use in effecting the surrender of the Certificates or, in the case of Book-Entry Shares, the surrender of such shares for payment of the Merger Consideration.

(ii) Upon surrender to the Paying Agent of Common Certificates or of Common Book-Entry Shares, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Common Certificates or Common Book-Entry Shares shall be entitled to receive in exchange therefor (i) Common Stock Consideration in the form of separate certificates or share deposit receipts for Acquiring Fund Common Stock and (ii) cash in an amount equal to the Common Cash Consideration, for each share formerly represented by such Common Certificate or Common Book-Entry Shares (less any required withholding taxes) and such Common Certificate or Common Book-Entry Shares shall then be canceled. No interest shall be paid or accrued for the benefit of holders of the Common Certificates or Common Book-Entry Shares on the Common Cash Consideration.

(iii) If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate or Book-Entry Share is registered, it shall be a condition of payment that the Certificate or Book-Entry Share so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration, as applicable, to a person other than the registered holder of the Certificate or Book-Entry Share surrendered or shall have established to the satisfaction of the Acquiring Fund that such tax either has been paid or is not applicable.

(iv) Until surrendered as contemplated by, and in accordance with, this paragraph 3.2, each Certificate and each Book-Entry Share shall be deemed at any time after the Effective Date to represent only the right to receive upon such surrender the applicable Merger Consideration as contemplated by this paragraph 3.

(v) At any time following the date that is six months after the Effective Date, the Acquiring Fund shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which have been deposited with the Paying Agent and which have not been disbursed to holders of Certificates or Book-Entry Shares and thereafter such holders shall be entitled to look to the Acquiring Fund (subject to abandoned property, escheat or other

 

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similar laws) only as general creditors thereof with respect to the Merger Consideration payable (without interest) upon due surrender of their Certificates or Book-Entry Shares. The Acquiring Fund shall pay all charges and expenses, including those of the Paying Agent, in connection with the exchange of Acquired Fund Common Stock for Merger Consideration. None of the Acquiring Fund, the Acquired Fund or the Paying Agent shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any Cash Consideration remaining unclaimed as of a date which is immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity shall, to the extent permitted by applicable law, become the property of the Acquiring Fund free and clear of any claims or interests of any person previously entitled thereto. All cash paid in accordance with the terms of this Article 3 in respect of Certificates or Book-Entry Shares that have been surrendered in accordance with the terms of this Agreement shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Acquired Fund Common Stock represented thereby.

(vi) After the Effective Date, the stock transfer books of the Acquired Fund shall be closed and thereafter there shall be no further registration of transfers of Acquired Fund Common Stock that were outstanding prior to the Effective Date. After the Effective Date, Certificates or Book-Entry Shares presented to the Paying Agent for transfer shall be canceled and exchanged for the Merger Consideration, as applicable, provided for, and in accordance with the procedures set forth in, this Article 3.

3.3 Withholding Taxes. The Acquiring Fund or the Paying Agent will be entitled to deduct and withhold from amounts otherwise payable pursuant to this Agreement to any holder of shares of Acquired Fund Common Stock such amounts as the Acquiring Fund or the Paying Agent shall determine in good faith are required to be deducted and withheld with respect to such payments under the Code and the rules and Treasury Regulations promulgated thereunder, or any provision of state, local or foreign tax law. Any amounts so deducted and withheld will be timely paid to the applicable tax authority and will be treated for all purposes of this Agreement as having been paid to the holder of the shares of Acquired Fund Common Stock in respect of which such deduction and withholding was made.

3.4 Lost, Stolen or Destroyed Certificates. In the event any Certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Acquiring Fund, the posting by such person of a bond in customary amount and upon such terms as the Acquiring Fund may determine are necessary as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration, as applicable, pursuant to this Agreement.

 

  4. COVENANTS

4.1 Operations in the Normal Course. Each party covenants to operate its business in the ordinary course between the date hereof and the Effective Date, it being understood that such ordinary course of business will include (i) the declaration and payment of customary dividends and other distributions and (ii) in the case of the Acquired Fund, preparing for its deregistration, except that the distribution of dividends pursuant to paragraph 6.6 of this Agreement shall not be deemed to constitute a breach of the provisions of this paragraph 4.1.

4.2 Stockholders’ Meetings.

(a) The Acquired Fund and the Acquiring Fund shall hold a meeting of its respective stockholders for the purpose of considering the Merger as described herein, which meeting has been called for [ ], 2016, and any adjournments or postponements thereof.

(b) The Acquired Fund and the Acquiring Fund mailed to each of its respective stockholders of record entitled to vote at the meeting of stockholders at which action is to be considered regarding the Merger, in sufficient time to comply with requirements as to notice thereof, a combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.

4.3 Articles of Merger. The parties agree that, as soon as practicable after satisfaction of all conditions to the Merger, they will jointly file executed Articles of Merger with the Department and make all other filings or recordings required by Maryland law in connection with the Merger.

 

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4.4 Regulatory Filings.

(a) The Acquired Fund undertakes that, if the Merger is consummated, it will file, or cause its agents to file, an application pursuant to Section 8(f) of the 1940 Act for an order declaring that the Acquired Fund has ceased to be a registered investment company.

(b) The Acquiring Fund has filed the Registration Statement with the SEC, which has become effective. The Acquired Fund agrees to cooperate fully with the Acquiring Fund, and has furnished to the Acquiring Fund the information relating to itself to be set forth in the Registration Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder and the state securities or blue sky laws.

4.5 Preservation of Assets. The Acquiring Fund agrees that it has no plan or intention to sell or otherwise dispose of the assets of the Acquired Fund to be acquired in the Merger, except for dispositions made in the ordinary course of business.

4.6 Tax Matters. Each of the parties agrees that by the Effective Date all of its federal and other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes. In connection with this covenant, the parties agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. The Acquiring Fund agrees to retain for a period of ten (10) years following the Effective Date all returns, schedules and work papers and all material records or other documents relating to tax matters of the Acquired Fund for its final taxable year and for all prior taxable periods. Any information obtained under this paragraph 4.6 shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Effective Date, the Acquiring Fund shall prepare, or cause its agents to prepare, any federal, state or local tax returns, including any Forms 1099, required to be filed and provided to required persons by the Acquired Fund with respect to its final taxable year ending with the Effective Date and for any prior periods or taxable years for which the due date for such return has not passed as of the Effective Date and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities and provided to required persons. Notwithstanding the aforementioned provisions of this paragraph 4.6, any expenses incurred by the Acquiring Fund (other than for payment of taxes) in excess of any accrual for such expenses by the Acquired Fund in connection with the preparation and filing of said tax returns and Forms 1099 after the Effective Date shall be borne by the Acquiring Fund.

4.7 Stockholder List. Prior to the Effective Date, the Acquired Fund shall have made arrangements with its transfer agent to deliver to the Acquiring Fund a list of the names and addresses of all of the holders of record of Acquired Fund Common Stock on the Effective Date and the respective number of shares of Acquired Fund Common Stock owned by each such stockholder, certified by the Acquired Fund’s transfer agent or President to the best of their knowledge and belief. The Acquiring Fund and the Acquired Fund will (i) use all reasonable best efforts to cause the Merger to constitute a reorganization under Section 368(a) of the Code and (ii) shall execute and deliver officer’s certificates containing appropriate representations at such time or times as may be reasonably requested by counsel, including the effective date of the Registration Statement and the Closing Date, for purposes of rendering opinions with respect to the tax treatment of the Merger.

4.8 Delisting, Termination of Registration as an Investment Company. The Acquired Fund agrees that the (i) delisting of the shares of the Acquired Fund with the NYSE and (ii) termination of its registration as an investment company will be effected in accordance with applicable law as soon as practicable following the Effective Date.

 

  5. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE ACQUIRED FUND

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

5.1 Certificates and Statements by the Acquiring Fund.

(a) The Acquiring Fund shall have furnished a statement of assets, liabilities and capital, together with a schedule of investments with their respective dates of acquisition and tax costs, certified on its behalf by its President (or any Vice

 

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President) and its Treasurer, and a certificate executed by both such officers, dated the Effective Date, certifying that there has been no material adverse change in its financial position since September 30, 2015, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.

(b) The Acquiring Fund shall have furnished to the Acquired Fund a certificate signed by its President (or any Vice President), dated the Effective Date, certifying that as of the Effective Date, all representations and warranties made by the Acquiring Fund in this Agreement are true and correct in all material respects as if made at and as of such date and the Acquiring Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates.

5.2 Absence of Litigation. There shall be no material litigation pending with respect to the matters contemplated by this Agreement.

5.3 Legal Opinion. The Acquired Fund shall have received an opinion of Simpson Thacher & Bartlett LLP, as counsel to the Acquiring Fund, in form and substance reasonably satisfactory to the Acquired Fund and dated the Effective Date, to the effect that:

(i) the Acquiring Fund is a corporation duly organized, validly existing under the law of the State of Maryland and in good standing with the Department;

(ii) the Acquiring Fund has the corporate power to carry on its business as a closed-end investment company registered under the 1940 Act;

(iii) the Agreement has been duly authorized, executed and delivered by the Acquiring Fund, and, assuming due authorization, execution and delivery of the Agreement by the Acquired Fund, constitutes a valid and legally binding obligation of the Acquiring Fund enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and by equitable principles;

(iv) to such counsel’s knowledge, no consent, approval, authorization or order of any United States federal or Maryland or New York state court or governmental authority is required for the consummation by the Acquiring Fund of the Merger, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act and the published rules and regulations of the SEC thereunder and under Maryland law, New York law and such as may be required under state securities or blue sky laws;

(v) the Registration Statement has become effective under the 1933 Act and the Proxy Statement and Prospectus was filed on [            ], 2016 pursuant to Rule 497(c) of the rules and regulations of the SEC under the 1933 Act and, to such counsel’s knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued or proceeding for that purpose has been instituted or threatened by the SEC;

(vi) to such counsel’s knowledge, there are no legal or governmental proceedings or contracts to which the Acquiring Fund is a party or by which it is bound required to be described in the Registration Statement which are not described therein or, if required to be filed, filed as required;

(vii) the execution and delivery of this Agreement does not, and the consummation of the Merger will not, violate any material provision of the Acquiring Fund Charter, the Acquiring Fund Bylaws, as amended, or any agreement set forth in a schedule to the opinion, which the Acquiring Fund has advised such counsel are all material contracts to which the Acquiring Fund is a party or by which the Acquiring Fund is bound, except insofar as the parties have agreed to amend such provision as a condition precedent to the Merger; and

(viii) to such counsel’s knowledge, no material suit, action or legal or administrative proceeding is pending or threatened against the Acquiring Fund.

In giving the opinion set forth above, Simpson Thacher & Bartlett LLP may state that it is relying on certificates of officers of the Acquiring Fund with regard to matters of fact and certain certificates and written statements of governmental

 

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officials with respect to the good standing of the Acquiring Fund and on the opinion of Foley & Lardner LLP as to matters of Maryland law.

5.4 Regulatory Orders. The Acquiring Fund shall have received from any relevant state securities administrator such order or orders as are reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, and any applicable state securities or blue sky laws in connection with the transactions contemplated hereby, and that all such orders shall be in full force and effect.

5.5 Satisfaction of the Acquired Fund. All proceedings taken by the Acquiring Fund and its counsel in connection with the Merger and all documents incidental thereto shall be satisfactory in form and substance to the Acquired Fund.

 

  6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND

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

6.1 Certificates and Statements by the Acquired Fund.

(a) The Acquired Fund shall have furnished a statement of assets, liabilities and capital, together with a schedule of investments with their respective dates of acquisition and tax costs, certified on its behalf by its President (or any Vice President) and its Treasurer, and a certificate executed by both such officers, dated the Effective Date, certifying that there has been no material adverse change in its financial position since February 28, 2015, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.

(b) The Acquired Fund shall have furnished to the Acquiring Fund a certificate signed by its President (or any Vice President), dated the Effective Date, certifying that as of the Effective Dates, all representations and warranties made by the Acquired Fund in this Agreement are true and correct in all material respects as if made at and as of such date and that the Acquired Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such date.

6.2 Absence of Litigation. There shall be no material litigation pending with respect to the matters contemplated by this Agreement.

6.3 Legal Opinion. The Acquiring Fund shall have received an opinion of Simpson Thacher & Bartlett LLP, as counsel to the Acquired Fund, in form and substance reasonably satisfactory to the Acquiring Fund and dated the Effective Date, to the effect that:

(i) the Acquired Fund is a corporation duly organized, validly existing under the law of the State of Maryland and in good standing with the Department;

(ii) the Acquired Fund has the corporate power to carry on its business as a closed-end investment company registered under the 1940 Act;

(iii) the Agreement has been duly authorized, executed and delivered by the Acquired Fund, and, assuming due authorization, execution and delivery of the Agreement by the Acquiring Fund, constitutes a valid and legally binding obligation of the Acquired Fund enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and by equitable principles;

(iv) to such counsel’s knowledge, no consent, approval, authorization or order of any United States federal or Maryland or New York state court or governmental authority is required for the consummation by the Acquired Fund of the Merger, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act and the published rules and regulations of the SEC thereunder and under Maryland law, New York law and such as may be required under state securities or blue sky laws;

 

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(v) to such counsel’s knowledge, there are no legal or governmental proceedings or contracts to which the Acquired Fund is a party or by which it is bound required to be described in the Registration Statement which are not described therein or, if required to be filed, filed as required;

(vi) the execution and delivery of this Agreement does not, and the consummation of the Merger will not, violate any material provision of the Acquired Fund Charter, the Acquired Fund Bylaws, as amended, or any agreement set forth in a schedule to the opinion, which the Acquired Fund has advised such counsel are all material contracts to which the Acquired Fund is a party or by which it is bound, except insofar as the parties have agreed to amend such provision as a condition precedent to the Merger; and

(vii) to such counsel’s knowledge, no material suit, action or legal or administrative proceeding is pending or threatened against the Acquired Fund.

In giving the opinion set forth above, Simpson Thacher & Bartlett LLP may state that it is relying on certificates of officers of the Acquired Fund with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the good standing of the Acquired Fund and on the opinion of Foley & Lardner LLP, as to matters of Maryland law.

6.4 Satisfaction of the Acquiring Fund. All proceedings taken by the Acquired Fund and its counsel in connection with the Merger and all documents incidental thereto shall be satisfactory in form and substance to the Acquiring Fund.

6.5 Dividends. Prior to the Effective Date, the Acquired Fund shall have declared and paid a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to its stockholders substantially all of its net investment income that has accrued through the Effective Date, if any, and substantially all of its net capital gain, if any, realized through the Effective Date.

6.6 Custodian’s Certificate. The Acquired Fund’s custodian shall have delivered to the Acquiring Fund a certificate identifying all of the assets of the Acquired Fund held or maintained by such custodian as of the Valuation Time.

6.7 Books and Records. The Acquired Fund’s transfer agent shall have provided to the Acquiring Fund (i) the originals or true copies of all of the records of the Acquired Fund in the possession of such transfer agent as of the Effective Date, (ii) a certificate setting forth the number of shares of Acquired Fund Common Stock outstanding as of the Valuation Time, and (iii) the name and address of each holder of record of any shares and the number of shares held of record by each such stockholder.

 

  7. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING FUND AND ACQUIRED FUND

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

7.1 Approval of Merger. The Merger shall have been approved by the affirmative vote of a majority of the outstanding shares of Acquired Fund Common Stock; the Acquiring Fund shall have delivered to the Acquired Fund a copy of the resolutions approving this Agreement pursuant to this Agreement adopted by the Acquiring Fund Board, certified by its secretary; and the Acquired Fund shall have delivered to the Acquiring Fund a copy of the resolutions approving this Agreement adopted by the Acquired Fund Board and the Acquiring Fund’s stockholders, certified by its secretary.

7.2 Regulatory Filings.

(a) Any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, relating to the transactions contemplated hereby shall have expired or been terminated.

 

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(b) The SEC shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Merger under Section 25(c) of the 1940 Act; no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of the Acquired Fund or would prohibit the Merger.

(c) 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 Acquired Fund or the Acquiring Fund from completing the transactions contemplated by this Agreement.

7.3 Consents. All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities deemed necessary by the Acquiring Fund or the Acquired Fund 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 Acquired Fund, provided that either party hereto may for itself waive any of such conditions.

7.4 Registration Statement. 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.

7.5 Tax Opinion. The parties shall have received the opinion of Simpson Thacher & Bartlett LLP, dated the Closing Date, substantially to the effect that, based upon certain facts, assumptions and representations made by the Acquired Fund, the Acquiring Fund and their respective authorized officers:

(i) the Merger as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1) of the Code and that the Acquiring Fund and the Acquired Fund will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code;

(ii) except for consequences regularly attributable to a termination of the Acquired Fund’s taxable year, no gain or loss will be recognized by the Acquired Fund as a result of the Merger or upon the conversion of shares of Acquired Fund Common Stock into shares of Acquiring Fund Common Stock;

(iii) no gain or loss will be recognized by the Acquiring Fund as a result of the Merger or upon the conversion of shares of Acquired Fund Common Stock into shares of Acquiring Fund Common Stock;

(iv) no gain or loss will be recognized by the holders of the Acquired Fund Common Stock upon the conversion of their shares of Acquired Fund Common Stock into shares of Acquiring Fund Common Stock, except to the extent such holders are paid cash in lieu of fractional shares of Acquiring Fund Common Stock in the Merger;

(v) the tax basis of the Acquired Fund assets in the hands of the Acquiring Fund will be the same as the tax basis of such assets in the hands of the Acquired Fund immediately prior to the consummation of the Merger;

(vi) immediately after the Merger, the aggregate tax basis of the Acquiring Fund Common Stock received by each holder of Acquired Fund Common Stock in the Merger (including that of fractional share interests purchased by the Acquiring Fund) will be equal to the aggregate tax basis of the shares of Acquired Fund Common Stock owned by such stockholder immediately prior to the Merger;

(vii) a stockholder’s holding period for Acquiring Fund Common Stock (including that of fractional share interests purchased by the Acquiring Fund) will be determined by including the period for which he or she held shares of Acquired Fund Common Stock converted pursuant to the Merger, provided that such shares of Acquired Fund Common Stock were held as capital assets;

(viii) the Acquiring Fund’s holding period with respect to the Acquired Fund’s assets transferred pursuant to the Merger will include the period for which such assets were held by the Acquired Fund; and

 

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(ix) the payment of cash to the holders of Acquired Fund Common Stock in lieu of fractional shares of Acquiring Fund Common Stock will be treated as though such fractional shares were distributed as part of the Merger and then redeemed by the Acquiring Fund, with the result that the holder of Acquired Fund Common Stock will generally have a capital gain or loss to the extent the cash distribution differs from such stockholder’s basis allocable to the fractional shares of Acquiring Fund Common Stock (assuming such Acquired Fund Common Stock was held as a capital asset).

The delivery of such opinion is conditioned upon the receipt by Simpson Thacher & Bartlett LLP of representations it shall request of the Acquiring Fund and the Acquired Fund. Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor the Acquired Fund may waive the condition set forth in this paragraph 7.5.

7.6 Assets and Liabilities. The assets and liabilities of the Acquired Fund to be transferred to the Acquiring Fund shall not include any assets or liabilities which the Acquiring Fund, by reason of limitations in its Registration Statement or the Acquiring Fund Charter, may not properly acquire or assume. The Acquiring Fund does not anticipate that there will be any such assets or liabilities but the Acquiring Fund will notify the Acquired Fund if any do exist and will reimburse the Acquired Fund for any reasonable transaction costs incurred by the Acquired Fund for the liquidation of such assets and liabilities.

 

  8. INDEMNIFICATION

8.1 The Acquiring Fund. The Acquiring Fund, out of its assets and property, agrees to indemnify and hold harmless the Acquired Fund and the members of the Acquired Fund Board and its 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 Acquired Fund and those board members 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 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 Acquiring Fund or the members of the Acquiring Fund Board or its officers prior to the Closing Date, provided that such indemnification by the Acquiring Fund 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.

8.2 The Acquired Fund. The Acquired Fund, out of its assets and property, agrees to indemnify and hold harmless the Acquiring Fund and the members of the Acquiring Fund Board and its 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 Acquiring Fund and those board members 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 Acquired 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 Acquired Fund or the members of the Acquired Fund Board or its officers prior to the Closing Date, provided that such indemnification by the Acquired Fund 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. BROKER FEES AND EXPENSES

9.1 No Broker Fees. The Acquiring Fund and the Acquired Fund represent and warrant to each other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein.

9.2 Payment of Expenses. The costs of Merger, including the costs of preparing, printing, assembling and mailing material in connection with the solicitation of proxies are estimated to be approximately $474,600. Legg Mason Partners Fund Advisor, LLC, or an affiliate thereof, will bear half the costs of the Merger, with the remaining costs shared equally by the Acquiring Fund and the Acquired Fund. Such expenses shall include, but not be limited to, all costs related to the preparation and distribution of the Registration Statement, proxy solicitation expenses, SEC registration fees, and NYSE

 

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listing fees. Neither of the Acquiring Fund and the Acquired Fund owes any broker’s or finder’s fees in connection with the transactions provided for herein.

 

  10. COOPERATION FOLLOWING EFFECTIVE DATE

In case at any time after the Effective Date any further action is necessary to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as the other party may reasonably request, all at the sole cost and expense of the requesting party (unless the requesting party is entitled to indemnification as described below). The Acquired Fund acknowledges and agrees that from and after the Effective Date, the Acquiring Fund shall be entitled to possession of all documents, books, records, agreements and financial data of any sort pertaining to the Acquired Fund.

 

  11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

11.1 Entire Agreement. The Acquiring Fund and the Acquired Fund agree that neither party has made any representation, warranty or covenant not set forth herein and that this Agreement constitutes the entire agreement between the parties.

11.2 Survival of Warranties. The covenants to be performed after the Closing by both the Acquiring Fund and the Acquired Fund, and the obligations of the Acquiring Fund in Article 8, 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 AND WAIVERS

12.1 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date by resolution of either the Acquiring Fund Board or the Acquired Fund Board, if circumstances should develop that, in the opinion of that board, make proceeding with the Agreement inadvisable with respect to the Acquiring Fund or the Acquired Fund, respectively. Any such termination resolution to be effective shall be promptly communicated to the other party and, in any event, prior to the Closing Date. In the event of termination of this Agreement pursuant to the provisions hereof, the Agreement shall become void and have no further effect, and there shall not be any liability hereunder on the part of either of the parties or their respective board members or officers, except for any such material breach or intentional misrepresentation, as to each of which all remedies at law or in equity of the party adversely affected shall survive.

12.2 Waiver. At any time prior to the Effective Date, any of the terms or conditions of this Agreement may be waived by either the Acquired Fund Board or the Acquiring Fund Board (whichever is entitled to the benefit thereof), if, in the judgment of such board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended in this Agreement to the stockholders of their respective fund, on behalf of which such action is taken.

 

  13. TRANSFER RESTRICTION

Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance of any shares to any person who at the time of the Merger is, to its knowledge, an affiliate of a party to the Merger pursuant to Rule 145(c), the Acquiring Fund will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows:

THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC. (OR ITS STATUTORY SUCCESSOR) UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.

and, further, that stop transfer instructions will be issued to the Acquiring Fund’s transfer agent with respect to such shares. The Acquired Fund will provide the Acquiring Fund on the Effective Date with the name of any Acquired Fund Stockholder who is to the knowledge of the Acquired Fund an affiliate of it on such date.

 

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  14. MATERIAL PROVISIONS

All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.

 

  15. 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 Acquired Fund and the Acquiring Fund; provided, however, that following the meeting of the Acquired Fund stockholders called by the Acquired Fund pursuant to paragraph 4.2 of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of shares of Acquiring Fund Common Stock to be issued to the holders of Acquired Fund Common Stock under this Agreement to the detriment of such stockholders without their further approval.

 

  16. 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 Acquiring Entity or the Acquired Entity, at its address set forth in the preamble to this Agreement, in each case to the attention of its President.

 

  17. ENFORCEABILITY; HEADINGS; COUNTERPARTS; GOVERNING LAW; SEVERABILITY; ASSIGNMENT; LIMITATION OF LIABILITY

17.1 Enforceability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

17.2 Headings. 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.

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

17.4 Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the internal laws of the State of New York.

17.5 Successors and Assigns. 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 party. 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.

 

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

 

Western Asset Managed High Income Fund Inc.
By:    
  Name: Jane E. Trust
 

Title:    President, Chairman and Chief

            Executive Officer

 
 
Western Asset High Income Opportunity Fund Inc.
By:    
  Name: Jane E. Trust
 

Title:    President, Chairman and Chief

            Executive Officer

 
(With respect to paragraph 9.2 only)
 
 
Legg Mason Partners Fund Advisor, LLC
By:    
  Name:
 

Title:    President

 

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APPENDIX B

DESCRIPTION OF MOODY’S AND S&P RATINGS

The definitions of the applicable rating symbols are set forth below:

Standard & Poor’s Ratings Service (“Standard & Poor’s”)—Ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standings within the major rating categories.

 

AAA Bonds rated “AAA” have the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

 

AA Bonds rated “AA” differ 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 Bonds rated “A” are 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 Bonds rated “BBB” exhibit 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 Bonds rated “BB” are less vulnerable to nonpayment than other speculative issues. However, they face 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 Bonds rated “B” are 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 Bonds rated “CCC” are 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 Bonds rated “CC” are currently highly vulnerable to nonpayment.

 

C A “C” rating is assigned to bonds that are currently highly vulnerable to nonpayment, bonds that have payment arrearages allowed by the terms of the documents, or bonds of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

 

D Bonds rated “D” are in payment default. The “D” rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered to “D” upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

 

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L Ratings qualified with “L” apply only to amounts invested up to federal deposit insurance limits.

 

NR indicates no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.

Moody’s Investors Service (“Moody’s”)—Numerical modifiers 1, 2 and 3 may be applied to each generic rating from “Aa” to “Caa,” where 1 is the highest and 3 the lowest ranking within its generic category.

 

Aaa Bonds rated “Aaa” are judged to be of the highest quality, with minimal credit risk.

 

Aa Bonds rated “Aa” are judged to be of high quality and are subject to very low credit risk.

 

A Bonds rated “A” are considered upper-medium grade and are subject to low credit risk.

 

Baa Bonds rated “Baa” are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.

 

Ba Bonds rated “Ba” are judged to have speculative elements and are subject to substantial credit risk.

 

B Bonds rated “B” are considered speculative and are subject to high credit risk.

 

Caa Bonds rated “Caa” are judged to be of poor standing and are subject to very high credit risk.

 

Ca Bonds rated “Ca” are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

 

C Bonds rated “C” are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest.

Absence of Rating: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.

Should no rating be assigned, the reason may be one of the following:

 

  1. An application for rating was not received or accepted.

 

  2. The issue or issuer belongs to a group of securities or companies that are not rated as a matter of policy.

 

  3. There is a lack of essential data pertaining to the issue or issuer.

 

  4. The issue was privately placed, in which case the rating is not published in Moody’s publications.

Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.

Short-Term Debt Security Ratings:

Moody’s short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.

Moody’s employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:

P-1: Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.

 

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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.

Fitch Ratings, Inc.—A brief description of the applicable Fitch Ratings, Inc. (“Fitch”) ratings symbols and meanings (as published by Fitch) follows ( “+” 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, to categories below ‘CCC’, or to Short-term ratings other than ‘F1’):

Investment Grade Long-Term Credit Ratings:

 

AAA Highest credit quality. “AAA” ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely 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.

Speculative Grade Long-Term Credit Ratings:

 

BB Speculative. “BB” ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.

 

B Highly speculative. “B” ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

 

CCC Substantial credit risk. Default is a real possibility.

 

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.

 

  Default. “D” ratings indicate a default. Default generally is defined as one of the following:

 

   

failure to make payment of principal and/or interest under the contractual terms of the rated obligation;

 

   

the bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of the business of an issuer/obligor; or

 

   

the distressed exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation to avoid a probable payment default.

 

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Short-Term Credit 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 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. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.

 

C High short-term default risk. Default is a real possibility.

 

D Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.

 

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. Applicable to entity ratings only.

Notes to Long-term and Short-term ratings for Fitch:

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”.

Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a heightened probability of a rating change and the likely direction of such change. These are designated as “Positive”, indicating a potential upgrade, “Negative”, for a potential downgrade, or “Evolving”, if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period.

Rating Outlook: Rating Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. The majority of Outlooks are generally Stable, which is consistent with the historical migration experience of ratings over a one- to two-year period. Positive or Negative rating Outlooks do not imply that a rating change is inevitable and, similarly, ratings with Stable Outlooks can be raised or lowered without a prior revision to the Outlook, if circumstances warrant such an action. Occasionally, where the fundamental trend has strong, conflicting elements of both positive and negative, the Rating Outlook may be described as evolving.

 

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APPENDIX C

LEGG MASON PARTNERS FUND ADVISOR, LLC

PROXY VOTING POLICY

LMPFA delegates to each subadviser the responsibility for voting proxies for its funds, as applicable, through its contracts with each subadviser. Each subadviser may use its own proxy voting policies and procedures to vote proxies of the funds if the funds’ Board reviews and approves the use of those policies and procedures. Accordingly, LMPFA does not expect to have proxy-voting responsibility for any of the funds.

Should LMPFA become responsible for voting proxies for any reason, such as the inability of a subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained and the use of its proxy voting policies and procedures is authorized by the Board. In the case of a material conflict between the interests of LMPFA (or its affiliates if such conflict is known to persons responsible for voting at LMPFA) and any fund, the Board of Directors of LMPFA shall consider how to address the conflict and/or how to vote the proxies. LMPFA shall maintain records of all proxy votes in accordance with applicable securities laws and regulations.

LMPFA shall be responsible for gathering relevant documents and records related to proxy voting from each subadviser and providing them to the funds as required for the funds to comply with applicable rules under the Investment Company Act of 1940. LMPFA shall also be responsible for coordinating the provision of information to the Board with regard to the proxy voting policies and procedures of each subadviser, including the actual proxy voting policies and procedures of each subadviser, changes to such policies and procedures, and reports on the administration of such policies and procedures.

 

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APPENDIX D

WESTERN ASSET MANAGEMENT COMPANY

PROXY VOTING POLICY AND PROCEDURES

BACKGROUND

An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established 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.

POLICY

As a fixed income only manager, the occasion to vote proxies is very rare. However, Western Asset 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 Western Asset’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 Western Asset 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 Management Company Limited) 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 investment professionals 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

 

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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.

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 investment professionals 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. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

 

  4. A brief identification of the matter voted on;

 

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  5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

 

  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 II 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.

 

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  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 favours 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.

 

  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.

 

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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.

 

  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.

 

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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.

 

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APPENDIX E

WESTERN ASSET MANAGEMENT COMPANY LIMITED

PROXY VOTING POLICY AND PROCEDURES

POLICY

As a fixed income only manager, the occasion to vote proxies is very rare. However, Western Asset Management Company Limited (“Western Asset”) 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 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 Western Asset’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 Western Asset 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 Management Company, its U.S. affiliate) regarding the voting of any securities owned by its clients.

PROCEDURE

Responsibility and Oversight

The Western Asset Investment Services 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 investment professionals 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 Client Account Transition Team 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 of existing clients were reminded of the appropriate routing to Corporate Actions for proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. 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 Investment Support 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. As part of the Annual Monitoring Program, the Legal and Compliance Department staff will review 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. Investment Support Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and investment professionals 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. The Investment Support Department 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. Council 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;

 

  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.

 

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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 Western Asset’s Part II 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 & Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

 

  1. Whether Western Asset (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 Asset or an officer or director of Western Asset 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. 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.

 

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  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 Western Asset 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 Western Asset 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 authorisation 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, Reorganisations 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.

 

  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 authorisation 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.

 

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  3. Western Asset votes on a case-by-case basis on other shareholder proposals where Western Asset 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.

 

  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 pre-emptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have pre-emptive rights.

 

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The information contained in this Proxy 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 Proxy Statement/Prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JANUARY 12, 2016

WESTERN ASSET MANAGED HIGH INCOME FUND INC.

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the Proxy Statement/Prospectus dated             , 2016, relating specifically to the proposed merger of Western Asset Managed High Income Fund Inc. (“MHY”) with and into Western Asset High Income Opportunity Fund Inc. (“HIO,” and together with MHY, the “Funds”) in accordance with the Maryland General Corporation Law (the “Merger”). You may obtain a copy of the Proxy Statement/Prospectus to by contacting each Fund at (888) 777-0102, by writing each Fund at the address listed above or by visiting our website at www.lmcef.com. The Merger is to occur pursuant to an Agreement and Plan of Merger. Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the same meanings as are given to them in the Proxy Statement/Prospectus.

TABLE OF CONTENTS

 

1. General Information

     S-2   

2. Financial Statements and Other Incorporated Documents

     S-2   

3. Pro Forma Financial Statements

     S-2   

 

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GENERAL INFORMATION

A Joint Special Meeting of Stockholders of MHY and HIO, at which stockholders of MHY and HIO will consider the Merger, will be held at 620 Eighth Avenue, 49th Floor, New York, New York, on Thursday, March 24, 2016 at 10:00 a.m., Eastern Daylight Time. For further information about the Merger, see the Proxy Statement/Prospectus.

FINANCIAL STATEMENTS

The Statement of Additional Information related to the Proxy Statement/Prospectus dated                 , 2016 consists of this cover page, the accompanying pro forma financial statements and the following documents, each of which was filed electronically with the SEC and is incorporated by reference herein:

The financial statements of each Fund as included in the Funds’ Annual Reports filed for the last-completed fiscal year, and semi-annual period, if applicable, for each Fund:

 

   

Western Asset Managed High Income Fund Inc., Semi-Annual Report to Stockholders for the Six-Month Period Ended August 31, 2015, filed on October 22, 2015 (accession no. 0001193125-15-350115).

 

   

Western Asset Managed High Income Fund Inc., Annual Report to Stockholders for the Fiscal Year Ended February 28, 2015, filed on April 17, 2015 (accession no. 0001193125-15-135519).

 

   

Western Asset High Income Opportunity Fund Inc., Annual Report to Stockholders for the Fiscal Year Ended September 30, 2015, filed on November 24, 2015 (accession no. 0001193125-15-386792).

PRO FORMA FINANCIAL STATEMENTS

Western Asset Managed High Income Fund Inc. (Target Fund) and Western Asset High Income Opportunity Fund Inc. (Acquiring Fund)

The unaudited pro forma information provided herein should be read in conjunction with the annual report to shareholders, for the fiscal year ended February 28, 2015 for the Target Fund, and for the fiscal year ended September 30, 2015 for the Acquiring Fund.

At a meeting held on November 11 and 12, 2015, the Board of Directors of the Funds approved an Agreement and Plan of Reorganization (the “Reorganization Agreement”) whereby the Acquiring Fund will acquire all the assets, and assume 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 be terminated as a series of the Trust (the “Reorganization”).

The unaudited pro forma information set forth below for the year ended September 30, 2015 is intended to present ratios and supplemental data as if the acquisition of the Target Fund by the Acquiring Fund had been consummated at October 1, 2014. Legg Mason Partners Fund Advisor, LLC (the “LMPFA”) is the investment manager of each of the Target Fund and the Acquiring Fund. Western Asset Management Company (“Western Asset”) and Western Asset Management Company Limited (“Western Asset Limited”) are the investment subadvisers of each of the Target Fund and the Acquiring Fund.

Both the Target and Acquiring Funds pay a management fee, calculated daily and paid monthly, at an annual rate of 0.80% of each Fund’s average daily net assets. The manager pays Western 70% of the net management fee it receives from each of the Target Fund and the Acquiring Fund. In turn, Western pays Western Limited a subadvisory fee of 0.30% on the Target and Acquiring Funds’ assets managed by Western Limited.

The Target Fund and Acquiring Fund have the same 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.

 

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As of September 30, 2015, the net assets of: (i) the Target Fund were $249,031,185 and (ii) the Acquiring Fund were $457,404,575. The net assets of the combined fund as of September 30, 2015 would have been $706,435,760.

On a pro forma basis for the year ended September 30, 2015, the proposed Reorganization would have resulted in the following approximate increases/(decreases) to expenses charged:

 

Audit and tax fees

   $ (55,350

Transfer agent fees

   $ (48,999

Fund accounting fees

   $ (28,175

Legal fees

   $ (22,005

Shareholder reporting fees

   $ (19,914

Miscellaneous fees

   $ (8,736

Listing fees

   $ (221

No significant accounting policies (including valuation of portfolio securities) will change as a result of the proposed Reorganization.

It is anticipated that no holdings will be sold from the Target or Acquiring Fund as a result of the Reorganization.

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

 

  1. No gain or loss is generally 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 liquidation of the Target Fund.

 

  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. Target Fund stockholders may, however, recognize gain or loss with respect to any cash those stockholders receive pursuant to the reorganization in lieu of fractional shares.

 

  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.

As of September 30, 2015, the Target Fund and the Acquiring Fund had the following capital loss carryovers for federal income tax purposes:

 

Target Fund

 

Year of Expiration

    Amount   

No Expiration(1)

  $ (3,750,476

2/28/2017

    (6,640,949

2/28/2018

    (35,714,593

2/28/2019

    (5,212,866
 

 

 

 
  $ (47,568,408

Acquiring Fund

 

Year of Expiration

    Amount   

No Expiration(1)

  $ (24,092,664

9/30/2016

    (2,157,094

9/30/2017

    (17,968,287

9/30/2018

    (49,024,877

9/30/2019

    (11,684,123
 

 

 

 
    $(80,834,381)   

 

(1) 

Both Funds are permitted to carry forward these capital losses for an unlimited period. However, these losses will be required to be utilized prior to their other capital losses with the expiration dates listed above. As a result of this

 

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  ordering rule, the other capital losses may be more likely to expire unutilized. Additionally, these capital losses retain their character as either short-term or long-term capital losses rather than being considered all short-term as are the Funds’ other capital losses listed above.

LMPFA, or an affiliate thereof, will pay 50% of the Target and Acquiring Funds’ reorganization costs. The estimated reorganizations costs of the Target Fund and Acquiring Fund are $212,100 and $262,500, respectively. LMPFA, or an affiliate thereof, will pay 50% of each Fund’s reorganization costs whether or not the Reorganization is consummated.

 

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PART C

OTHER INFORMATION

 

Item 15. Indemnification

The Registrant has entered into an Indemnification Agreement with each director whereby the Registrant has agreed to indemnify each director against expenses and costs actually and reasonably incurred by such director in connection with any claims, suits or proceedings; provided that no indemnification shall be provided to the extent that the director engaged in conduct for which indemnification may not lawfully be provided to the such director.

Sections 3 and 4 of Article VI of the Registrant’s Articles of Incorporation, incorporated by reference as Exhibit (a) to this Registration Statement, provide that:

To the maximum extent permitted by Maryland statutory or decisional law, as amended or interpreted, no current or former director or officer of the Registrant shall have any liability to the Registrant or its stockholders for money damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the Registrant whether or not such person is a director or officer at the time of any proceeding in which liability is asserted.

The Registrant shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent that indemnification of directors is permitted by Maryland statutory or decisional law. The Registrant shall indemnify and advance expenses to its officers to the same extent as its directors and may do so to such further extent as is consistent with law. The Board of Directors may by Bylaw, resolution or agreement make further provision for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland statutory or decisional law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and may adopt, approve and amend from time to time such Bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. This indemnification applies to events occurring at the time a person serves as a director or officer of the Registrant whether or not such person is a director or officer at the time of any proceeding in which liability is asserted.

No provision of the Registrant’s Articles of Incorporation shall be effective to protect or purport to protect any director or officer of the Registrant against any liability to the Registrant or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.

Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

Item 16. Exhibits

 

Exhibit No.

  

Exhibit

1   (a)    Articles of Incorporation, dated July 30, 1993.*
1   (b)    Articles of Amendment, dated August 2, 1993.*
1   (c)    Articles of Amendment, dated December 16, 1994.*
1   (d)    Articles of Amendment, dated October 9, 2006.*
1   (e)    Articles Supplementary, dated February 27, 2007.*
2      Amended and Restated Bylaws.*

 

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Exhibit No.   

Exhibit

3      Not applicable.
4      Form of Agreement and Plan of Merger is included in Part A of the Registration Statement on Form N-14.
5      Not applicable
6   (a)    Management Agreement between Registrant and Legg Mason Partners Fund Advisor, LLC with respect to Registrant, dated August 1, 2006.*
6   (b)    Subadvisory Agreement between Legg Mason Partners Fund Advisor, LLC and Western Asset Management Company with respect to Registrant, dated August 1, 2006.*
6   (c)    Subadvisory Agreement between Western Asset Management Company and Western Asset Management Company Limited with respect to Registrant, dated August 1, 2006.*
7      Not applicable.
8      Not applicable
9      Custodian Services Agreement with State Street Bank and Trust Company.**
10      Not applicable.
11      Opinion and Consent of Foley & Lardner LLP as to the legality of the securities being registered.***
12      Form of Opinion of Simpson Thacher & Bartlett LLP supporting tax matters and consequences to stockholders discussed in the Proxy Statement/Prospectus.***
13      Not applicable.
14   (a)    Consent of Independent Registered Public Accounting Firm with respect to Western Asset Managed High Income Fund Inc.**
14   (b)    Consent of Independent Registered Public Accounting Firm with respect to Western Asset High Income Opportunity Fund Inc.**
15      Not applicable.
16      Power of Attorney.**
17   (a)    Form of Proxy Card.***
17   (b)    Code of Ethics of the Registrant and Legg Mason Partners Fund Advisor, LLC.***
17   (c)    Code of Ethics of Western Asset Management Company and Western Asset Management Company Limited.***
17   (d)    Transfer Agency and Services Agreement with American Stock Transfer, Inc.***
17   (e)    Fund Accounting Services Agreement with State Street Bank and Trust Company.**

 

* Filed on March 15, 2013 with the Registrant’s Registration Statement on Form N-14 (File Nos. 333-187302 and 811-07920) and incorporated by reference herein.
** Filed herewith.
*** To be filed by amendment.

 

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 reofferings by persons who may be deemed underwriters, in addition to the information called for by the other terms of the applicable form.

(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.

 

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(3) The undersigned registrant agrees to promptly file a post-effective amendment to this registration statement including a signed opinion of Simpson Thacher & Bartlett LLP supporting tax matters and consequences to stockholders discussed in the Proxy Statement/Prospectus.

 

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SIGNATURES

As required by the Securities Act of 1933, as amended, this registration statement has been signed on behalf of the Registrant, in the City of New York and State of New York, on the 12th day of January, 2016.

 

WESTERN ASSET HIGH INCOME OPPORTUNITY FUND INC.
By:   /S/    JANE E. TRUST      
  Jane E. Trust
  Chairman, Chief Executive Officer and President

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      

  

Chairman, Chief Executive Officer,
President and Director (Principal Executive Officer)

  January 12, 2016
Jane E. Trust     

/S/    RICHARD F. SENNETT*      

  

Principal Financial Officer
(Principal Financial Officer)

  January 12, 2016
Richard F. Sennett     

/S/    ROBERT D. AGDERN*      

  

Director

  January 12, 2016
Robert D. Agdern     

/S/    CAROL L. COLMAN*      

  

Director

  January 12, 2016
Carol L. Colman     

/S/    DANIEL P. CRONIN*      

  

Director

  January 12, 2016
Daniel P. Cronin     

/S/    PAOLO M. CUCCHI*      

  

Director

  January 12, 2016
Paolo M. Cucchi     

/S/    LESLIE H. GELB*      

  

Director

  January 12, 2016
Leslie H. Gelb     

/S/    WILLIAM R. HUTCHINSON*      

  

Director

  January 12, 2016
William R. Hutchinson     

/S/    EILEEN KAMERICK*      

  

Director

  January 12, 2016
Eileen Kamerick     

/S/    DR. RIORDAN ROETT*      

  

Director

  January 12, 2016
Dr. Riordan Roett     
*BY:   /S/    JANE E. TRUST      
  Jane E. Trust,
  Attorney-in-Fact, January 12, 2016

The original powers of attorney authorizing Jane E. Trust to execute this Registration Statement, and any amendments thereto, for each a trustee of the Registrant on whose behalf this Registration Statement is filed have been executed and incorporated by reference herein as Exhibit 16.


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EXHIBIT INDEX

 

Exhibit No.  

Exhibit

9   Custodian Services Agreement with State Street Bank and Trust Company.
14(a)   Consent of Independent Registered Public Accounting Firm with respect to Western Asset Managed High Income Fund Inc.
14(b)   Consent of Independent Registered Public Accounting Firm with respect to Western Asset High Income Opportunity Fund Inc.
16   Power of Attorney.
17(e)   Fund Accounting Services Agreement with State Street Bank and Trust Company.
EX-99.(9) 2 d109853dex999.htm CUSTODIAN SERVICES AGREEMENT Custodian Services Agreement

Execution Copy

CUSTODIAN SERVICES AGREEMENT

THIS AGREEMENT is made as of October 5, 2012 by and among each Fund (as defined below) on behalf of each of its Portfolios (as defined below) and State Street Bank and Trust Company, a Massachusetts trust company (the “Custodian”).

WHEREAS, the Custodian is a bank having at least the minimum qualifications required by Section 17(f)(1) of the 1940 Act to act as custodian of the portfolio securities and other assets of investment companies; and

WHEREAS, each of the Funds on behalf of each of its Portfolios wishes to retain the Custodian to act as custodian of its portfolio securities and other assets, and the Custodian has indicated its willingness to so act;

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, and intending to be legally bound hereby, the parties hereto agree as follows:

 

1. DEFINITIONS. As used in this Agreement:

Authorized Person” means any of the persons duly authorized by the applicable Fund Board of Trustees or Directors to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund or one or more of its Portfolios as set forth in a certificate (which shall also set forth any limitations on such Persons’ scope of authority), such certificate to be executed by the Secretary or Assistant Secretary of the applicable Fund, as the same may be revised from time to time.

Board” means the Board of Trustees or Directors of the applicable Fund.

CEA” means the Commodities Exchange Act, as amended, and “CFTC” means the Commodity Futures Trading Commission.

Domestic Securities” means securities and other Financial Assets or instruments and other investments of a Portfolio to be held in places within the United States.

Domestic Sub-Custodian” shall have the meaning set forth in Section 2.6(b).

Federal Securities Laws” has the meaning set forth in Section (e)(1) of Rule 38a-1 promulgated under the 1940 Act.

Financial Assets” has the meaning set forth in the Uniform Commercial Code.

FINRA” means the Financial Industry Regulatory Authority, Inc.


Foreign Assets” means any of the Portfolios’ investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Portfolios’ transactions in such investments.

Foreign Custody Manager” has the meaning set forth in Section (a)(3) of Rule 17f-5 promulgated under the 1940 Act.

Foreign Securities” means securities and other Financial Assets of a Portfolio for which the primary market is outside the United States.

Foreign Securities Depository” means a foreign securities clearing system qualifying as an Eligible Securities Depository (as defined in Section (b)(1) of Rule 17f-7 under the 1940 Act) that is listed on Schedule B annexed hereto, as amended from time to time pursuant to Section 4.5 hereof.

Foreign Sub-Custodian” means a foreign banking institution qualifying as an Eligible Foreign Custodian (as defined in Section (a)(1) of Rule 17f-5 promulgated under the 1940 Act) that has been selected by the Custodian and is listed on Schedule A annexed hereto, as amended from time to time pursuant to Section 4.2 hereof.

Funds” means the investment companies identified on Exhibit A annexed hereto, and such additional Funds made subject to this Agreement pursuant to Section 12(c) hereof.

Governing Documents” means, with respect to each of the Portfolios, (i) the declaration of trust, charter or other constituting document of the Fund of which the Portfolio is a series or portfolio, (ii) the currently effective prospectus under the 1933 Act, (iii) the most recent statement of additional information, and (iv) a certified copy of the applicable Fund Board’s resolution approving the engagement of the Custodian to act as custodian of the securities and other assets of its Portfolio(s).

1933 Act” means the Securities Act of 1933, as amended.

1934 Act” means the Securities Exchange Act of 1934, as amended.

1940 Act” means the Investment Company Act of 1940, as amended.

Portfolios” means the separate series or portfolios of the Funds, and, as applicable, the separate classes of each such Portfolio, identified on Exhibit A hereto, and such additional Portfolios made subject to this Agreement pursuant to Section 12(d) hereof, and, in the case of any closed-end investment company or other Fund for which no separate series or portfolio is so identified, the Fund itself.

Proper Instructions” means written instructions given by an Authorized Person to the Custodian in such form and manner as the Custodian and the Funds shall agree upon from time to time, including communications effected directly between protected electromechanical or

 

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electronic devices, in each case in accordance with such testing and authentication procedures as may be agreed to from time to time by the Custodian and the Funds (“Written Instructions”) and, subject to any limitations in scope of authority, may be oral instructions (“Oral Instructions”) received by the Custodian in such manner and with such testing and authentication procedures as the Custodian and the Funds shall agree upon from time to time, from a person reasonably believed by the Custodian to be an Authorized Person. It is understood that the Funds must follow security procedures, including but not limited to, those selected by a Fund, as applicable, via the form of Funds Transfer Addendum to this Agreement. “Special Instructions” shall be Written Instructions accompanied by a copy of a resolution by the appropriate Board authorizing the action, or, if so approved by the Board, Written Instructions given by two Authorized Persons with authority to give such Special Instructions.

Repo Custodian” means a custodian appointed by a Fund for the purpose of engaging in tri-party repurchase agreement transactions.

Rule 17f-5” means Rule 17f-5 under the 1940 Act.

Rule 17f-7” means Rule 17f-7 under the 1940 Act.

SEC” means the Securities and Exchange Commission.

Shares” mean the shares of beneficial interest of any Portfolio.

Transfer Agent” means, with respect to each Fund, any transfer agent appointed by its Board.

Underlying Fund Shares” means uncertificated shares of registered “investment companies” (as defined in Section 3(a)(1) of the 1940 Act) the ownership of which is evidenced through entries in the books and records of the transfer agent of the applicable registered “investment company.”

Underlying Transfer Agent” means the transfer agent with respect to Underlying Fund Shares.

U.S. Clearing System” means a clearing agency located in the United States which is registered with the SEC as a clearing agency under Section 17A of the 1934 Act or a book-entry system authorized by the U.S. Department of the Treasury.

 

2. APPOINTMENT OF CUSTODIAN; GENERAL DUTIES.

2.1. Appointment.

(a) Each of the Funds hereby appoints the Custodian as the custodian of the cash, securities and other assets of each of its Portfolios, including Domestic Securities and Foreign Securities.

 

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(b) Upon becoming a party to this Agreement, each of the Funds shall provide the Custodian with a copy of its Governing Documents (unless the same has previously been provided to the Custodian), and will provide the Custodian with a copy of amendments, supplements and modifications thereof from time to time.

(c) The Custodian hereby accepts appointment as custodian of the securities and assets of the Portfolios of the Funds, agrees to keep safely all cash, securities and other assets of each Portfolio delivered to the Custodian, and agrees to perform the duties of such custodian in accordance with the provisions of this Agreement and all laws and regulations applicable to the Custodian in its performance of the services hereunder.

2.2. Delivery of Portfolio Assets.

(a) Each Fund, on behalf of its Portfolio(s), shall deliver, or cause to be delivered, to the Custodian all securities and cash of such Portfolio(s), and from time to time all payments of income, payments of principal or capital distributions received by it with respect to Portfolio securities, and the cash consideration received by it for such new or treasury Shares representing interests in its Portfolio(s) as may be issued or sold from time to time.

(b) Except as otherwise provided in this Agreement, the Custodian shall not be responsible for any property of a Portfolio which is not received by the Custodian or which is delivered out in accordance with Proper Instructions, including without limitation Portfolio property (i) held by brokers, private bankers or other entities on behalf of the Portfolio, (ii) held by a sub-custodian authorized pursuant to Section 2.6(b) hereof, (iii) held by entities which have advanced monies to or on behalf of the Portfolio and which have received Portfolio property as security for such advance(s), or (iv) delivered or otherwise removed from the custody of the Custodian in advance of payment therefor pursuant to Section 2.5(vii) hereof. With respect to Underlying Fund Shares, the holding of confirmation statements that identify the shares as being recorded in the Custodian’s name on behalf of the Portfolios will be deemed custody for purposes hereof.

2.3. Reliance on Instructions and Authority.

(a) Concurrently with the execution of this Agreement, and from time to time thereafter, as appropriate, each Fund shall deliver to the Custodian, duly certified by such Fund’s Secretary or Assistant Secretary, a certificate setting forth: (i) the names, titles, signatures and scope of authority of all Authorized Persons, (ii) the names, titles and signatures of those Authorized Persons, if any, who are authorized to give Special Instructions, and (iii) a copy of resolutions of the Boards of the applicable Funds effecting the authorizations referred to in the preceding clauses (i) and (ii). Such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until receipt by the Custodian of a similar certificate to the contrary.

 

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(b) The Custodian will be protected in acting upon any Proper or Special Instructions which are transmitted with testing or authentication pursuant to terms and conditions agreed to by the Custodian and the Fund from time to time, provided that such instructions comply with the other provisions of this Agreement. The Funds shall promptly confirm any Oral Instructions with Written Instructions, provided that failure of such confirming Written Instructions to be received by the Custodian shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions, and provided further that if Written Instructions confirming Oral Instructions are inconsistent with such Oral Instructions, any actions of the Custodian prior to receipt of such Written Instructions shall not be invalidated and the only obligation of the Custodian in connection therewith shall be to promptly notify the Fund of such inconsistency.

(c) The Custodian may receive and accept a copy of a resolution certified by the Secretary or an Assistant Secretary of any Fund as conclusive evidence (i) of the authority of any person to act in accordance with such resolution or (ii) of any determination or of any action by the applicable Board as described in such resolution, and such resolution may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary.

2.4. Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of each Portfolio of each Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Portfolio, other than cash maintained by the Portfolio in a bank account established and used in accordance with Rule 17f-3 under the 1940 Act. Funds held by the Custodian for a Portfolio may be deposited by it to its credit as Custodian in the banking department of the Custodian or with sub-custodians appointed pursuant to Sections 2.6(b) or (c) hereof. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. The Custodian shall take reasonable steps to ensure that, to the extent reasonably possible, such funds are covered by federal deposit insurance.

2.5. Payment of Fund Moneys. Upon receipt of Proper Instructions on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of a Portfolio in the following cases only:

(i) Upon the purchase of Domestic Securities for the account of the Portfolio but only (A) against the delivery of such securities or evidence of title thereto to the Custodian or its agent appointed pursuant to Section 2.6(a) hereof registered in the name of the Portfolio or in the name of a nominee of the Custodian referred to in Section 3.3 hereof or in proper form for transfer; (B) in the case of a purchase effected through a U.S. Clearing System, in accordance with the conditions set forth in Section 3.5 hereof; (C) in the case of a purchase of Underlying Fund Shares, in accordance with the conditions set forth in Section 3.7 hereof; (D) in the case of repurchase agreements entered into between the applicable Fund on behalf of a Portfolio and the Custodian or another bank, or a broker-dealer which is

 

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a member of FINRA, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian’s account at the Federal Reserve Bank with such securities or (ii) where the counterparty is the Custodian, against delivery of the receipt evidencing purchase by the Portfolio of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Portfolio; or (E) for transfer to a time deposit account of the Fund in any bank; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined herein.

(ii) In connection with conversion, exchange or surrender of securities owned by the Portfolio as set forth in Section 3.2(viii) hereof;

(iii) For the redemption or repurchase of Shares issued as set forth in Section 5 hereof;

(iv) For the payment of any expense or liability incurred by the Portfolio, including but not limited to the following payments for the account of the Portfolio: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses;

(v) For the payment of any dividends on Shares declared pursuant to the Fund’s Governing Documents;

(vi) For payment of the amount of dividends received in respect of securities sold short;

(vii) Upon the purchase of domestic investments that cannot, in accordance with domestic market practice, be delivered versus payment for such security, including without limitation repurchase agreement transactions involving delivery of Portfolio monies to a Repo Custodian, in advance of delivery of the purchased securities, in accordance with Written Instructions, which (except in the case of a repurchase agreement transaction) have been signed by two Authorized Persons, that set forth (A) that such payment is to be made as a “free delivery,” (B) the amount of such payment and (C) the person(s) to whom such payment is to be made;

(viii) For delivery in accordance with the provisions of any agreement among the Fund on behalf of a Portfolio, the Custodian and a broker-dealer registered under the 1934 Act and a member of FINRA, relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund on behalf of such Portfolio;

 

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(ix) For delivery in accordance with the provisions of any agreement among the Fund on behalf of a Portfolio, the Custodian and a futures commission merchant registered under the CEA, relating to compliance with the rules of the CFTC and/or any contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund on behalf of such Portfolio; and

(x) For any other purpose, but only upon receipt of Special Instructions from the Fund on behalf of the applicable Portfolio setting forth (A) the amount of such payment and (B) the person(s) to whom such payment is to be made.

2.6. Appointment of Agents and Sub-Custodians.

(a) Agents. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the 1940 Act to act as a custodian (as such term is defined in Rule 17f-4 under the 1940 Act), as its agent, as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. (The Underlying Transfer Agent shall not be deemed an agent or subcustodian of the Custodian for purposes of this Section 2.6 or any other provision of this Agreement.)

(b) Domestic Sub-Custodians. Upon receipt of Proper Instructions, which shall include appropriate certification as to authorization by the Board on behalf of the applicable Portfolio(s), the Custodian shall on behalf of the applicable Portfolio(s) from time to time employ one or more sub-custodians located in the United States that qualify to serve as custodians for registered management companies under the 1940 Act (“Domestic Sub-Custodians”), including without limitation any Repo Custodian or other sub-custodian appointed by a Fund for special purposes, provided that the Custodian shall have no more or less responsibility or liability to any Fund on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian; provided further, however, that the Custodian shall be liable to the Fund, in accordance with Section 8 hereof, for the Custodian’s own actions in transmitting any instructions received by it from the Fund and for the Custodian’s own actions in connection with the delivery of any securities, cash or other assets held by it to any sub-custodian. In addition, if, at any time, a Portfolio suffers or incurs any loss, damage, cost, expense, liability or claim as a result of any action or omission on the part of any such sub-custodian, then, to the extent that the Custodian has a claim in connection therewith against such sub-custodian, the Custodian shall use commercially reasonable efforts to pursue such claim on behalf of the applicable Portfolio and shall promptly remit to the account of such Portfolio the amount of any recovery by the Custodian in connection therewith. Notwithstanding the immediately foregoing sentence, at a Fund’s election, the applicable Portfolios shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against any such sub-custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Portfolio has not been made whole for any such loss, damage, cost, expense, liability or claim.

 

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(c) Foreign Sub-Custodians. The Custodian may employ as sub-custodian for each Fund’s Foreign Securities on behalf of the applicable Portfolio(s) the foreign banking institutions and foreign securities depositories designated in Schedules A and B hereto, but only in accordance with the applicable provisions of Section 4 hereof.

2.7. Actions Permitted Without Express Authority. The Custodian may in its discretion, without express authority from the applicable Fund on behalf of each applicable Portfolio:

(i) Surrender securities in temporary form for securities in definitive form;

(ii) Endorse for collection, in the name of the Portfolio, checks, drafts and other negotiable instruments; and

(iii) In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Portfolio except as otherwise directed by Proper Instructions.

2.8. Records and Reports.

(a) The Custodian shall, with respect to each Portfolio, create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of each Fund under the 1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.

(b) All such records shall be the property of the applicable Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees, agents or independent auditors of such Fund and employees and agents of the SEC.

(c) The Custodian shall promptly provide or otherwise make available to the Funds on a daily or less frequent basis, such notifications, reports, statements, summaries, schedule, balances and trial balances, rollforwards, reconciliations and other information as may be mutually acceptable to the Funds and the Custodian, which may be included on a schedule to this Agreement.

2.9. Accountants; Compliance Matters.

(a) The Custodian shall take all reasonable action, as a Fund with respect to a Portfolio may from time to time request, to obtain from year to year favorable opinions from the Fund’s independent accountants with respect to the Custodian’s activities hereunder and/or in connection with the preparation of the Fund’s Form N-1A or Form N-2, as applicable, and Form N-CSR, Form N-SAR or other reports to the SEC and with respect to any other requirements thereof.

 

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(b) The Custodian shall provide the applicable Fund, on behalf of each of the Portfolios at such times as such Fund may reasonably request, with reports by independent public accountants and other third parties on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a U.S. Clearing System or a Foreign Securities Depository, relating to the services provided by the Custodian under this Agreement; such reports shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. The Custodian shall reasonably promptly (but, in no event, in not greater than sixty (60) days) notify each Fund of each determination of a significant deficiency, material weakness or inadequacy in the internal accounting controls of the Custodian.

(c) The Custodian further agrees to provide such information and assistance from time to time as may be reasonably requested by any of the Funds in connection with the Custodian’s compliance procedures as applicable to the Funds and/or in connection with the Funds’ periodic compliance audits of the Custodian. Without limiting the preceding sentence, the Custodian agrees to provide: (i) in connection with the Funds’ compliance programs pursuant to Rule 38a-1 promulgated under the 1940 Act, such periodic reports, documentation and certifications as any Fund or its compliance officers may reasonably request, and reasonably prompt notification of any Material Compliance Matter (as such term is defined in Rule 38a-1 under the 1940 Act) that comes to the attention of the Custodian; (ii) sub-certificates in connection with the certification requirements of the Sarbanes-Oxley Act of 2002 applicable to services for the Funds; and (iii) a copy of each SSAE 16 Type 2 audit report (or any comparable successor report thereto) prepared in accordance with all applicable industry standards by an independent third party with respect to services hereunder.

2.10. Advances by the Custodian.

(a) The Custodian may, in its sole discretion, advance funds on behalf of any of the Portfolios to make any payment permitted by this Agreement upon receipt of Proper Instructions from the applicable Fund required by this Agreement for such payments on behalf of the Portfolio.

(b) Upon mutual agreement between a Fund, on behalf of each applicable Portfolio, and the Custodian, the Custodian shall, upon receipt of Proper Instructions from the Fund on behalf of the Portfolio make federal funds available to such Portfolio as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received and/or wire transfers initiated in payment for Shares of such Portfolio which are deposited into the Portfolio’s account.

 

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(c) Should a payment or payments pursuant to Section 2.10(a) or (b) above, with advanced funds, result in an overdraft (due to insufficiencies of the Portfolio’s account with the Custodian, or for any other reason), any such overdraft or related indebtedness shall be deemed for purposes of this Agreement a loan made by the Custodian to the Fund for the account of the Portfolio payable on demand. Such overdraft shall bear interest at the current rate charged by the Custodian for such loans unless the Fund on behalf of the Portfolio shall provide the Custodian with compensating balances. Each of the Funds agrees that the Custodian shall have a continuing lien and security interest to the extent of any overdraft or indebtedness in and to any property at any time held by the Custodian for the benefit of the applicable Portfolio or in which the applicable Portfolio has an interest and which is then in the Custodian’s possession or control (or in the possession or control of any third party acting on the Custodian’s behalf). Each of the Funds authorizes the Custodian, in the Custodian’s sole discretion, at any time to charge any overdraft or indebtedness, together with interest due thereon, against any balance of account standing to the credit of the applicable Portfolio on the Custodian’s books. In addition, the Custodian shall be entitled to utilize available cash and to dispose of such Portfolio’s Financial Assets and other assets to the extent necessary to obtain reimbursement; provided, however, the Custodian shall have provided the Fund three (3) days’ notice with respect thereto.

2.11. Disruption of Services; Contingency Facilities. In order to minimize the disruption of the services to be provided under this Agreement or any exhibit, schedule or annex hereto, the Custodian shall implement and maintain directly or through third parties contingency facilities and procedures reasonably designed to provide for periodic back-up of the computer files and data with respect to the Portfolios and emergency use of electronic data processing equipment to provide services under this Agreement or any exhibit, schedule or annex hereto. The Custodian shall, upon reasonable request, discuss with senior management of the Funds such disaster recovery plan and shall, upon reasonable request, provide a high-level presentation summarizing such plan. In the event of equipment failure, work stoppage, governmental action, communication disruption or other impossibility of performance beyond the Custodian’s control, the Custodian shall, at no additional expense to the Funds, take reasonable steps to minimize service interruptions.

 

3. CUSTODY WITH RESPECT TO DOMESTIC SECURITIES

3.1. Holding Domestic Securities. The Custodian shall hold and physically segregate for the account of each Portfolio all non-cash property, to be held by it in the United States, including all Domestic Securities owned by such Portfolio other than (i) securities which are maintained pursuant to Section 3.5 in a U.S. Clearing System and (ii) Underlying Fund Shares owned by each Fund which are maintained pursuant to Section 3.7 hereof in an account with the Underlying Transfer Agent.

 

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3.2. Delivery of Securities. The Custodian shall release and deliver Domestic Securities owned by a Portfolio held by the Custodian, in a U.S. Clearing System account of the Custodian or in an account at the Underlying Transfer Agent, only upon receipt of Proper Instructions on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:

(i) Upon sale of such securities for the account of the Portfolio and receipt of payment therefor;

(ii) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Portfolio;

(iii) In the case of a sale effected through a U.S. Clearing System, in accordance with the provisions of Section 3.5 hereof;

(iv) To the depository agent in connection with tender or other similar offers for securities of the Portfolio;

(v) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian;

(vi) To the issuer thereof, or its agent, for transfer into the name of the Portfolio or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent or any sub-custodian appointed pursuant to Section 2.6; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian;

(vii) Upon the sale of such securities for the account of the Portfolio, to the broker or its clearing agent, against a receipt, for examination in accordance with “street delivery” custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian’s own negligence or willful misconduct;

(viii) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;

(ix) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;

 

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(x) For delivery in connection with any loans of securities made by the Portfolio under a securities lending agreement (A) against receipt of collateral as agreed from time to time by the Fund on behalf of the Portfolio, except that in connection with any loans for which collateral is to be credited to the Custodian’s account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian, in its capacity as custodian hereunder, will not be held liable or responsible for the delivery of securities owned by the Portfolio prior to the receipt of such collateral or (B) to the lending agent, or the lending agent’s custodian, in accordance with Written Instructions (which may or may not provide for the receipt by the Custodian of collateral therefor);

(xi) For delivery as security in connection with any borrowing by a Fund on behalf of a Portfolio requiring a pledge of assets by the Fund on behalf of such Portfolio, but only against receipt of amounts borrowed;

(xii) For delivery in accordance with the provisions of any agreement among the Fund on behalf of a Portfolio, the Custodian and a broker-dealer registered under the 1934 Act and a member of FINRA, relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund on behalf of such Portfolio;

(xiii) For delivery in accordance with the provisions of any agreement among a Fund on behalf of a Portfolio, the Custodian, and a futures commission merchant registered under the CEA, relating to compliance with the rules of the CFTC and/or any contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund on behalf of such Portfolio;

(xiv) Upon the sale or other delivery of such investments (including, without limitation, to one or more sub-custodians authorized pursuant to Section 2.6(b)), as set forth in Written Instructions, provided that such Written Instructions shall set forth (x) the securities of the Portfolio to be delivered and (y) the person(s) to whom delivery of such securities shall be made;

(xv) Upon receipt of instructions from the Fund’s Transfer Agent for delivery to such Transfer Agent or to the holders of Shares in connection with distributions or redemptions in kind, as may be described from time to time in the currently effective prospectus and statement of additional information of the Fund related to a Portfolio, in satisfaction of requests by holders of Shares for repurchase or redemption;

(xvi) In the case of a sale processed through the Underlying Transfer Agent for Underlying Fund Shares, in accordance with Section 3.7 hereof; and

(xvii) For any other purpose, but only upon receipt of Special Instructions from the Fund on behalf of the applicable Portfolio specifying (A) the securities of the Portfolio to be delivered and (B) the person(s) to whom delivery of such securities shall be made.

 

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3.3. Registration of Securities. All securities accepted by the Custodian on behalf of the Portfolio under the terms of this Agreement shall be in “street name” or other good delivery form. Domestic Securities held by the Custodian (other than bearer securities) shall be registered in the name of the Portfolio or in the name of any nominee of a Fund on behalf of the Portfolio or of any nominee of the Custodian which nominee shall be assigned exclusively to the Portfolio, unless the Fund has authorized in writing the appointment of a nominee to be used in common with affiliated registered management investment companies, or in the name or nominee name of any agent or any sub-custodian appointed pursuant to Section 2.6. If, however, a Fund directs the Custodian to maintain securities in “street name”, the Custodian shall utilize its best efforts only to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers.

3.4. Collection of Income. Except with respect to Portfolio property released and delivered pursuant to Section 3.2(xiv) or purchased pursuant to Section 2.5(vii), and subject to the last sentence of Section 3.3, the Custodian shall collect on a timely basis all income and other payments with respect to registered Domestic Securities held hereunder to which each Portfolio shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer Domestic Securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to such Portfolio’s custodian account maintained hereunder. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due each Portfolio on securities loaned pursuant to the provisions of Section 3.2 (x) shall be the responsibility of the applicable Fund. The Custodian, in its capacity as custodian hereunder, will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Portfolio is properly entitled. The Custodian shall as soon as reasonably practicable notify the Fund in such manner as the Fund and the Custodian may agree in writing if any amount payable to the Fund or other asset of the Fund is not received by the Custodian when due.

3.5. Deposit of Fund Assets in U.S. Clearing Systems. The Custodian may deposit and/or maintain securities or other Financial Assets owned by a Portfolio in a U.S. Clearing System in compliance with the conditions of Rule 17f-4 under the 1940 Act, as amended from time to time.

3.6. Segregated Account. The Custodian shall upon receipt of Proper Instructions on behalf of each applicable Portfolio, which may be continuing instructions, establish and maintain a segregated account or accounts for and on behalf of each such Portfolio, into which account or

 

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accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 3.5 hereof, (i) in accordance with the provisions of any agreement among the Fund on behalf of the Portfolio, the Custodian and a broker-dealer registered under the Exchange Act and a member of FINRA (or any futures commission merchant registered under the CEA), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the CFTC or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Portfolio, (ii) for purposes of segregating cash or securities in connection with options purchased, sold or written by the Portfolio or commodity futures contracts or options thereon purchased or sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio with the procedures required by Investment Company Act Release No. 10666, or any subsequent release of the SEC, or interpretative opinion of the staff of the SEC, relating to the maintenance of segregated accounts by registered investment companies, and (iv) for any other purpose in accordance with Proper Instructions.

3.7. Deposit of Fund Assets with the Underlying Transfer Agent. Underlying Fund Shares shall be deposited and/or maintained in an account or accounts maintained with the Underlying Transfer Agent, provided that such securities are maintained in an account or accounts on the books and records of the Underlying Transfer Agent in the name of the Custodian as custodian for the Portfolio. The records of the Custodian with respect to Underlying Fund Shares which are maintained with the Underlying Transfer Agent shall identify by book-entry those Underlying Fund Shares belonging to each Portfolio.

3.8. Ownership Certificates for Tax Purposes. The Custodian shall execute as soon as reasonably practicable, and shall require any Domestic Sub-Custodian to execute as soon as reasonably practicable, ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to Domestic Securities of each Portfolio held by it and in connection with transfers of securities.

3.9. Voting Domestic Shares. The Custodian shall, with respect to the Domestic Securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Portfolio or a nominee of the Portfolio, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities.

3.10. Communications Relating to Portfolio Securities.

(a) The Custodian shall transmit promptly to the applicable Fund for each Portfolio all written information and notices received by the Custodian from issuers with regard to the securities being held for the Portfolio and/or any corporate action by such issuer affecting such securities (including without limitation stock splits, stock dividends, reorganizations, pendency of calls and maturities of Domestic Securities and expirations of rights in connection therewith, notices of exercise of call and put options written by the Fund on behalf of the Portfolio and the maturity of futures contracts purchased or sold by the Fund on behalf of the Portfolio).

 

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(b) With respect to tender or exchange offers, the Custodian shall transmit promptly to the applicable Fund all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or its agents) making the tender or exchange offer. If a Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian prior to the deadline established by the Custodian in its reasonable discretion as will give the Custodian (including any Foreign Sub-Custodian) sufficient time to take such action, which deadline shall in no event be longer than three (3) business days prior to the date on which the Custodian is to take such action. If the Fund provides the Custodian with such notification after such deadline, the Custodian shall use commercially reasonable efforts to take such action. The Custodian shall inform the Fund or its appointed investment adviser a reasonable time in advance, to the extent possible, of pertinent deadlines in each case.

 

4. CUSTODY WITH RESPECT TO FOREIGN SECURITIES

4.1. Foreign Custody Manager.

(a) Each Fund, by resolution adopted by its Board, hereby delegates to the Custodian, subject to Section (b) of Rule 17f-5 under the 1940 Act, the responsibilities set forth in Sections 4.1 through 4.4 with respect to Foreign Assets of the Portfolios held outside the United States, and the Custodian hereby accepts such delegation as Foreign Custody Manager with respect to the Portfolios.

(b) The Foreign Custody Manager shall be responsible for performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Schedule A to this Agreement, which list of countries may be amended from time to time by any Fund with the consent of the Foreign Custody Manager, which consent will not be unreasonably withheld. Schedule A further lists the Foreign Sub-Custodians selected by the Foreign Custody Manager to maintain the assets of the Portfolios.

(c) Upon the receipt by the Foreign Custody Manager of Proper Instructions to open an account or to place or maintain Foreign Assets in a country listed on Schedule A, and the fulfillment by each Fund, on behalf of the applicable Portfolio(s), of the applicable account opening requirements for such country, the Foreign Custody Manager shall be deemed to have been delegated by such Fund’s Board on behalf of such Portfolio(s) responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Execution of this Agreement by the Fund shall, to the extent any particular Fund has or will have Foreign Assets, be deemed to be a Proper Instruction to open an account or to place or maintain Foreign Assets in each country listed on Schedule A in which the Custodian has previously placed or currently maintains such Fund’s Foreign Assets pursuant to the terms of the Agreement. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the

 

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account of a Portfolio with the Foreign Sub-Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board on behalf of such Portfolio to the Custodian as Foreign Custody Manager for that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager with respect to such Portfolio with respect to that country and shall use commercially reasonable efforts to effect the closing of such account.

(d) The Foreign Custody Manager may withdraw its acceptance of delegated responsibilities with respect to a designated country upon at least 60 days (or such longer period which the parties may agree) prior written notice to the Fund.

4.2. Foreign Sub-Custodians.

(a) Subject to the provisions of this Section 4, the Foreign Custody Manager may place and maintain the Foreign Assets in the care of a Foreign Sub-Custodian in each country listed on Schedule A, as amended from time to time. In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with a Foreign Sub-Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Foreign Sub-Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1) under the 1940 Act.

(b) The Foreign Custody Manager shall determine that the contract governing the foreign custody arrangements with each Foreign Sub-Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).

(c) In each case in which the Foreign Custody Manager maintains Foreign Assets with a Foreign Sub-Custodian, the Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with such Foreign Sub-Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Foreign Sub-Custodian. In the event the Foreign Custody Manager determines that the custody arrangements with any Foreign Sub-Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall notify the Board in accordance with Section 4.3 hereunder.

(d) For purposes of this Section 4, the applicable Board shall be deemed to have considered and determined, or in the event such Board shall have delegated to the applicable Adviser such duty in accordance with Rule 17f-5, such Adviser shall be deemed to have considered and determined, to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country listed on Schedule A (for which the Custodian is serving as Foreign Custody Manager of the Portfolios). For these purposes, “Country Risk” means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country’s political environment, economic and

 

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financial infrastructure (including any Foreign Securities Depositories operating in that country), prevailing or developing custody and settlement practices, and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country; provided, however, that “Country Risk” shall not include the custody or settlement practices and procedures of an Eligible Fund Custodian selected by the Foreign Custody Manager that are not substantially consistent with prevailing practices in the country in which the Foreign Assets are held or to be held by such Eligible Fund Custodian.

(e) Upon reasonable request of a Fund, and subject to restrictions under applicable law, the Custodian will use reasonable efforts to arrange for the independent accountants of the Fund to be afforded reasonable access to the books and records of any foreign banking institution employed as a Foreign Sub-Custodian as may be required in connection with the examination of the Fund’s books and records.

4.3. Reporting Requirements. The Foreign Custody Manager shall report the withdrawal of the Foreign Assets from any Foreign Sub-Custodian and the placement of such Foreign Assets with another Foreign Sub-Custodian by providing the Board an amended Schedule A at the end of the calendar quarter in which an amendment to such schedule has occurred. The Foreign Custody Manager shall make reasonably prompt written reports to the Board of any other material change in the foreign custody arrangements of the Portfolios described in this Section 4 after the occurrence of the material change.

4.4. Representations with respect to Rule 17f-5. The Foreign Custody Manager represents to each Fund that it is a U.S. Bank as defined in Section (a)(7) of Rule 17f-5, Each Fund represents to the Custodian that its Board has determined that it is reasonable for such Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Portfolios.

4.5. Foreign Securities Depositories. The Custodian shall provide the Fund with an analysis of the custody risks associated with maintaining assets with the Foreign Securities Depositories set forth on Schedule B hereto, in accordance with Section (a)(1)(i)(A) of Rule 17f-7. The Custodian shall monitor such risks on a continuing basis, shall promptly notify the Fund of any material change in such risks, in accordance with Section (a)(1)(i)(B) of Rule 17f-7 and the Funds shall, as soon as reasonably practicable and via Proper Instructions to the Custodian, withdraw the Fund’s assets from a Foreign Securities Depository if the custody arrangements with such Foreign Securities Depository no longer meets the requirements of Rule 17f-7. Notwithstanding anything to the contrary in Section 8 of this Agreement, for the avoidance of doubt the Custodian shall have no obligation to withdraw assets from a Foreign Securities Depository other than upon receipt of such Proper Instructions from the Funds. Schedule B shall be updated from time to time by the Custodian’s provision to the Fund of an updated Schedule B at the end of the calendar quarter in which an amendment to such schedule has occurred.

 

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4.6. Holding Foreign Securities.

(a) The Custodian shall identify on its books as belonging to the Portfolios the Foreign Securities held by each Foreign Sub-Custodian or Foreign Securities Depository. The Custodian may hold Foreign Securities for all of its customers, including the Portfolios, with any Foreign Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to Foreign Securities of the Portfolios which are maintained in such account shall identify those securities as belonging to the Portfolios and (ii) to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities so held by the Foreign Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.

(b) Foreign securities shall be maintained in a Foreign Securities Depository in a designated country through arrangements implemented by the Custodian or a Foreign Sub-Custodian, as applicable, in such country.

4.7. Transactions in Foreign Custody Account.

(a) The Custodian or a Foreign Sub-Custodian shall release and deliver Foreign Securities of the Portfolios held by the Custodian or such Foreign Sub-Custodian, or in a Foreign Securities Depository account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:

(i) Upon the sale of such Foreign Securities for the Portfolio in accordance with market practice for institutional customers in the country where such Foreign Securities are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment, provided the Custodian has advised the Fund or its duly appointed investment adviser of such practice in accordance with Section 4.7A(b) below; or (B) in the case of a sale effected through a Foreign Securities Depository, in accordance with the rules governing the operation of the Foreign Securities Depository;

(ii) In connection with any repurchase agreement related to Foreign Securities;

(iii) To the depository agent in connection with tender or other similar offers for Foreign Securities of the Portfolios;

(iv) To the issuer thereof or its agent when such Foreign Securities are called, redeemed, retired or otherwise become payable;

(v) To the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub-Custodian or of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units;

 

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(vi) To brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom;

(vii) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement;

(viii) In the case of warrants, rights or similar Foreign Securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities;

(ix) For delivery as security in connection with any borrowing by a Fund on behalf of a Portfolio requiring a pledge of assets by the Fund on behalf of such Portfolio, but only against receipt of amounts borrowed;

(x) In connection with trading in options and futures contracts, including delivery as original margin and variation margin;

(xi) Subject to Section 4.7(a)(i) hereof, upon the sale or other delivery of such Foreign Securities (including, without limitation, to one or more Repo Custodians or other sub-custodians authorized pursuant to Section 2.6(b)) in advance of payment therefor, provided that applicable Proper Instructions shall set forth (A) the Foreign Securities to be delivered and (B) the person(s) to whom delivery shall be made;

(xii) In connection with the lending of Foreign Securities;

(xiii) Upon receipt of instructions from the Fund’s Transfer Agent for delivery to such Transfer Agent or to the holders of Shares in connection with distributions or redemptions in kind, as may be described from time to time in the currently effective prospectus and statement of additional information of the Fund related to a Portfolio (or, with respect to closed-end investment company, as may otherwise be described in writing by the applicable Fund), in satisfaction of requests by holders of Shares for repurchase or redemption; and

(xiv) For any other purpose, but only upon receipt of Special Instructions specifying (A) the Foreign Securities to be delivered and (B) the person(s) to whom delivery of such securities shall be made.

 

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(b) Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities Depository to pay out, monies of a Portfolio in the following cases only:

(i) Upon the purchase of Foreign Securities for the Portfolio in accordance with market practices for institutional customers in the country where such Foreign Securities are held or traded, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such Foreign Securities provided the Custodian has advised the Fund or its duly appointed investment adviser of such practice in accordance with Section 4.7A(b) below; or (B) in the case of a purchase effected through a Foreign Securities Depository, in accordance with the rules governing the operation of such Foreign Securities Depository;

(ii) In connection with the conversion, exchange or surrender of Foreign Securities of the Portfolio as set forth in Section 4.7(a)(vii) hereof;

(iii) For the payment of any expense or liability of the Portfolio, including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Agreement, legal fees, accounting fees, and other operating expenses;

(iv) For the purchase or sale of foreign exchange or foreign exchange contracts for the Portfolio, including transactions executed with or through the Custodian or its Foreign Sub-Custodians;

(v) In connection with trading in options and futures contracts, including delivery as original margin and variation margin;

(vi) Subject to Section 4.7(a)(i) hereof, upon the purchase of foreign investments including, without limitation, repurchase agreement transactions involving delivery of Portfolio monies to Repo Custodian(s), in advance of delivery of the purchased securities, provided that applicable Proper Instructions shall set forth (A) the amount of such payment and (B) the person(s) to whom payment shall be made;

(vii) For payment of part or all of the dividends received in respect of securities sold short;

(viii) In connection with the borrowing or lending of Foreign Securities; and

(ix) For any other purpose, but only upon receipt of Special Instructions specifying (A) the amount of such payment and (B) the person(s) to whom such payment is to be made.

4.7A. Market Conditions.

(a) Except as more particularly set forth in Sections 4.7(a)(i) and 4.7(b)(i), settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of

 

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Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs.

(b) The Custodian shall provide to each Board or its duly authorized designee the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian, including without limitation information relating to a Foreign Sub-Custodian, described on Schedule C hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule C from time to time, provided that no such revision shall result in a Board or its duly authorized designee being provided with substantively less information than had been previously provided hereunder.

4.8. Registration of Foreign Securities. The Foreign Securities maintained in the custody of a Foreign Sub-Custodian (other than bearer securities) shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing, and the applicable Fund on behalf of such Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of a Portfolio under the terms of this Agreement unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice.

4.9. Bank Accounts. With respect to transactions under this Section 4, the Custodian shall identify on its books as belonging to the applicable Fund cash (including cash denominated in foreign currencies) deposited with the Custodian. Where the Custodian is unable to maintain, or market practice does not facilitate the maintenance of, cash on the books of the Custodian, a bank account or bank accounts shall be opened and maintained outside the United States on behalf of a Portfolio with a Foreign Sub-Custodian in accordance with the provisions of this agreement and Rule 17f-5. The Custodian shall take reasonable steps to ensure that, to the extent reasonably possible, such funds are covered by any deposit insurance provided by the local government or other similar protections. All accounts referred to in this Section 4.9 shall be, subject only to draft or order by the Custodian (or, if applicable, such Foreign Sub-Custodian) acting pursuant to the terms of this Agreement to hold cash received by or from or for the account of the Portfolio. Cash maintained on the books of the Custodian (including its branches, subsidiaries and affiliates), regardless of currency denomination, is maintained in bank accounts established under, and subject to the laws of, the Commonwealth of Massachusetts.

4.10. Collection of income. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Portfolios shall be entitled and shall credit such income, as collected, to the applicable Portfolio. In the event that extraordinary measures are required to collect such income, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. The Custodian shall as soon as reasonably practicable notify the Fund in such manner as the Fund and the Custodian may agree in writing if any amount payable to the Fund or other asset of the Fund is not received by the Custodian when due.

 

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4.11. Shareholder Voting Rights. With respect to the Foreign Securities held pursuant to this Section 4, the Custodian shall use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. Each Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of such Fund to exercise shareholder rights.

4.12. Communications Relating to Foreign Securities. The Custodian shall transmit promptly to the applicable Fund written information with respect to materials received by the Custodian via the Foreign Sub-Custodians from issuers of the Foreign Securities being held for the account of the Portfolios (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith). With respect to tender or exchange offers, the Custodian shall transmit promptly to the applicable Fund written information so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer and shall promptly forward to the Foreign Sub-Custodian or the issuer, as applicable, any instructions, forms or other documents as the Custodian shall receive from the Fund in connection therewith. All primary written communications to the Funds with respect to Foreign Securities shall be in English. If a Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian prior to the deadline established by the Custodian in its reasonable discretion as will give the Custodian (including any Foreign Sub-Custodian) sufficient time to take such action. If the Fund provides the Custodian with such notification after such deadline, the Custodian shall use commercially reasonable efforts to take such action (or to cause the Foreign Sub-Custodian to take such action). The Custodian shall inform the Fund or its duly appointed investment adviser a reasonable time in advance, to the extent possible, of pertinent deadlines in each case.

4.13. Liability in Respect of Foreign Assets.

(a) Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian shall meet the requirements set forth in Rule 17f-5. If, at any time, a Portfolio suffers or incurs any loss, damage, cost, expense, liability or claim as a result of any action or omission on the part of a Foreign Sub-Custodian, then, to the extent that the Custodian has a claim in connection therewith against such Foreign Sub-Custodian under the Custodian’s agreement with the Foreign Sub-Custodian or under applicable law, the Custodian shall use commercially reasonable efforts to pursue such claim on behalf of the applicable Portfolio and shall promptly remit to the account of such Portfolio the amount of any recovery by the Custodian in connection therewith. Notwithstanding the immediately foregoing sentence, at a Fund’s election, the applicable Portfolios shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost,

 

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expense, liability or claim if and to the extent that the Portfolio has not been made whole for any such loss, damage, cost, expense, liability or claim. Such subrogation shall not relieve the Custodian to any extent from its liability or obligations to a Fund or Portfolio hereunder.

(b) Subject to Sections 8(a), 8(b) and 8(c) of this Agreement, the Custodian shall be responsible for the acts and omissions of any Foreign Sub-Custodian as if performed by the Custodian hereunder, taking into account established market practices and local laws prevailing in the jurisdiction in which the acts and omissions of the Foreign Sub-Custodian occur.

(c) Subject to and to the extent of receipt by the Custodian of relevant and necessary information with respect to the Funds and Portfolios that the Custodian has requested, the Custodian shall perform the following services: (i) file claims for exemptions, reductions in withholding taxes, or refunds of any tax with respect to withheld foreign (non-U.S.) taxes in instances in which such claims are appropriate; (ii) withhold appropriate amounts as required by U.S. tax laws with respect to amounts received on behalf of nonresident aliens; and (iii) provide to the Funds such information actually received by the Custodian that could, in the Custodian’s reasonable belief and sole discretion, assist any of the Funds in their submission of any reports or returns with respect to taxes, it being specifically understood and agreed that the Custodian shall not thereby or otherwise be considered any Fund’s tax advisor or tax counsel. Other than the servicing responsibilities identified herein, the Custodian shall have no responsibility or liability for any tax payment obligations now or hereafter imposed on any Fund, the Portfolios or the Custodian as custodian of the Portfolios by the tax law of the United States or of any state or political subdivision thereof. It shall be the responsibility of each Fund to notify, or cause to be notified, the Custodian of the obligations imposed by such countries other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibilities of the Custodian with regard to such tax law shall be to use reasonable efforts to effect the withholding of local taxes and related charges with regard to market entitlement/payment in accordance with local law and subject to local market practice or custom and to assist the Fund with respect to any claim for exemption or refund under the tax law of countries for which such Fund has provided such information. Except as specifically provided in this Agreement or otherwise agreed to in writing by the Custodian, the Custodian shall have no independent obligation to determine the tax obligations now or hereafter imposed on any of the Funds by any taxing authority or to obtain or provide information relating thereto, and shall have no obligation or liability with respect to such tax obligations. Each of the Funds agrees that the Custodian is authorized to deduct from any cash received or credited to the account of a Portfolio any taxes or levies required by any tax or other governmental authority having jurisdiction in respect of such Portfolio’s transactions, and that the Custodian is authorized to disclose any information required by any such tax or other governmental authority in relation to processing any claim for exemption from or reduction or refund of any taxes relating to Portfolio transactions and holdings.

 

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5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES.

(a) The Custodian shall receive from the distributor of the Shares or from the Transfer Agent and deposit into the account of the appropriate Portfolio such payments as are received for Shares thereof issued or sold from time to time by the applicable Fund. The Custodian will provide timely notification to such Fund on behalf of each such Portfolio and the Transfer Agent of any receipt by it of payments for Shares of such Portfolio.

(b) From such funds as may be available for the purpose, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholders. In connection with the redemption or repurchase of Shares, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by a Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between such Fund and the Custodian.

 

6. COMPENSATION OF CUSTODIAN. The Custodian shall be entitled to compensation for its services and expenses as may be agreed to from time to time in writing by the Funds and the Custodian.

 

7. ADDITIONAL SERVICES. The Funds engage the Custodian to provide, and the Custodian agrees to provide those additional services (if any) set forth in Exhibit C annexed hereto.

 

8. STANDARD OF CARE; LIMITATION OF LIABILITY; INDEMNIFICATION

(a) In performing its responsibilities under this Agreement (including without limitation in regard to its capacity as Foreign Custody Manager), the Custodian agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise and shall not be liable for any damages arising out of the Custodian’s performance of or failure to perform its duties under this Agreement except to the extent that such damages are reasonably foreseeable and arise directly out of the Custodian’s willful misfeasance, bad faith, negligence or otherwise from a breach of this Agreement.

(b) Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) the Custodian shall not be liable so long as and to the extent that it is in the exercise of reasonable care, for any defect in the title, validity or genuineness of any property or in the evidence of title thereto received by it or delivered by it pursuant to this Agreement, (ii) the Custodian shall not be liable for any losses suffered by any of the Funds due to items within

 

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Country Risk or factors beyond the Custodian’s reasonable control (including acts of civil or military authority, national emergencies, general work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riots, terrorism, nationalization or expropriation, currency restrictions, or failure of the mails, transportation, communication or power supply), provided that the Custodian has acted in accordance with the provisions of Section 2.11 above; and provided further that, for the avoidance of doubt, a Fund’s failure to perform its obligations under this Agreement shall be excused to the extent that such failure to perform is caused by or results from the Custodian’s aforementioned failure to perform. Further, the Custodian shall not be liable for the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction delivered in accordance with Section 2.3(b) hereof.

(c) The Custodian shall be without liability for any loss, damage or expense caused by or resulting from the insolvency of any Domestic Sub-Custodian or Foreign Sub-Custodian that is not a wholly-owned subsidiary of the Custodian; provided, however, that the foregoing exculpation of the Custodian with respect to the insolvency of a particular Foreign Sub-Custodian shall not be applicable if the Custodian fails to comply with its obligations under this Agreement or as a Foreign Custody Manager pursuant to Rule 17f-5 with respect to such Foreign Sub-Custodian. For the avoidance of doubt, if the Custodian has met its standard of care hereunder and has fulfilled its obligations as a Foreign Custody Manager pursuant to Rule 17f-5 with respect to a Foreign Sub-Custodian, then the Custodian shall be without liability for any loss, damage or expense caused by or resulting from the insolvency of such Foreign Sub-Custodian.

(d) The Custodian shall be without liability for any loss, damage or expense caused by or resulting from the insolvency of any U.S. Clearing System or Foreign Securities Depository; provided, however, that the foregoing exculpation of the Custodian with respect to the insolvency of any Foreign Securities Depository shall not be applicable if the Custodian fails to comply with its obligations under this Agreement or under Rule 17f-7 with respect to such Foreign Securities Depository. For the avoidance of doubt, if the Custodian has met its standard of care hereunder and has fulfilled its obligations under Rule 17f-7 with respect to a Foreign Securities Depository, then the Custodian shall be without liability for any loss, damage or expense caused by or resulting from the insolvency of such Foreign Securities Depository.

(e) The Custodian shall be entitled to receive at its own expense and act upon advice of counsel on all matters, and shall not be liable for any action reasonably taken or omitted in good faith and without negligence pursuant to the advice of counsel for the applicable Fund or (at the expense of the Custodian) such other counsel.

(f) The applicable Fund shall indemnify and hold harmless the Custodian and its affiliates from all taxes, charges, assessments, claims and liabilities (including, without limitation, liabilities arising under the Federal Securities Laws and any state or foreign securities and blue sky laws, and amendments thereto), and expenses, including without limitation reasonable attorneys’ fees and reasonable disbursements (including, without limitation, those incurred in asserting any claim by the Custodian against the Fund arising from the obligations of

 

25


the Fund hereunder), arising from any action or omission to act which the Custodian or its affiliate takes in accordance with the terms of this Agreement; provided that the Custodian and its affiliates shall not be indemnified against any liability (or any expenses incident to such liability) to the extent arising out of the Custodian’s or any of its affiliates’ own willful misfeasance, bad faith, negligence or breach of this Agreement. Notwithstanding the foregoing, in no event shall a Fund incur liability to the Custodian or its affiliates if the Fund is prevented, forbidden or delayed from performing, or omits to perform, any act or thing which this Agreement provides shall be performed or omitted to be performed, by reason of factors beyond the Fund’s reasonable control (including acts of civil or military authority, national emergencies, general work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riots, terrorism, nationalization or expropriation, currency restrictions, or failure of the mails, transportation, communication or power supply); provided, however, that for the avoidance of doubt, the Custodian’s failure to perform its obligations under this Agreement shall be excused to the extent that such failure to perform is caused by or results from the Fund’s aforementioned failure to perform.

(g) The Custodian shall indemnify and hold harmless the Funds from all taxes, charges, assessments, claims and liabilities arising directly from the Custodian’s failure to meet its obligations pursuant to this Agreement (including, without limitation, liabilities arising under the Federal Securities Laws, and any state and foreign securities and blue sky laws, and amendments thereto) and expenses, including without limitation reasonable attorneys’ fees and reasonable disbursements (including, without limitation, those incurred in asserting any claim by any Fund against the Custodian arising from the obligations of the Custodian hereunder), to the extent that such damages are reasonably foreseeable and arise directly out of the Custodian’s or any of its affiliates’ own willful misfeasance, bad faith, negligence or breach of this Agreement, provided that the Funds shall not be indemnified against any liability (or any expenses incident to such liability) to the extent arising out of any Fund’s own willful misfeasance, bad faith, negligence or breach of this Agreement.

(h) Upon the occurrence of any event relating to the services provided under this Agreement that causes or may cause any loss, damage or expense to one or more Funds or Portfolios, the Custodian (i) shall reasonably promptly notify each such Fund or Portfolio of the occurrence of such event and (ii) shall use (and shall use its reasonable best efforts to cause any applicable agent or domestic or foreign sub-custodian to use) commercially reasonable efforts and take reasonable steps under the circumstances to mitigate the effects of such event and to avoid continuing harm to each such Fund or Portfolio.

(i) The Custodian will maintain, at all times during the term of this Agreement, errors and omissions insurance, fidelity bonds and such other insurance as may be appropriate, in each case in a commercially reasonable amount sufficient to cover its potential liabilities under this Agreement. The Custodian agrees to provide the Funds with summaries of its applicable insurance coverage, and agrees to provide updated summaries monthly or as requested by the Funds.

 

26


(j) In order that the indemnification provisions contained in this Section 5 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party’s prior written consent.

 

9. DURATION AND TERMINATION.

(a) Term. This Agreement shall be effective on the date first written above and shall continue in full force and effect through and including December 31, 2016 (the “Term”).

(b) Termination for Cause. Notwithstanding the preceding clause (a) of this Section 9, the Funds may terminate the services of the Custodian under this Agreement (A) by providing thirty (30) days written notice in the event that the Custodian (i) shall fail in any material respect to perform its duties and obligations hereunder pursuant to the applicable standard of care set forth herein, the Funds shall have given written notice thereof, and such material failure shall not have been remedied to the reasonable satisfaction of the Funds within thirty (30) days after such written notice is received, or (ii) shall have ceased to be qualified as a custodian under the 1940 Act, shall be indicted for a crime, shall commence any bankruptcy or insolvency proceeding or have such a proceeding initiated against it which shall not be dismissed within 60 days, or shall suffer any other material adverse change in its condition, operations or professional reputation that is determined by the Funds in their reasonable discretion to threaten the continuing performance of services hereunder or the reputation of the Funds, or (B) immediately in the event of an appointment of a conservator or receiver for the Custodian or any parent of the Custodian by a regulatory agency or court of competent jurisdiction. Upon termination of this Agreement pursuant to this clause (b) with respect to any Fund or Portfolio, the applicable Fund shall pay Custodian its compensation due through the effective date of such termination (the “Termination Date”) and shall reimburse Custodian for its reasonable costs, expenses and disbursements incurred through the Termination Date.

(c) Cross-Termination for Cause. In addition, notwithstanding the preceding clause (a) of this Section 9, this Agreement may be terminated by the Custodian or by one or more Funds (with respect to the affected Funds or Portfolios) with no less than one hundred twenty (120) days’ notice in the case of termination of this Agreement by the Custodian, or thirty (30) days’ notice in the case of termination of this Agreement by a Fund, to the affected Funds or Custodian, as applicable, in the event of the termination by one of more of the Funds (as applicable) or State Street Bank and Trust Company of the fund accounting services agreement dated of even date herewith by and between the Fund(s) and State Street Bank and Trust Company, as fund accounting agent (the “Fund Accounting Services Agreement”), for cause pursuant to Section 8(b) thereof with respect to such Funds or Portfolios. Such termination notice must be provided by the terminating party no later than ninety (90) days after termination

 

27


the relevant portion of the Fund Accounting Services Agreement in order to be effective under this clause (c). Upon termination of this Agreement pursuant to this clause (c) with respect to any Fund or Portfolio, the applicable Fund shall pay Custodian its compensation due through the Termination Date and shall reimburse Custodian for its reasonable costs, expenses and disbursements incurred through the Termination Date.

(d) Deemed Cross-Termination for other than Cause. In addition, notwithstanding the preceding clause (a) of this Section 9, this Agreement may be terminated by the Custodian or by one or more Funds (with respect to the affected Funds or Portfolios) with no less than one hundred twenty (120) days’ notice in the case of termination of this Agreement by the Custodian, or thirty (30) days’ notice in the case of termination of this Agreement by a Fund, to the affected Funds or Custodian, as applicable, in the event of the termination by other party or parties of the Fund Accounting Services Agreement with respect to such party or parties other than for cause pursuant to Section 8(b) of such Fund Accounting Services Agreement. Such termination notice must be provided by each terminating party no later than ninety (90) days after termination the relevant portion of the Fund Accounting Services Agreement in order to be effective under this clause (d). Upon termination of this Agreement pursuant to this clause (d) by any Fund or Portfolio as a result of State Street Bank and Trust Company’s termination of the Fund Accounting Services Agreement other than for cause, the applicable Fund shall pay the Custodian its compensation due through the Termination Date and shall reimburse Custodian for its reasonable costs, expenses and disbursements incurred through the Termination Date.

(e) Change of Control of Custodian. The Custodian shall notify the Funds promptly following the execution of any agreement that would result in, or would be expected to result in, a change of control of the Custodian or any parent of the Custodian. Notwithstanding clause (a) of this Section 9, this Agreement may be terminated by one or more Funds upon at least sixty (60) days written notice following notice of execution of any such agreement.

(f) Termination for Non-Ordinary Course Transaction. Notwithstanding the preceding clause (a) of this Section 9, this Agreement may be terminated by a Fund, with respect to any Fund or Portfolio, upon written notice to the Custodian, in the event that the applicable Board approves (i) the liquidation or dissolution of the Fund or Portfolio, (ii) the merger of the Fund or Portfolio into, or the consolidation of the Fund or Portfolio with, another entity, or (iii) the sale by the Fund or Portfolio of all, or substantially all, of its assets to another entity. Upon termination of this Agreement pursuant to this clause (f), the applicable Fund shall pay the Custodian its compensation due through the Termination Date and shall reimburse Custodian for its reasonable costs, expenses and disbursements incurred through the Termination Date.

(g) Any Fund may terminate this Agreement with respect to such Fund or its Portfolio(s) for any reason other than as set forth in clauses (b), (c) (d), (e) or (f) of this Section 9 provided that (i) the applicable Fund shall be required to provide the Custodian at least six (6) months’ notice of the Termination Date; (ii) on the Termination Date, the applicable Fund shall pay the Custodian its compensation due through the Termination Date and shall reimburse Custodian for its reasonable costs, expenses and disbursements incurred through the Termination

 

28


Date; provided, however, that if the applicable Fund provides less than six (6) months’ notice of the Termination Date, then on the Termination Date the Fund shall pay the Custodian its compensation due through the date occurring six (6) months after the date of delivery of such lesser notice (based upon the average compensation previously earned by Custodian with respect to such Fund or Portfolio for the three (3) calendar months most recently preceding the delivery date of such notice) and shall reimburse the Custodian for its reasonable costs, expenses and disbursements incurred through the Termination Date; and (iii) notwithstanding the foregoing, if the end of the Term (as defined in clause (a) of this Section 9) is to occur less than six (6) months from the date of notice of termination, the applicable Fund shall provide such lesser notice as may be reasonably practicable, and on the Termination Date the applicable Fund shall pay the Custodian its compensation due through the Termination Date and shall reimburse Custodian for its reasonable costs, expenses and disbursements incurred through the Termination Date. Upon receipt of such payment and reimbursement as is due to the Custodian pursuant to this Section 9(g), the Custodian will deliver such Fund’s or Portfolio’s securities and cash as set forth hereinbelow.

(h) Termination of this Agreement with respect to the coverage of any one particular Fund or Portfolio shall in no way affect the rights and duties under this Agreement with respect to any other Fund or Portfolio.

(i) If a successor custodian for one or more Portfolios shall be appointed by the applicable Board, the Custodian shall, upon termination and receipt of Proper Instructions, deliver to such successor custodian, duly endorsed and in the form for transfer, all securities of each applicable Portfolio then held by it hereunder and shall transfer to an account of the successor custodian all of the securities of each such Portfolio held in a Securities System or at the Underlying Transfer Agent. The Custodian shall also provide to the successor custodian a Fund’s records (as described in Section 2.8 of this Agreement) as reasonably requested by the Fund. The Custodian also agrees to reasonably cooperate with the successor custodian and the Fund in the execution of such documents and the performance of such other necessary actions as may reasonably be requested by the successor custodian or the Fund in order to substitute the successor custodian for the Custodian, provided, however, that any special or unduly burdensome arrangements, and any expenses associated therewith, shall be subject to discussion by the parties. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of Proper Instructions, transfer such securities, funds and other properties in accordance with such instructions. In the event that no Proper Instructions designating a successor custodian or alternative arrangements shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a “bank” as defined in the 1940 Act, doing business in Boston, Massachusetts or New York, New York, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $250,000,000 and which satisfies any other then applicable criteria for service as a custodian for registered management companies under the 1940 Act, all securities, funds and other properties held by the Custodian on behalf of each applicable Portfolio and all instruments

 

29


held by the Custodian relative thereto and all other property held by it under this Agreement on behalf of each applicable Portfolio, and to transfer to an account of such successor custodian all of the securities of each such Portfolio held in any Securities System or at the Underlying Transfer Agent. Thereafter, such bank or trust company shall be the successor of the Custodian under this Agreement. All reasonable out-of-pocket expenses associated with the transfer of custody hereunder upon termination hereof shall be borne by the respective Funds (except as may be specifically agreed in writing by the parties in relation to special arrangements.

(j) In the event that securities, funds and other properties remain in the possession of the Custodian after the Termination Date hereof owing to failure of any Fund to provide Proper Instructions as aforesaid, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Agreement relating to the duties and obligations of the Custodian shall remain in full force and effect.

(k) Notwithstanding any provision of this Section 9 to the contrary, in the event that this Agreement is terminated in its entirety, the parties agree to continue operating under the terms of this Agreement as if this Agreement remained in full force and effect for one year or for such shorter period of time as the parties mutually agree is necessary for the Custodian to deliver the books and records and any other properties of the Funds held hereunder by the Custodian to a successor custodian in an orderly manner.

(l) Any termination of services under this Agreement shall not affect the rights and obligations of the parties under Sections 4.13(c), 8 and 10 hereof.

 

10. CONFIDENTIALITY.

(a) The Custodian agrees to keep confidential, and to cause its employees and agents to keep confidential, all records of the Funds and information relating to the Funds, including without limitation information as to their respective shareholders and their respective portfolio holdings, unless the release of such records or information is made in connection with the services provided under this Agreement, at the written direction of the applicable Fund or otherwise consented to, in writing, by the respective Funds. The Fund agrees that such consent shall not be unreasonably withheld where the Custodian may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, or that is independently derived by any party hereto without the use of any information derived in connection with the services provided under this Agreement. Notwithstanding the foregoing, the Custodian may aggregate Fund or Portfolio data with similar data of other customers of the Custodian (“Aggregated Data”) and may use Aggregated Data for purposes of constructing statistical models so long as such Aggregated Data represents such a sufficiently large sample that no Fund or Portfolio data can be identified either directly or by inference or implication.

 

30


(b) Notwithstanding any provision herein to the contrary, each party hereto agrees that any Nonpublic Personal Information, as defined under Section 248.3(t) of Regulation S-P (“Regulation S-P”), promulgated under the Gramm-Leach-Bliley Act (the “GLB Act”), disclosed or otherwise made accessible by a party hereunder is for the specific purpose of permitting the other party to perform its duties as set forth in this Agreement. Each party agrees that, with respect to such information, it will comply with Regulation S-P and the GLB Act and that it will not disclose any Nonpublic Personal Information received in connection with this Agreement to any other party, except to the extent necessary to carry out the services set forth in this Agreement or as otherwise permitted by Regulation S-P or the GLB Act.

(c) Without limiting the generality of the preceding clause (a), the Custodian acknowledges and agrees that the Funds are prohibited by law from making selective public disclosure of information regarding portfolio holdings, that disclosure of any and all such information to the Custodian hereunder is made strictly under the conditions of confidentiality set forth in this Section 10 and solely for the purposes of the performance of custodial services hereunder, that any misuse of such information (including without limitation any disclosure to others by the Custodian or any of its employees or agents, or any trading on the basis of such information by anyone in receipt of such information) may constitute a criminal offense of trading on or tipping of material inside information regarding publicly traded securities, that access to any and all such information regarding portfolio holdings of the Funds shall be restricted to those persons needing such information in the course of the performance of duties hereunder, and that the Custodian shall apprise all such persons having access of the obligation hereunder and under applicable law to prevent unauthorized disclosure of such confidential information.

(d) The Custodian acknowledges and agrees that any breach or threatened breach of this Section 10 would cause not only financial damage, but irreparable harm to the Funds; for which money damages will not provide an adequate remedy. Accordingly, in the event of a breach or threatened breach of this Section 10, the Funds shall (in addition to all other rights and remedies they may have pursuant to this Agreement, including without limitation Section 8(g), and at law and in equity) be entitled to an injunction, without the necessity of posting any bond or surety, to restrain disclosure or misuse, in whole or in part, of any confidential information.

(e) The Custodian will implement and maintain a written information security program that contains appropriate security measures to safeguard confidential records and information of the Funds, including the personal information of the Funds’ shareholders, employees, directors and/or officers that the Custodian receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. For these purposes, “personal information” shall mean (i) an individual’s name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) drivers license number, (c) state identification card number, (d) debit or credit card number, (e) financial account number or (f) personal identification number or password that would permit access to a person’s account or (ii) any combination of the foregoing that would allow a person to log onto or access an individual’s

 

31


account. Notwithstanding the foregoing “personal information” shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.

 

11. NOTICES.

All notices and other communications, excluding Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. Notices shall be addressed,

if to the Custodian, to:

Neal J. Chansky, Senior Vice President

State Street Bank and Trust Company

U.S. Investor Services Division, LCC/2S

Lafayette Corporate Center

2 Avenue de Lafayette

Boston, Massachusetts 02111-1724

Tel: (617) 662-1376

Fax: (617) 662-2204

with a copy to:

Mary Moran Zeven, Senior Vice President and Senior Managing Counsel

State Street Bank and Trust Company

Legal Division, LCC/2S

Lafayette Corporate Center

2 Avenue de Lafayette

Boston, Massachusetts 02111-1724

Tel: (617) 662-1783

Fax: (617) 662-2702

if to any of the Funds, to:

Legg Mason & Co., LLC

Attn: General Counsel

100 First Stamford Pl., 6th FL

Stamford, CT 06902

 

32


or at such other address as shall have been provided by like notice to the sender of any such notice or other communication by the other party.

 

12. FUNDS AS PARTIES; LIMITATION ON FUND LIABILITIES.

(a) The Custodian acknowledges and agrees that the obligations assumed by each of the Funds hereunder shall be limited in all cases to the assets of the Fund and that the Custodian may not seek satisfaction of any such obligation from the officers, agents, employees, trustees, directors or shareholders of the Fund or of any Portfolio of the Fund, and to the extent such trustees or officers are regarded as entering into this Agreement, they do so only as trustees or officers and not individually and that the obligations of this Agreement are not binding upon any such trustee, officer, employee or shareholder individually, but are binding only upon the assets and property of said Fund (or Portfolio thereof). The Custodian hereby agrees that such trustees, officers, employees or shareholders shall not be personally liable under this Agreement and that the Custodian shall look solely to the property of the Fund (or Portfolio thereof) for the performance of the Agreement or payment of any claim under the Agreement.

(b) This Agreement is an agreement entered into between the Custodian and each of the Funds with respect to each Portfolio. With respect to any obligation of the Fund on behalf of any Portfolio arising out of this Agreement, the Custodian shall look for payment or satisfaction of such obligation solely to the assets of the Portfolio to which such obligation relates with the same effect as if the Custodian had separately contracted with the Fund by separate written instrument with respect to each Portfolio.

(c) Additional management investment companies (each a “New Fund”) may from time to time become parties as Funds to this Agreement by (A) delivery to the Custodian of (i) an instrument of adherence agreeing to become bound by and party to this Agreement executed by any such New Fund on behalf of each of its series or portfolios, (ii) an amendment and restatement of Exhibit A setting forth the appropriate information as to such New Fund and its series or portfolios, and (iii) copies of the New Fund’s Governing Documents and (B) the Custodian’s receipt of the foregoing documents, whereupon the Custodian, subject to satisfactory completion of its customary due diligence, may agree in writing to the addition of such New Fund and its series or portfolios, which agreement shall not be unreasonably withheld, it being understood that the Custodian shall not be deemed to be unreasonable in the event that (i) the Custodian’s ability to provide services hereunder to the New Fund is otherwise restricted by regulatory requirements or its internal risk profiles or policies, which may include consideration of material changes to the risks contemplated by the provision of the services under this Agreement to a New Fund or (ii) the Custodian does not generally offer custodial services to institutional clients regarding the particular type of fund or assets.

(d) Additional portfolios or series of existing management investment companies that are already party to this Agreement (each a “New Portfolio”) may from time to time be added to this list of series or portfolios serviced under this Agreement by (A) delivery to the Custodian of (i) an instrument of adherence agreeing to become bound by and party to this Agreement

 

33


executed by the existing party Fund on behalf its New Portfolio, (ii) an amendment and restatement of Exhibit A setting forth the appropriate information as to such New Portfolio, and (iii) copies of the New Portfolio’s Governing Documents, if applicable, and (B) the Custodian’s receipt of the foregoing documents, whereupon the Custodian, subject to satisfactory completion of its customary due diligence, may agree in writing to the addition of such New Portfolio, which agreement shall not be unreasonably withheld, it being understood that the Custodian shall not be deemed to be unreasonable in the event that (i) the Custodian’s ability to provide services hereunder to the New Portfolio is otherwise restricted by regulatory requirements or its internal risk profiles or policies, which may include consideration of material changes to the risks contemplated by the provision of services under this Agreement to a New Portfolio or (ii) the Custodian does not generally offer custodial services to institutional clients regarding the particular type of fund or assets.

 

13. MISCELLANEOUS.

(a) This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought.

(b) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement may not be assigned by either party, nor may the duties of either party be delegated, without the prior written consent of the other party, except that the Custodian may assign or delegate certain of its non-custodial obligations hereunder to an affiliate or subsidiary of the Custodian without the Funds’ prior written consent, provided that the Custodian shall remain responsible for the actions and omissions of such affiliate or subsidiary as if such actions or omissions were taken by the Custodian.

(c) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and all schedules, exhibits, appendices, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

(d) Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

(e) This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof.

 

34


(f) The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

(g) This Agreement shall be deemed to be a contract made in the Commonwealth of Massachusetts and governed by the laws of the Commonwealth of Massachusetts, without regard to principles of conflicts of law.

(h) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

(i) Regulation GG. Each Fund hereby represents and warrants that it does not engage in an “Internet gambling business,” as such term is defined in Section 233.2(r) of Federal Reserve Regulation GG (12 CFR 233) (“Regulation GG”). For the avoidance of doubt, the term “engage” shall not be deemed to include a passive investment made in the ordinary course of business. Each Fund hereby covenants and agrees that it shall not engage in an Internet gambling business. In accordance with Regulation GG, each Fund is hereby notified that “restricted transactions,” as such term is defined in Section 233.2(y) of Regulation GG, are prohibited in any dealings with the Custodian pursuant to this Agreement or otherwise between or among any party hereto.

(j) Shareholder Communications Election. Rule 14b-2 under the 1934 Act requires banks which hold securities for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, the Custodian needs each Fund to indicate whether it authorizes the Custodian to provide such Fund’s name, address, and share position to requesting companies whose securities the Fund owns. If a Fund tells the Custodian “no,” the Custodian will not provide this information to requesting companies. If a Fund tells the Custodian “yes” or does not check either “yes” or “no” below, the Custodian is required by the rule to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For a Fund’s protection, the Rule prohibits the requesting company from using the Fund’s name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below.

 

YES ¨    The Custodian is authorized to release the Fund’s name, address, and share positions.
NO x    The Custodian is not authorized to release the Fund’s name, address, and share positions.

 

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IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the date first above-written.

 

EACH MANAGEMENT INVESTMENT COMPANY IDENTIFIED ON EXHIBIT A HERETO
By:  

LOGO

 

 

  Name:
  Title:
STATE STREET BANK AND TRUST COMPANY
By:  

 

  Name: Michael F. Rogers
  Title: Executive Vice President

 


IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the date first above-written.

 

EACH MANAGEMENT INVESTMENT COMPANY IDENTIFIED ON EXHIBIT A HERETO
By:  

 

 

  Name:
  Title:
STATE STREET BANK AND TRUST COMPANY
By:  

LOGO

 

  Name: Michael F. Rogers
  Title: Executive Vice President

 


List of Exhibits/Schedules

 

Exhibit A:    List of Funds and Portfolios
Exhibit B:    Reserved
Exhibit C:    Additional Services
Schedule A:    Foreign Sub-Custodians
Schedule B:    Foreign Securities Depositories
Schedule C:    Information Provided regarding Foreign Custody and Settlement Practices

 


Exhibit A

Legg Mason Partners Equity Trust

Legg Mason Batterymarch Global Equity Fund

Legg Mason Batterymarch S&P 500 Index Fund

Legg Mason Batterymarch U.S. Large Cap Equity Fund

Legg Mason Capital Management All Cap Fund

Legg Mason ClearBridge Aggressive Growth Fund

Legg Mason ClearBridge Appreciation Fund

Legg Mason ClearBridge Equity Fund

Legg Mason ClearBridge Equity Income Builder Fund

Legg Mason ClearBridge Fundamental All Cap Value Fund

Legg Mason ClearBridge Large Cap Growth Fund

Legg Mason ClearBridge Large Cap Value Fund

Legg Mason ClearBridge Mid Cap Core Fund

Legg Mason ClearBridge Mid Cap Growth Fund

Legg Mason ClearBridge Small Cap Growth Fund

Legg Mason ClearBridge Small Cap Value Fund

Legg Mason ClearBridge Tactical Diversified Income Fund (fka Legg Mason ClearBridge Diversified Large Cap Growth Fund)

Legg Mason Dynamic Multi-Strategy Fund

Legg Mason Esemplia Emerging Markets Long-Short Fund

Legg Mason Global Currents International All Cap Opportunity Fund

Legg Mason Global Currents International Small Cap Opportunity Fund

Legg Mason Investment Counsel Financial Services Fund

Legg Mason Investment Counsel Social Awareness Fund

Legg Mason Lifestyle Allocation 85%

Legg Mason Lifestyle Allocation 70%

Legg Mason Lifestyle Allocation 50%

Legg Mason Lifestyle Allocation 30%

Legg Mason Permal Tactical Allocation Fund

Legg Mason Target Retirement 2015

Legg Mason Target Retirement 2020

Legg Mason Target Retirement 2025

Legg Mason Target Retirement 2030

Legg Mason Target Retirement 2035

Legg Mason Target Retirement 2040

Legg Mason Target Retirement 2045

Legg Mason Target Retirement 2050

Legg Mason Target Retirement Fund

Legg Mason Partners Income Trust

Western Asset Adjustable Rate Income Fund

Western Asset California Municipals Fund

Western Asset Corporate Bond Fund

Western Asset Global High Yield Bond Fund

Western Asset Global Strategic Income Fund

Western Asset High Income Fund

Western Asset Intermediate Maturity California Municipals Fund

Western Asset Intermediate Maturity New York Municipals Fund

Western Asset Intermediate-Term Municipals Fund

 

A-1


Western Asset Managed Municipals Fund

Western Asset Massachusetts Municipals Fund

Western Asset Mortgage Backed Securities Fund

Western Asset Municipal High Income Fund

Western Asset New Jersey Municipals Fund

Western Asset New York Municipals Fund

Western Asset Oregon Municipals Fund

Western Asset Pennsylvania Municipals Fund

Western Asset Short Duration Municipal Income Fund

Western Asset Short-Term Bond Fund

Western Asset Emerging Markets Debt Fund

Legg Mason Partners Variable Equity Trust

Legg Mason ClearBridge Variable Aggressive Growth Portfolio

Legg Mason ClearBridge Variable Appreciation Portfolio

Legg Mason ClearBridge Variable Equity Income Builder Portfolio

Legg Mason ClearBridge Variable Fundamental All Cap Value Portfolio

Legg Mason ClearBridge Variable Large Cap Growth Portfolio

Legg Mason ClearBridge Variable Large Cap Value Portfolio

Legg Mason ClearBridge Variable Mid Cap Core Portfolio

Legg Mason ClearBridge Variable Small Cap Growth Portfolio

Legg Mason Dynamic Multi-Strategy VIT Portfolio

Legg Mason Investment Counsel Variable Social Awareness Portfolio

Legg Mason Variable Lifestyle Allocation 50%

Legg Mason Variable Lifestyle Allocation 70%

Legg Mason Variable Lifestyle Allocation 85%

Legg Mason Partners Variable Income Trust

Legg Mason Western Asset Variable Global High Yield Bond Portfolio

Legg Mason Western Asset Variable High Income Portfolio

Legg Mason Western Asset Variable Strategic Bond Portfolio

Legg Mason Partners Money Market Trust

Western Asset California Tax Free Money Market Fund (f/k/a Western Asset California Tax Free Reserves)

Western Asset Connecticut Municipal Money Market Fund (f/k/a Western Asset Connecticut Tax Free Reserves)

Western Asset Government Reserves

Western Asset Liquid Reserves

Western Asset New York Tax Free Money Market Fund

Western Asset Tax Free Reserves

Western Asset U.S. Treasury Reserves

Legg Mason Partners Institutional Trust

Western Asset Institutional AMT Free Municipal Money Market Fund

Western Asset Institutional Cash Reserves

Western Asset Institutional Government Reserves

Western Asset Institutional Liquid Reserves

Western Asset Institutional Tax Free Reserves

Western Asset Institutional U.S. Treasury Reserves

 

A-2


Western Asset SMASh Series C Fund

Western Asset SMASh Series EC Fund

Western Asset SMASh Series M Fund

Legg Mason Partners Premium Money Market Trust

Western Asset Premium Liquid Reserves

Western Asset Premium U.S. Treasury Reserves

Western Asset Premium Tax Free Reserves

Master Portfolio Trust

Government Portfolio

Liquid Reserves Portfolio

Prime Cash Reserves Portfolio

Tax Free Reserves Portfolio

U.S. Treasury Reserves Portfolio

ClearBridge Energy MLP Fund Inc.

ClearBridge Energy MLP Opportunity Fund Inc.

ClearBridge Energy MLP Total Return Fund Inc.

Legg Mason BW Global Income Opportunities Fund Inc.

LMP Capital & Income Fund Inc.

LMP Corporate Loan Fund Inc.

LMP Real Estate Income Fund Inc.

Western Asset Emerging Markets Debt Fund Inc.

Western Asset Emerging Markets Income Fund Inc.

Western Asset Global Corporate Defined Opportunity Fund Inc.

Western Asset Global High Income Fund Inc.

Western Asset Global Partners Income Fund Inc.

Western Asset High Income Fund Inc.

Western Asset High Income Fund II Inc.

Western Asset High Income Opportunity Fund Inc.

Western Asset High Yield Defined Opportunity Fund Inc.

Western Asset Inflation Management Fund Inc.

Western Asset Intermediate Muni Fund Inc.

Western Asset Investment Grade Defined Opportunity Trust Inc.

Western Asset Managed High Income Fund Inc.

Western Asset Managed Municipals Fund Inc.

Western Asset Mortgage Defined Opportunity Fund Inc.

Western Asset Municipal Defined Opportunity Trust Inc.

Western Asset Municipal High Income Fund Inc.

Western Asset Municipal Partners Fund Inc.

Western Asset Variable Rate Strategic Fund Inc.

Western Asset Worldwide Income Fund Inc.

Legg Mason Global Asset Management Trust

Legg Mason Batterymarch Emerging Markets Trust

Legg Mason Batterymarch International Equity Trust

Legg Mason Batterymarch U.S. Small Capitalization Equity Portfolio

 

A-3


Legg Mason BW Absolute Return Opportunities Fund

Legg Mason BW Diversified Large Cap Value Fund

Legg Mason BW Global Opportunities Bond Fund

Legg Mason BW International Opportunities Bond Fund

Legg Mason Capital Management Disciplined Equity Research Fund

Legg Mason Capital Management Growth Trust

Legg Mason Capital Management Special Investment Trust

Legg Mason Capital Management Value Trust

Legg Mason Strategic Real Return Fund

Legg Mason Investment Trust

Legg Mason Capital Management Opportunity Trust

•Legg Mason Tax-Free Income Fund

Legg Mason Investment Counsel Maryland Tax-Free Income Trust

Western Asset Funds, Inc.

Western Asset Core Bond Fund

Western Asset Core Plus Bond Fund

Western Asset Global Government Bond Fund

Western Asset Global Multi-Sector Fund

Western Asset High Yield Fund

Western Asset Inflation Indexed Plus Bond Fund

Western Asset Intermediate Bond Fund

Western Asset Global Government Bond Fund

Western Asset Total Return Unconstrained Fund

Western Asset Income Fund

Western Asset/Claymore U.S. Inflation Protected Securities Fund

Western Asset/Claymore U.S. Inflation Protected Securities Fund 2

Western Asset Premier Bond Fund

Real Return Fund, Ltd.

Tactical Allocation Fund, Ltd.

 

A-4


Exhibit B

Reserved.

 


Exhibit C

None.

 


LOGO

SUBCUSTODIANS – SCHEDULE A

 

MARKET    SUBCUSTODIAN
Argentina    Citibank, N.A.
Australia   

Citigroup Pty. Limited

The Hongkong and Shanghai Banking Corporation Limited

Austria    UniCredit Bank Austria AG
Bahrain   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Bangladesh    Standard Chartered Bank
Belgium    Deutsche Bank AG, Netherlands (operating through its Amsterdam branch with support from its Brussels branch)
Benin    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Bermuda    HSBC Bank Bermuda Limited

Federation of

Bosnia and Herzegovina

   UniCredit Bank d.d.
Botswana    Standard Chartered Bank Botswana Limited
Brazil    Citibank, N.A.
Bulgaria   

ING Bank N.V.

UniCredit Bulbank AD

Burkina Faso    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Canada    State Street Trust Company Canada
Chile    Banco Itaú Chile
People’s Republic of China   

HSBC Bank (China) Company Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

China Construction Bank Corporation (for A-share market only)

Colombia    Cititrust Colombia S.A. Sociedad Fiduciaria
Costa Rica    Banco BCT S.A.
Croatia   

Privredna Banka Zagreb d.d.

Zagrebacka Banka d.d.

Cyprus    BNP Paribas Securities Services, S.C.A., Greece (operating through its Athens branch)
Czech Republic   

Československá obchodní banka, a.s.

UniCredit Bank Czech Republic a.s.

 

LIMITED ACCESS


LOGO

 

Denmark    Skandinaviska Enskilda Banken AB (publ), Sweden (operating through its Copenhagen branch)
Ecuador    Banco de la Producción S.A. PRODUBANCO
Egypt   

HSBC Bank Egypt S.A.E.

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Estonia    AS SEB Pank
Finland    Skandinaviska Enskilda Banken AB (publ), Sweden (operating through its Helsinki branch)
France    Deutsche Bank AG, Netherlands (operating through its Amsterdam branch with support from its Paris branch)
Republic of Georgia    JSC Bank of Georgia
Germany    Deutsche Bank AG
Ghana    Standard Chartered Bank Ghana Limited
Greece    BNP Paribas Securities Services, S.C.A.
Guinea-Bissau    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Hong Kong    Standard Chartered Bank (Hong Kong) Limited
Hungary    UniCredit Bank Hungary Zrt.
Iceland    Landsbankinn hf.
India   

Deutsche Bank AG

The Hongkong and Shanghai Banking Corporation Limited

Indonesia    Deutsche Bank AG
Ireland    State Street Bank and Trust Company, United Kingdom branch
Israel    Bank Hapoalim B.M.
Italy    Deutsche Bank S.p.A.
Ivory Coast    Société Générale de Banques en Côte d’Ivoire
Japan   

Mizuho Corporate Bank Limited

The Hongkong and Shanghai Banking Corporation Limited

Jordan   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Kazakhstan   

SB HSBC Bank Kazakhstan JSC

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Kenya    Standard Chartered Bank Kenya Limited
Republic of Korea   

Deutsche Bank AG

The Hongkong and Shanghai Banking Corporation Limited

Kuwait   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

 

2

LIMITED ACCESS


LOGO

 

Latvia    AS SEB banka
Lebanon   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Lithuania    AB SEB bankas
Malaysia    Standard Chartered Bank Malaysia Berhad
Mali    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Malta   

The Hongkong and Shanghai Banking Corporation Limited

(operating through its subsidiary HSBC Bank Malta Plc., Valletta)

Mauritius    The Hongkong and Shanghai Banking Corporation Limited
Mexico    Banco Nacional de México, S.A.
Morocco    Citibank Maghreb
Namibia    Standard Bank Namibia Limited
Netherlands    Deutsche Bank AG
New Zealand    The Hongkong and Shanghai Banking Corporation Limited
Niger    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Nigeria    Stanbic IBTC Bank Plc.
Norway    Skandinaviska Enskilda Banken AB (publ), Sweden (operating through its Oslo branch)
Oman   

HSBC Bank Oman S.A.O.C.

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Pakistan    Deutsche Bank AG
Palestine   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Peru    Citibank del Perú, S.A.
Philippines    Deutsche Bank AG
Poland    Bank Handlowy w Warszawie S.A.
Portugal   

BNP Paribas Securities Services, S.C.A., Paris (operating through its Lisbon branch with support from its Paris branch)

Deutsche Bank AG, Netherlands (operating through its Amsterdam branch with support from its Lisbon branch)

Puerto Rico    Citibank N.A.
Qatar   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Romania    ING Bank N.V.
Russia    ING Bank (Eurasia) ZAO

 

3

LIMITED ACCESS


LOGO

 

Saudia Arabia   

SABB Securities Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

Senegal    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Serbia    UniCredit Bank Serbia JSC
Singapore   

Citibank N.A.

United Overseas Bank Limited

Slovak Republic   

Československá obchodná banka, a.s.

UniCredit Bank Slovakia a.s.

Slovenia    UniCredit Banka Slovenija d.d.
South Africa   

FirstRand Bank Limited

Standard Bank of South Africa Limited

Spain    Deutsche Bank S.A.E.
Sri Lanka    The Hongkong and Shanghai Banking Corporation Limited
Republic of Srpska    UniCredit Bank d.d.
Swaziland    Standard Bank Swaziland Limited
Sweden    Skandinaviska Enskilda Banken AB (publ)
Switzerland   

Credit Suisse AG

UBS AG

Taiwan - R.O.C.   

Deutsche Bank AG

Standard Chartered Bank (Taiwan) Limited

Thailand    Standard Chartered Bank (Thai) Public Company Limited
Togo    via Société Générale de Banques en Côte d’Ivoire, Abidjan, Ivory Coast
Trinidad & Tobago    Republic Bank Limited
Tunisia    Banque Internationale Arabe de Tunisie
Turkey    Citibank, A.S.
Uganda    Standard Chartered Bank Uganda Limited
Ukraine    ING Bank Ukraine
United Arab Emirates – Dubai Financial Market   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

United Arab Emirates – Dubai International Financial Center   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

United Arab Emirates – Abu Dhabi   

HSBC Bank Middle East Limited

(as delegate of The Hongkong and Shanghai Banking Corporation Limited)

United Kingdom    State Street Bank and Trust Company, United Kingdom branch

 

4

LIMITED ACCESS


LOGO

 

Uruguay    Banco Itaú Uruguay S.A.
Venezuela    Citibank, N.A.
Vietnam    HSBC Bank (Vietnam) Limited
Zambia    Standard Chartered Bank Zambia Plc.
Zimbabwe    Barclays Bank of Zimbabwe Limited

 

5

LIMITED ACCESS


LOGO

DEPOSITORIES OPERATING IN NETWORK MARKETS – SCHEDULE B

 

MARKET    DEPOSITORY
Argentina    Caja de Valores S.A.
Australia    Austraclear Limited
Austria    Oesterreichische Kontrollbank AG (Wertpapiersammelbank Division)
Bahrain    Clearing, Settlement, Depository and Registry System of the Bahrain Bourse
Bangladesh    Central Depository Bangladesh Limited
Belgium   

Euroclear Belgium

National Bank of Belgium

Benin    Dépositaire Central – Banque de Règlement
Bermuda    Bermuda Securities Depository

Federation of

Bosnia and Herzegovina

   Registar vrijednosnih papira u Federaciji Bosne i Hercegovine, d.d.
Botswana    Central Securities Depository Company of Botswana Ltd.
Brazil   

Central de Custódia e de Liquidação Financeira de Títulos Privados (CETIP)

Companhia Brasileira de Liquidação e Custódia

Sistema Especial de Liquidação e de Custódia (SELIC)

Bulgaria   

Bulgarian National Bank

Central Depository AD

Burkina Faso    Dépositaire Central – Banque de Règlement
Canada    The Canadian Depository for Securities Limited
Chile    Depósito Central de Valores S.A.

People’s Republic

of China

  

China Securities Depository and Clearing Corporation Limited, Shanghai Branch

China Securities Depository and Clearing Corporation Limited, Shenzhen Branch

Colombia   

Depósito Central de Valores

Depósito Centralizado de Valores de Colombia S.A. (DECEVAL)

Costa Rica    Central de Valores S.A.
Croatia    Središnje klirinško depozitarno društvo d.d.
Cyprus    Central Depository and Central Registry
Czech Republic   

Centrální depozitář cenných papírů, a.s.

Czech National Bank

Denmark    VP Securities A/S

 

LIMITED ACCESS


LOGO

 

Egypt   

Central Bank of Egypt

Misr for Central Clearing, Depository and Registry S.A.E.

Estonia    AS Eesti Väärtpaberikeskus
Finland    Euroclear Finland
France    Euroclear France
Republic of Georgia   

Georgian Central Securities Depository

National Bank of Georgia

Germany    Clearstream Banking AG, Frankfurt
Ghana   

Central Securities Depository (Ghana) Limited

GSE Securities Depository Company Limited

Greece   

Bank of Greece, System for Monitoring Transactions in Securities in Book-Entry Form

Kentriko Apothetirio Aksion, a department of Hellenic Exchanges S.A. Holding

Guinea-Bissau    Dépositaire Central – Banque de Règlement
Hong Kong   

Central Moneymarkets Unit

Hong Kong Securities Clearing Company Limited

Hungary    Központi Elszámolóház és Értéktár (Budapesti) Zrt. (KELER)
Iceland    Icelandic Securities Depository Limited
India   

Central Depository Services (India) Limited

National Securities Depository Limited

Reserve Bank of India

Indonesia   

Bank Indonesia

PT Kustodian Sentral Efek Indonesia

Ireland   

Euroclear UK & Ireland Limited *

Euroclear Bank S.A./N.V.

Israel    Tel Aviv Stock Exchange Clearing House Ltd. (TASE Clearing House)
Italy    Monte Titoli S.p.A.
Ivory Coast    Dépositaire Central – Banque de Règlement
Japan   

Bank of Japan – Financial Network System

Japan Securities Depository Center (JASDEC) Incorporated

Jordan    Securities Depository Center
Kazakhstan    Central Securities Depository
Kenya   

Central Bank of Kenya

Central Depository and Settlement Corporation Limited

Republic of Korea    Korea Securities Depository
Kuwait    Kuwait Clearing Company

Latvia

 

Lebanon

  

Latvian Central Depository

 

Banque du Liban

 

7

LIMITED ACCESS


LOGO

 

  

Custodian and Clearing Center of Financial Instruments

for Lebanon and the Middle East (Midclear) S.A.L.

Lithuania    Central Securities Depository of Lithuania
Malaysia   

Bank Negara Malaysia

Bursa Malaysia Depository Sdn. Bhd.

Mali    Dépositaire Central – Banque de Règlement
Malta    Central Securities Depository of the Malta Stock Exchange
Mauritius   

Bank of Mauritius

Central Depository and Settlement Co. Limited

Mexico    S.D. Indeval, S.A. de C.V.
Morocco    Maroclear
Namibia    Bank of Namibia
Netherlands    Euroclear Nederland
New Zealand    New Zealand Central Securities Depository Limited
Niger    Dépositaire Central – Banque de Règlement
Nigeria   

Central Bank of Nigeria

Central Securities Clearing System Limited

Norway    Verdipapirsentralen
Oman    Muscat Clearing & Depository Company S.A.O.C.
Pakistan   

Central Depository Company of Pakistan Limited

State Bank of Pakistan

Palestine    Clearing, Depository and Settlement system, a department of the Palestine Securities Exchange
Peru    CAVALI S.A. Institución de Compensación y Liquidación de Valores
Philippines   

Philippine Depository & Trust Corporation

Registry of Scripless Securities (ROSS) of the Bureau of the Treasury

Poland   

Rejestr Papierów Wartościowych

Krajowy Depozyt Papierów Wartościowych, S.A.

Portugal   

INTERBOLSA - Sociedad Gestora de Sistemas

de Liquidação e de Sistemas Centralizados de Valores Mobiliários, S.A.

Qatar    Central Clearing and Registration (CCR), a department of the Qatar Exchange
Romania   

National Bank of Romania

S.C. Depozitarul Central S.A.

Russia   

National Settlement Depository

Vneshtorgbank, Bank for Foreign Trade of the Russian Federation

Senegal    Dépositaire Central – Banque de Règlement

 

8

LIMITED ACCESS


LOGO

 

Serbia    Central Registrar, Depository and Clearinghouse
Singapore   

Monetary Authority of Singapore

The Central Depository (Pte.) Limited

Slovak Republic    Centrálny depozitár cenných papierov SR, a.s.
Slovenia    KDD - Centralna klirinško depotna družba d.d.
South Africa    Strate Limited
Spain    IBERCLEAR
Sri Lanka   

Central Bank of Sri Lanka

Central Depository System (Pvt) Limited

Republic of Srpska    Central Registry of Securities in the Republic of Srpska JSC
Sweden    Euroclear Sweden
Switzerland    SIX SIS AG
Taiwan - R.O.C.   

Central Bank of the Republic of China (Taiwan)

Taiwan Depository and Clearing Corporation

Thailand    Thailand Securities Depository Company Limited
Togo    Dépositaire Central – Banque de Règlement
Trinidad and Tobago   

Central Bank of Trinidad and Tobago

Trinidad and Tobago Central Depository Limited

Tunisia   

Société Tunisienne Interprofessionelle pour la

Compensation et le Dépôt des Valeurs Mobilières (STICODEVAM)

Turkey   

Central Bank of Turkey

Central Registry Agency

Uganda   

Bank of Uganda

Securities Central Depository

Ukraine   

All-Ukrainian Securities Depository

National Bank of Ukraine

United Arab Emirates -

Abu Dhabi

  

Clearing, Settlement, Depository and Registry department

of the Abu Dhabi Securities Exchange

United Arab Emirates -

Dubai Financial Market

   Clearing and Depository System, a department of the Dubai Financial Market

United Arab Emirates -

Dubai International

Financial Center

   Central Securities Depository, owned and operated by NASDAQ Dubai Limited
United Kingdom    Euroclear UK & Ireland Limited *
Uruguay    Banco Central del Uruguay
Venezuela   

Banco Central de Venezuela

Caja Venezolana de Valores

 

9

LIMITED ACCESS


LOGO

 

Vietnam    Vietnam Securities Depository
Zambia   

Bank of Zambia

LuSE Central Shares Depository Limited

TRANSNATIONAL

Euroclear Bank S.A./N.V.

Clearstream Banking, S.A.

 

** Euroclear UK & Ireland Limited (EUI) serves as depository for GBP- and EUR-denominated money market instruments. Also, EUI utilizes its CREST system to facilitate settlement for eligible securities in the UK and Ireland, with securities ownership recorded at the relevant issuer’s registrar.

 

10

LIMITED ACCESS


LOGO

SCHEDULE C

 

Publication/Type of Information

  

Brief Description

(scheduled frequency)     

The Guide to Custody in World Markets

(hardcopy annually and regular website updates)

   An overview of settlement and safekeeping procedures, custody practices and foreign investor considerations for the markets in which State Street offers custodial services.

Global Custody Network Review

(annually)

   Information relating to Foreign Sub-Custodians in State Street’s Global Custody Network. The Review stands as an integral part of the materials that State Street provides to its U.S. mutual fund clients to assist them in complying with SEC Rule 17f-5. The Review also gives insight into State Street’s market expansion and Foreign Sub-Custodian selection processes, as well as the procedures and controls used to monitor the financial condition and performance of our Foreign Sub-Custodian banks.

Securities Depository Review

(annually)

   Custody risk analyses of the Foreign Securities Depositories presently operating in Network markets. This publication is an integral part of the materials that State Street provides to its U.S. mutual fund clients to meet informational obligations created by SEC Rule 17f-7.

Global Legal Survey

(annually)

   With respect to each market in which State Street offers custodial services, opinions relating to whether local law restricts (i) access of a fund’s independent public accountants to books and records of a Foreign Sub- Custodian or Foreign Securities System, (ii) a fund’s ability to recover in the event of bankruptcy or insolvency of a Foreign Sub-Custodian or Foreign Securities System, (iii) a fund’s ability to recover in the event of a loss by a Foreign Sub-Custodian or Foreign Securities System, and (iv) the ability of a foreign investor to convert cash and cash equivalents to U.S. dollars.

Subcustodian Agreements

(annually)

   Copies of the contracts that State Street has entered into with each Foreign Sub-Custodian that maintains U.S. mutual fund assets in the markets in which State Street offers custodial services.

Global Market Bulletin

(daily or as necessary)

   Information on changing settlement and custody conditions in markets where State Street offers custodial services. Includes changes in market and tax regulations, depository developments, dematerialization information, as well as other market changes that may impact State Street’s clients.

Foreign Custody Advisories

(as necessary)

   For those markets where State Street offers custodial services that exhibit special risks or infrastructures impacting custody, State Street issues market advisories to highlight those unique market factors which might impact our ability to offer recognized custody service levels.

Material Change Notices

(presently on a quarterly basis or as otherwise necessary)

   Informational letters and accompanying materials confirming State Street’s foreign custody arrangements, including a summary of material changes with Foreign Sub-Custodians that have occurred during the previous quarter. The notices also identify any material changes in the custodial risks associated with maintaining assets with Foreign Securities Depositories.

 

LIMITED ACCESS


 

                         FUNDS TRANSFER ADDENDUM

 

OPERATING GUIDELINES

   LOGO
  

1. OBLIGATION OF THE SENDER: State Street is authorized to promptly debit Client’s account(s) upon the receipt of a payment order in compliance with the selected Security Procedure chosen for funds transfer and in the amount of money that State Street has been instructed to transfer. State Street shall execute payment orders in compliance with the Security Procedure and with the Client’s instructions on the execution date provided that such payment order is received by the customary deadline for processing such a request, unless the payment order specifies a later time. All payment orders and communications received after this time will be deemed to have been received on the next business day.

2. SECURITY PROCEDURE: The Client acknowledges that the Security Procedure it has designated on the Selection Form was selected by the Client from Security Procedures offered by State Street. The Client agrees that the Security Procedures are reasonable and adequate for its wire transfer transactions and agrees to be bound by any payment orders, amendments and cancellations, whether or not authorized, issued in its name and accepted by State Street after being confirmed by any of the selected Security Procedures. The Client also agrees to be bound by any other valid and authorized payment order accepted by State Street. The Client shall restrict access to confidential information relating to the Security Procedure to authorized persons as communicated in writing to State Street. The Client must notify State Street immediately if it has reason to believe unauthorized persons may have obtained access to such information or of any change in the Client’s authorized personnel. State Street shall verify the authenticity of all instructions according to the Security Procedure.

3. ACCOUNT NUMBERS: State Street shall process all payment orders on the basis of the account number contained in the payment order. In the event of a discrepancy between any name indicated on the payment order and the account number, the account number shall take precedence and govern. Financial institutions that receive payment orders initiated by State Street at the instruction of the Client may also process payment orders on the basis of account numbers, regardless of any name included in the payment order. State Street will also rely on any financial institution identification numbers included in any payment order, regardless of any financial institution name included in the payment order.

4. REJECTION: State Street reserves the right to decline to process or delay the processing of a payment order which (a) is in excess of the collected balance in the account to be charged at the time of State Street’s receipt of such payment order; (b) if initiating such payment order would cause State Street, in State Street’s sole judgment, to exceed any volume, aggregate dollar, network, time, credit or similar limits upon wire transfers which are applicable to State Street; or (c) if State Street, in good faith, is unable to satisfy itself that the transaction has been properly authorized.

5. CANCELLATION OR AMENDMENT: State Street shall use reasonable efforts to act on all authorized requests to cancel or amend payment orders received in compliance with the Security Procedure provided that such requests are received in a timely manner affording State Street reasonable opportunity to act. However, State Street assumes no liability if the request for amendment or cancellation cannot be satisfied.

6. ERRORS: State Street shall assume no responsibility for failure to detect any erroneous payment order provided that State Street complies with the payment order instructions as received and State Street complies with the Security Procedure. The Security Procedure is established for the purpose of authenticating payment orders only and not for the detection of errors in payment orders.

7. INTEREST AND LIABILITY LIMITS: State Street shall assume no responsibility for lost interest with respect to the refundable amount of any unauthorized payment order, unless State Street is notified of the unauthorized payment order within thirty (30) days of notification by State Street of the acceptance of such payment order. In no event shall State Street be liable for special, indirect or consequential damages, even if advised of the possibility of such damages and even for failure to execute a payment order.

8. AUTOMATED CLEARING HOUSE (“ACH”) CREDIT ENTRIES/PROVISIONAL PAYMENTS: When a Client initiates or receives ACH credit and debit entries pursuant to these Guidelines and the rules of the National Automated Clearing House Association and the New England Clearing House Association, State Street will act as an Originating Depository Financial Institution and/or Receiving Depository Institution, as the case may be, with respect to such entries. Credits given by State Street with respect to an ACH credit entry are provisional until State Street receives final settlement for such entry from the Federal Reserve Bank. If State Street does not receive such final settlement, the Client agrees that State Street shall receive a refund of the amount credited to the Client in connection with such entry, and the party making payment to the Client via such entry shall not be deemed to have paid the amount of the entry.

9. CONFIRMATION STATEMENTS: Confirmation of State Street’s execution of payment orders shall ordinarily be provided within 24 hours. Notice may be delivered through State Street’s proprietary information systems, such as, but not limited to Horizon and GlobalQuest®, account statements, advices, or by facsimile or callback. The Client must report any objections to the execution of a payment order within 30 days.

 


 

                         FUNDS TRANSFER ADDENDUM

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10. LIABILITY ON FOREIGN ACCOUNTS: State Street shall not be required to repay any deposit made at a non-U.S. branch of State Street, or any deposit made with State Street and denominated in a non-U.S. dollar currency, if repayment of such deposit or the use of assets denominated in the non-U.S. dollar currency is prevented, prohibited or otherwise blocked due to: (a) an act of war, insurrection or civil strife; (b) any action by a non-U.S. government or instrumentality or authority asserting governmental, military or police power of any kind, whether such authority be recognized as a defacto or a dejure government, or by any entity, political or revolutionary movement or otherwise that usurps, supervenes or otherwise materially impairs the normal operation of civil authority; or(c) the closure of a non-U.S. branch of State Street in order to prevent, in the reasonable judgment of State Street, harm to the employees or property of State Street. The obligation to repay any such deposit shall not be transferred to and may not be enforced against any other branch of State Street.

The foregoing provisions constitute the disclosure required by Massachusetts General Laws, Chapter 167D, Section 36.

While State Street is not obligated to repay any deposit made at a non-U.S. branch or any deposit denominated in a non-U.S. currency during the period in which its repayment has been prevented, prohibited or otherwise blocked, State Street will repay such deposit when and if all circumstances preventing, prohibiting or otherwise blocking repayment cease to exist.

11. MISCELLANEOUS: State Street and the Client agree to cooperate to attempt to recover any funds erroneously paid to the wrong party or parties, regardless of any fault of State Street or the Client, but the party responsible for the erroneous payment shall bear all costs and expenses incurred in trying to effect such recovery. These Guidelines may not be amended except by a written agreement signed by the parties.

 


 

                         FUNDS TRANSFER ADDENDUM

 

Security Procedure(s) Selection Form

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Please select one or more of the funds transfer security procedures indicated below.

¨ SWIFT

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a cooperative society owned and operated by member financial institutions that provides telecommunication services for its membership. Participation is limited to securities brokers and dealers, clearing and depository institutions, recognized exchanges for securities, and investment management institutions. SWIFT provides a number of security features through encryption and authentication to protect against unauthorized access, loss or wrong delivery of messages, transmission errors, loss of confidentiality and fraudulent changes to messages. SWIFT is considered to be one of the most secure and efficient networks for the delivery of funds transfer instructions.

Selection of this security procedure would be most appropriate for existing SWIFT members.

¨ Standing Instructions

Standing Instructions may be used where funds are transferred to a broker on the Client’s established list of brokers with which it engages in foreign exchange transactions. Only the date, the currency and the currency amount are variable. In order to establish this procedure, State Street will send to the Client a list of the brokers that State Street has determined are used by the Client. The Client will confirm the list in writing, and State Street will verify the written confirmation by telephone. Standing Instructions will be subject to a mutually agreed upon limit. If the payment order exceeds the established limit, the Standing Instruction will be confirmed by telephone prior to execution.

¨ Remote Batch Transmission

Wire transfer instructions are delivered via Computer-to-Computer (CPU-CPU) data communications between the Client and State Street. Security procedures include encryption and or the use of a test key by those individuals authorized as Automated Batch Verifiers.

Clients selecting this option should have an existing facility for completing CPU-CPU transmissions. This delivery mechanism is typically used for high-volume business.

¨ Global Horizon Interchangesm Funds Transfer Service

Global Horizon Interchange Funds Transfer Service (FTS) is a State Street proprietary microcomputer-based wire initiation system. FTS enables Clients to electronically transmit authenticated Fedwire, CHIPS or internal book transfer instructions to State Street.

This delivery mechanism is most appropriate for Clients with a low-to-medium number of transactions (5-75 per day), allowing Clients to enter, batch, and review wire transfer instructions on their PC prior to release to State Street.

¨ Telephone Confirmation (Callback)

Telephone confirmation will be used to verify all non-repetitive funds transfer instructions received via untested facsimile or phone. This procedure requires Clients to designate individuals as authorized initiators and authorized verifiers. State Street will verify that the instruction contains the signature of an authorized person and prior to execution, will contact someone other than the originator at the Client’s location to authenticate the instruction.

Selection of this alternative is appropriate for Clients who do not have the capability to use other security procedures.

¨ Repetitive Wires

For situations where funds are transferred periodically (minimum of one instruction per calendar quarter) from an existing authorized account to the same payee (destination bank and account number) and only the date and currency amount are variable, a repetitive wire may be implemented. Repetitive wires will be subject to a mutually agreed upon limit. If the payment order exceeds the established limit, the instruction will be confirmed by telephone prior to execution. Telephone confirmation is used to establish this process. Repetitive wire instructions must be reconfirmed annually.

This alternative is recommended whenever funds are frequently transferred between the same two accounts.

¨ Transfers Initiated by Facsimile

The Client faxes wire transfer instructions directly to State Street Mutual Fund Services. Standard security procedure requires the use of a random number test key for all transfers. Every six months the Client receives test key logs from State Street. The test key contains alpha-numeric characters, which the Client puts on each document faxed to State Street. This procedure ensures all wire instructions received via fax are authorized by the Client.

We provide this option for Clients who wish to batch wire instructions and transmit these as a group to State Street Mutual Fund Services once or several times a day.

 


 

                         FUNDS TRANSFER ADDENDUM

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¨ Instruct

Instruct is a State Street web-based application designed to provide internet-enabled remote access that allows for the capturing, verification and processing of various instruction types, including securities, cash and foreign exchange transactions. Instruct is designed using industry standard formats to facilitate straight-through processing. Instruct provides a number of security features through user entitlements, industry standard encryption protocols, digital security certificates and multiple tiers of user authentication requirements.

¨ Secure Transport

Secure Transport is a file transfer application based upon the Secure File Transfer Protocol standard that is designed to enable State Street clients/ investment managers to send file based transfer and transaction instructions over the internet. Secure Transport features multi-factor authenticators such as SecurID and digital certificates, and incorporates industry-standard encryption protocols.

¨ Automated Clearing House (ACH)

State Street receives an automated transmission or a magnetic tape from a Client for the initiation of payment (credit) or collection (debit) transactions through the ACH network. The transactions contained on each transmission or tape must be authenticated by the Client. Clients using ACH must select one or more of the following delivery options:

¨ Global Horizon Interchange Automated Clearing House Service

Transactions are created on a microcomputer, assembled into batches and delivered to State Street via fully authenticated electronic transmissions in standard NACHA formats.

¨ Transmission from Client PC to State Street Mainframe with Telephone Callback

¨ Transmission from Client Mainframe to State Street Mainframe with Telephone Callback

¨ Transmission from DST Systems to State Street Mainframe with Encryption

¨ Magnetic Tape Delivered to State Street with Telephone Callback

¨ Email with Enforced Transport Layer Security Combined with Telephone Callback

Transport Layer Security is a communication method that allows clients to electronically deliver financial transaction instructions to State Street using an enforced (encrypted) connection. The communication method features use of enforced network connections which include industry-standard transport layer cryptography to effect point-to-point encryption. Please note that such point-to-point encryption is performed at the domain level and not at the individual user level or email gateway within the client’s organization. Telephone confirmation will be used to verify transaction instructions received via email with enforced TLS. This procedure requires clients to designate individuals as authorized initiators and authorized verifiers. State Street will contact the client’s designees to authenticate instructions received by this method.

¨ Email “Send Secure” Feature Available in Outlook with Telephone Callback

“Send Secure” is a communication method that allows clients to electronically deliver financial transaction instructions to State Street using an enforced (encrypted) connection by responding to a secure email received from State Street The communication method features use of enforced network connections which include industry-standard transport layer cryptography to effect point-to-point encryption at the desktop. Telephone confirmation will be used to verify transaction instructions received via email using the “send secure” feature. This procedure requires clients to designate individuals as authorized initiators and authorized verifiers. State Street will contact the client’s designees to authenticate instructions received by this method.

¨ State Street Cash Manager® Global Funds Transfer (GFT)

State Street’s proprietary web-based system that enables clients to originate and electronically transmit authenticated repetitive and non-repetitive Fed wires, CHIPS, internal book transfers, drawdowns, and international payments to State Street. Instructions received by State Street via Cash Manager® constitute funds transfer instructions originated by the Client and can either be in U.S. dollar or other currencies supported by the system. The State Street Cash Manager® GFT is a web-based system utilizing the Internet and employs the use of ID and password security, two factor token authentication and encryption to protect the integrity of transmissions to State Street.

State Street is hereby instructed to accept funds transfer instructions only via the delivery methods and security procedures indicated. The selected delivery methods and security procedure(s) will be effective                      for payment orders initiated by our organization.

 


                         FUNDS TRANSFER ADDENDUM

 

Key Contact Information

 

Whom shall we contact to implement your selection(s)?

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CLIENT OPERATIONS CONTACT                   ALTERNATE CONTACT   

 

Name

     

 

Name

  

 

Address

     

 

Address

  

 

City/State/Zip Code

     

 

City/State/Zip Code

  

 

Telephone Number

     

 

Telephone Number

  

 

Facsimile Number

     

 

Facsimile Number

  

 

SWIFT Number

        

 

Telex Number

        


 

                         FUNDS TRANSFER ADDENDUM

 

INSTRUCTION(S)

 

TELEPHONE CONFIRMATION

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Fund                                                                                                                    
Investment Adviser                                                                                      

Authorized Initiators

    Please Type or Print

Please provide a listing of Fund officers or other individuals who are currently authorized to INITIATE wire transfer instructions to State Street:

 

NAME     TITLE (Specify whether position is with Fund or Investment Adviser)     SPECIMEN SIGNATURE

 

   

 

   

 

 

   

 

   

 

 

   

 

   

 

 

   

 

   

 

 

   

 

   

 

Authorized Verifiers

    Please Type or Print

Please provide a listing of Fund officers or other individuals who will be CALLED BACK to verify the initiation of repetitive wires of $10 million or more and all non-repetitive wire instructions:

 

NAME     CALLBACK PHONE NUMBER     DOLLAR LIMITATION (IF ANY)

 

   

 

   

 

 

   

 

   

 

 

   

 

   

 

 

   

 

   

 

 

   

 

   

 

EX-99.(14)(A) 3 d109853dex9914a.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm

Consent of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders

Western Asset Managed High Income Fund Inc.:

We consent to the use of our report dated April 16, 2015, with respect to the financial statements of Western Asset Managed High Income Fund Inc. as of February 28, 2015, incorporated herein by reference and to the reference to our firm under the heading “Financial Highlights” in the Proxy Statement/Prospectus on Form N-14.

 

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New York, New York

January 11, 2016

 

 

 

 

 

EX-99.(14)(B) 4 d109853dex9914b.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm

Consent of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders

Western Asset High Income Opportunity Fund Inc.:

We consent to the use of our report dated November 19, 2015, with respect to the financial statements of Western Asset High Income Opportunity Fund Inc. as of September 30, 2015, incorporated herein by reference and to the reference to our firm under the heading “Financial Highlights” in the Proxy Statement/Prospectus on Form N-14.

 

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New York, New York

January 11, 2016

 

 

EX-99.(16) 5 d109853dex9916.htm POWER OF ATTORNEY POWER OF ATTORNEY

Exhibit(16)

POWER OF ATTORNEY

KNOW ALL PEOPLE BY THESE PRESENTS, that each person whose signature appears below hereby makes, constitutes and appoints each of Jane E. Trust, Richard F. Sennett, Robert I. Frenkel and George P. Hoyt with full power to act without the other, as his or her agent and attorney-in-fact for the purpose of executing in his or her name, in his or her capacity as a Director and/or officer of Western Asset High Income Opportunity Fund Inc., a proxy statement/prospectus on Form N-14 (including amendments thereto) to be filed with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder.

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.

This power of attorney shall be valid from the date hereof until revoked by me.

IN WITNESS WHEREOF, I have executed this instrument as of the 8th day of January, 2016

 

/s/ Jane E. Trust

   
Jane E. Trust     Chairman, President, Chief Executive Officer and Director
   

/s/ Richard F. Sennett

   
Richard F. Sennett     Principal Financial Officer
   

/s/ Robert D. Agdern

   
Robert D. Agdern     Director
   

/s/ Carol L. Colman

   
Carol L. Colman     Director
   

/s/ Daniel P. Cronin

   
Daniel P. Cronin     Director
   

/s/ Paolo M. Cucchi

   
Paolo M. Cucchi     Director
   

/s/ Leslie H. Gelb

   
Leslie H. Gelb     Director
   

/s/ William R. Hutchinson

   
William R. Hutchinson     Director
   

/s/ Eileen A. Kamerick

   
Eileen A. Kamerick     Director
   

/s/ Dr. Riordan Roett

   
Dr. Riordan Roett     Director
   
EX-99.(17)(E) 6 d109853dex9917e.htm FUND ACCOUNTING SERVICES AGREEMENT Fund Accounting Services Agreement

Execution Copy

FUND ACCOUNTING SERVICES AGREEMENT

THIS AGREEMENT is made as of October 5, 2012 by and between State Street Bank and Trust Company, a Massachusetts trust company (the “Fund Accounting Agent”), and each Fund (as defined below) on behalf of each of its Portfolios (as defined below).

WHEREAS, each of the Funds wishes to retain the Fund Accounting Agent to provide accounting services for each of the Portfolios, and the Fund Accounting Agent wishes to render such services.

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby the parties hereto agree as follows:

1. DEFINITIONS. As used in this Agreement:

Applicable Authorities” means all laws applicable to a Fund or the Fund Accounting Agent, including without limitation the Securities Laws and all other applicable rules, regulations, official interpretations and guidance of a regulatory entity or agency having jurisdiction over a Fund or the Fund Accounting Agent.

Authorized Person” means any of the persons duly authorized by the applicable Fund Board of Trustees or Directors to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund or one or more of its Portfolios as set forth in a certificate (which shall also set forth any limitations on such Persons’ scope of authority), such certificate to be executed by the Secretary or Assistant Secretary of the applicable Fund, as the same may be revised from time to time.

CEA” means the Commodities Exchange Act, as amended.

Custodian” means, for each Portfolio, the custodian identified opposite such Portfolio’s name on Exhibit A.

Funds” means the investment companies identified on Exhibit A annexed hereto, and such additional Funds made subject to this Agreement pursuant to Section 12(c) hereof.

Governing Documents” means, with respect to each of the Portfolios, (i) the declaration of trust, charter or other constituting document of the Fund of which the Portfolio is a series or portfolio, (ii) the currently effective prospectus under the 1933 Act, (iii) the most recent statement of additional information, and (iv) a certified copy of the applicable Fund Board’s resolution approving the engagement of the Fund Accounting Agent to provide accounting services hereunder.

1933 Act” means the Securities Act of 1933, as amended.


1934 Act” means the Securities Exchange Act of 1934, as amended.

1940 Act” means the Investment Company Act of 1940, as amended.

Manager” means, with respect to each Portfolio, the investment adviser or manager identified opposite such Portfolio’s name on Exhibit A.

Portfolios” means the separate series or portfolios of the Funds, and, as applicable, the separate classes of each such Portfolio, identified on Exhibit A hereto, and such additional Portfolios made subject to this Agreement pursuant to Section 12(c) hereof, and, in the case of any closed-end investment company or other Fund for which no separate series or portfolio is so identified, the Fund itself.

Proper Instructions” means written instructions given by an Authorized Person to the Fund Accounting Agent in such form and manner as the Fund Accounting Agent and the Funds shall agree upon from time to time, including communications effected directly between protected electromechanical or electronic devices, in each case in accordance with such testing and authentication procedures as may be agreed to from time to time by the Fund Accounting Agent and the Funds (“Written Instructions”) and, subject to any limitations in scope of authority, may be oral instructions (“Oral Instructions”) received by the Fund Accounting Agent in such manner and with such testing and authentication procedures as the Fund Accounting Agent and the Funds shall agree upon from time to time, from a person reasonably believed by the Fund Accounting Agent to be an Authorized Person.

SEC” means the Securities and Exchange Commission.

Securities Laws” means the 1933 Act, the 1934 Act, the 1940 Act and the CEA.

Shares” mean the shares of beneficial interest of any Portfolio.

2. APPOINTMENT. Each of the Funds hereby engages the Fund Accounting Agent as the Fund’s fund accounting agent to provide accounting services to each of the Portfolios in accordance with the terms set forth in this Agreement. The Fund Accounting Agent accepts such engagement and agrees to furnish such services in accordance with the provisions of this Agreement.

3. DUTIES OF THE FUND ACCOUNTING AGENT.

(a) The Fund Accounting Agent shall maintain the books of account of each Portfolio and shall perform the following duties for each Portfolio:

(i) Record general ledger entries for investment, capital share and income and expense activities;

 

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(ii) Calculate daily expenses, calculate daily income, reconcile daily activity to the trial balance and update the cash availability throughout the day as required by the applicable Fund or its Manager;

(iii) Maintain individual ledgers detailing investment securities activities;

(iv) Record changes in investment holdings resulting from stock splits, stock dividends, capital reorganizations and other corporate actions affecting outstanding securities;

(v) Reconcile cash and investment balances of the Portfolio with the Custodian, and provide the Portfolio’s Manager daily with estimates of the beginning cash balance available for investment purposes;

(vi) Calculate various contractual expenses (e.g., advisory and custody fees), monitor expense accruals and notify an officer of the Fund of any proposed adjustments, and control all disbursements and authorize such disbursements upon Written Instructions;

(vii) Calculate the market value of each Portfolio’s securities and other investments daily (as more fully described below) and transmit the same to the Portfolio’s Manager;

(viii) Calculate capital gains and losses, and determine the net income of each Portfolio;

(ix) Calculate daily, and more frequently as may be required by the Governing Documents or requested by the applicable Fund or its Manager, the net asset value of each Portfolio and promptly transmit the same pursuant to Written Instructions, which may be standing instructions;

(x) As appropriate, compute yields, total return, expense ratios, portfolio turnover rate, and, if required, average dollar-weighted maturity for each Portfolio;

(xi) Promptly provide or otherwise make available such reports and statements to the applicable Portfolio’s Manager, on a daily or less frequent basis, as shall be reasonably requested by the applicable Fund or its Manager and as may be agreed to by the Fund Accounting Agent, such agreement not to be unreasonably withheld; and transmit a copy of the daily portfolio valuation to the Portfolio’s Manager; and

All amounts to be calculated or computed by the Fund Accounting Agent hereunder shall be calculated or computed in accordance with the method, if any, set forth in the applicable Portfolio’s then current prospectus and in the most current valuation policy approved by the Board of Trustees or Directors of the applicable Fund that has been provided to the Fund Accounting Agent by an Authorized Person. Each Fund shall provide timely prior notice to the Fund Accounting Agent of any modification in the manner in which such calculations to be performed, and the Fund Accounting Agent shall not be responsible for any revisions to calculation methods unless such revisions are communicated in writing to the Fund Accounting Agent. To the extent that there may be multiple methods of making any such calculation or

 

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computation, the Fund Accounting Agent shall identify the available methods of calculation or computation to the applicable Funds and/or Portfolios and shall employ such methods as may be specified to the Fund Accounting Agent by means of Written Instructions.

(b) The Fund Accounting Agent undertakes to comply with all applicable requirements of Applicable Authorities having jurisdiction over the Fund Accounting Agent with respect to the duties to be performed by the Fund Accounting Agent hereunder.

(c) Without limitation of the generality of the preceding subsection (b), the Fund Accounting Agent shall create, maintain and retain accounting records for each Portfolio in such a manner as will meet the obligations of the Fund under the 1940 Act, including without limitation the requirements of Section 31 thereof and Rules 31a-l and 31a-2 thereunder. All such records shall be the property of the applicable Fund and shall at all times during the regular business hours of the Fund Accounting Agent be open for inspection by duly authorized officers, employees or agents of the applicable Fund, the independent public accountants of the applicable Fund, and employees and agents of the SEC. The Fund Accounting Agent shall preserve for the period(s) required by (i) the 1940 Act, and (ii) any court order, regulatory action or subpoena communicated to the Fund Accounting Agent by the Funds, the records required to be maintained thereunder. All such books and records shall be maintained in a form acceptable to the applicable Fund, and shall be reasonably arranged and indexed by the Fund Accounting Agent in a manner that permits reasonably prompt location, access and retrieval of any particular record, including, if requested by a Fund, within the time period specified by Applicable Authorities. The Fund Accounting Agent shall not destroy any files, records or documents created or maintained by the Fund Accounting Agent pursuant to this Agreement except in accordance with its record retention policy as communicated to the Funds from time to time or if such destruction is authorized by the Fund by means of Written Instructions. Upon a Fund’s request, the Fund Accounting Agent shall promptly surrender to such Fund all books and records of the Fund maintained by the Fund Accounting Agent pursuant to this Agreement in the format reasonably specified by the Fund.

(d) For purposes of calculating the market value of a Portfolio investment, the Fund Accounting Agent shall utilize prices obtained from sources designated by the Portfolio’s Manager (collectively, the “Authorized Price Sources”) on the Price Source Schedule annexed hereto as Exhibit B, as the same may be amended by the applicable Fund and the Fund Accounting Agent from time to time, or otherwise designated by means of Written Instructions (the “Price Source Authorization”). If such prices are not available from Authorized Price Sources or for any reason appear to the Fund Accounting Agent to be not reliable, the Fund Accounting Agent shall notify the Portfolio’s Manager in a timely manner and shall follow procedures that may be established from time to time between the parties hereto for the purposes of establishing the value of such Portfolio investment. The Fund Accounting Agent shall not override valuations received from an Authorized Price Source without Written Instructions from an Authorized Person. The Fund Accounting Agent shall provide such further valuation services, including without limitation back-testing and stale price reviews, as shall be reasonably requested by the applicable Fund or the Portfolio’s Manager from time to time, and shall make available to the Portfolio’s Manager from time to time such information or data about any Authorized Price Sources as may be reasonably requested by the Fund or the Portfolio’s Manager and that is otherwise available to the Fund Accounting Agent, all as may be agreed to by the Sub-Accounting Agreement, such agreement not to be unreasonably withheld.

 

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(e) The Fund Accounting Agent shall provide information from the books and records of the Funds to their respective independent public accountants, along with such other analyses and summaries as may be reasonably requested by the Fund or the Portfolio’s Manager and as may be mutually agreed to by the Fund and the Fund Accounting Agent.

(f) In order to minimize the disruption of the services to be provided under this Agreement or any exhibit, schedule or annex hereto, the Fund Accounting Agent shall implement and maintain directly or through third parties contingency facilities and procedures reasonably designed to provide for periodic back-up of the computer files and data with respect to the Portfolios and emergency use of electronic data processing equipment to provide services under this Agreement or any exhibit, schedule or annex hereto. The Fund Accounting Agent shall, upon reasonable request, discuss with senior management of the Funds such disaster recovery plan and shall, upon reasonable request, provide a high-level presentation summarizing such plan. In the event of equipment failure, work stoppage, governmental action, communication disruption or other impossibility of performance beyond the Fund Accounting Agent’s control, the Fund Accounting Agent shall, at no additional expense to the Funds, Portfolios or their Managers, take reasonable steps to minimize service interruptions.

(g) Upon any termination of services hereunder (whether as to only certain Funds or Portfolios or as to all services under this Agreement), the Fund Accounting Agent shall take commercially reasonable steps, without additional compensation (except as may be specifically agreed in writing by the applicable Fund or Manager in connection with any special or unduly burdensome transitional arrangements), to transfer the books and records and any other property of the applicable Fund held hereunder to a successor provider of accounting services and to provide reasonable assistance in connection with the transition, provided however, that such reasonable assistance shall be limited to a period of one hundred and eighty (180) days, or such longer period and at such additional compensation as the parties may agree upon.

(h) Annually, and as may otherwise be reasonably requested by a Fund, the Fund Accounting Agent shall deliver to such Fund a copy of each SSAE 16 Type 2 audit report (or any comparable successor report thereto) prepared in accordance with all applicable industry standards by a qualified independent third party with respect to services hereunder.

(i) The Fund Accounting Agent will maintain systems that allow each Fund to access and download on a remote basis such information maintained in the Fund Accounting Agent’s databases as may be agreed upon from time to time in writing by any Fund and the Fund Accounting Agent.

4A. PERFORMANCE GOALS.

The Fund Accounting Agent and the Funds may from time to time agree to document the manner in which they expect to deliver and receive the services contemplated by this Agreement. The parties agree that such document (s) (hereinafter referred to as “Service Level Document(s)”) reflect performance goals and any failure to perform in accordance with the provisions thereof shall not in

 

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and of itself be considered a breach of contract that gives rise to contractual or other remedies unless the parties mutually expressly agree otherwise. It is the intention of the parties that the first course of action for the initial failure to perform in accordance with the provisions of a Service Level Document, or any dispute relating to performance goals set forth in a Service Level Document, will be a meeting of the parties to resolve the failure pursuant to the consultation procedure described below and in accordance with the escalation process set forth in the Service Level Document. Nothing in this Section 4A shall modify any party’s applicable standard of care under this Agreement, and the holding of such meeting of the parties shall not be construed to prevent a party from pursuing any remedy otherwise available to it pursuant to this Agreement.

If a party to this Agreement is unable to meet the provisions of a Service Level Document, or in the event that a dispute arises relating to performance goals set forth in a Service Level Document, any party to this Agreement shall first address any concerns it may have by requiring a consultation with the other party. The purpose of the consultation procedure is to endeavor to resolve a failure to meet the provisions of a Service Level Document. If a consultation occurs pursuant to this Section 4A, all parties must negotiate in good faith to endeavor to accomplish the following:

 

  (a) implement changes which will enable the Service Level Document provisions to be more regularly met;

 

  (b) agree to alternative Service Level Document provisions which meet the parties’ respective business requirements; or

 

  (c) otherwise find a solution such that, within 30 days after the consultation, the inability to meet the Service Level Document provisions is substantially less likely to occur in the future.

4. DELIVERY OF DOCUMENTS AND INFORMATION.

(a) Upon becoming a party to this Agreement, each of the Funds shall provide the Fund Accounting Agent with a copy of its Governing Documents (unless the same has previously been provided to the Fund Accounting Agent), and will provide the Fund Accounting Agent with a copy of amendments, supplements and modifications thereof from time to time.

(b) Each Fund on a timely basis shall provide, or cause to be provided by the applicable Manager, transfer agent, Custodian or other Portfolio service provider, data, notices and other information regarding Portfolio activities requisite for, and as a condition to, the performance of the Fund Accounting Agent’s duties pursuant to Section 2 hereof, including without limitation information as to the following: securities trade authorizations, currency transactions, cash transaction reports, portfolio process, exchange rates, capital stock activity reports, portfolio securities activities, schedule of dividends or distributions, dividend or distribution declarations, dividend reconciliations/confirmations, corporate actions, service provider fee schedules, Portfolio budgets (including expense budgets), and Fund accounting policy determinations (including amortization and complex investment policies); provided, however, that for the avoidance of doubt, a Fund’s failure to deliver information requisite for the Fund Accounting Agent’s performance of a particular duty hereunder shall not excuse the Fund

 

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Accounting Agent’s performance of its other duties under this Agreement, unless such information is required for the Fund Accounting Agent’s performance of such other duties. The Fund Accounting Agent shall be entitled and instructed to rely upon such information and the Fund Accounting Agent shall have no responsibility to review, confirm or otherwise assume any duty with respect to the accuracy or completeness of such furnished information.

5. PROPER INSTRUCTIONS.

(a) Each Fund, directly or through the applicable Manager, as the case may be, shall communicate instructions in a timely manner to the Fund Accounting Agent by Proper Instructions, except as otherwise specifically provided by this Agreement.

(b) The applicable Fund, as the case may be, agrees promptly to forward or cause to be forwarded to the Fund Accounting Agent Written Instructions confirming Oral Instructions, provided that that failure of such confirming Written Instructions to be received by the Fund Accounting Agent shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions, and provided further that if Written Instructions confirming Oral Instructions are inconsistent with such Oral Instructions, any actions of the Fund Accounting Agent prior to receipt of such Written Instructions shall not be invalidated and the only obligation of the Fund Accounting Agent in connection therewith shall be to promptly notify the Manager of the applicable Fund of such inconsistency.

(c) The Fund Accounting Agent shall be entitled to rely upon any Proper Instructions it receives from a person reasonably believed by the Fund Accounting Agent to be an Authorized Person pursuant to this Agreement. Where Proper Instructions reasonably appear to have been received from an Authorized Person, the Fund Accounting Agent shall incur no liability to the Fund in acting upon such Proper Instructions which are transmitted with testing or authentication pursuant to terms and conditions agreed to by the Fund Accounting Agent and the Fund or a Portfolio’s Manager from time to time.

6. STANDARD OF CARE; LIMITATION OF LIABILITY; INDEMNIFICATION

(a) The Fund Accounting Agent shall be obligated to exercise in the performance of its duties hereunder reasonable care, prudence and diligence such as a person having responsibility for the provision of accounting services to management investment companies registered under the 1940 Act would exercise, to act in good faith and to use commercially reasonable efforts in performing services provided for under this Agreement, and shall not be liable for any damages arising out of its performance of or failure to perform its duties under this Agreement except to the extent that such damages are reasonably foreseeable and arise directly out of the Fund Accounting Agent’s willful misfeasance, bad faith, negligence or otherwise from a breach of this Agreement.

(b) Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) the Fund Accounting Agent shall not be liable for losses suffered by any of the Funds due to factors beyond its reasonable control (including acts of civil or military authority, national emergencies, general work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply), provided that

 

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the Fund Accounting Agent has acted in accordance with the provisions of Section 3(f) above; and provided further that, for the avoidance of doubt, a Fund’s failure to perform its obligations under this Agreement shall be excused to the extent that such failure to perform is caused by or results from the Fund Accounting Agent’s aforementioned failure to perform, and (ii) the Fund Accounting Agent shall not be liable for the validity or invalidity or authority or lack thereof of any Proper Instruction, except as set forth in Section 5(b) and (c).

(c) The applicable Fund agrees to indemnify and hold harmless the Fund Accounting Agent and its affiliates from all taxes, charges, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Laws and any state or foreign securities and blue sky laws, and amendments thereto), and expenses, including without limitation reasonable attorneys’ fees and reasonable disbursements (including, without limitation, those incurred in asserting any claim by the Fund Accounting Agent against the Fund arising from the obligations of the Fund hereunder), arising from any action or omission to act which the Fund Accounting Agent or its affiliate takes in accordance with the terms of this Agreement; provided that the Fund Accounting Agent and its affiliates shall not be indemnified against any liability (or any expenses incident to such liability) to the extent arising out of the Fund Accounting Agent’s or its affiliate’s own willful misfeasance, bad faith, negligence or breach of this Agreement. Notwithstanding the foregoing, in no event shall a Fund incur liability to the Fund Accounting Agent or its affiliates if the Fund is prevented, forbidden or delayed from performing, or omits to perform, any act or thing which this Agreement provides shall be performed or omitted to be performed, by reason of factors beyond the Fund’s reasonable control (including acts of civil or military authority, national emergencies, general work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riots, terrorism, nationalization or expropriation, currency restrictions, or failure of the mails, transportation, communication or power supply); provided, however, that for the avoidance of doubt, the Fund Accounting Agent’s failure to perform its obligations under this Agreement shall be excused to the extent that such failure to perform is caused by or results from the Fund’s aforementioned failure to perform.

(d) The Fund Accounting Agent agrees to indemnify and hold harmless the Funds from all taxes, charges, assessments, claims and liabilities arising from the Fund Accounting Agent’s failure to meet its obligations pursuant to this Agreement (including, without limitation, liabilities arising under the Securities Laws, and any state and foreign securities and blue sky laws, and amendments thereto) and expenses, including without limitation reasonable attorneys’ fees and reasonable disbursements (including, without limitation, those incurred in asserting any claim by any Fund against the Fund Accounting Agent arising from the obligations of the Fund Accounting Agent hereunder), to the extent that such damages are reasonably foreseeable and arise directly out of the Fund Accounting Agent’s or its affiliate’s own willful misfeasance, bad faith, negligence or breach of this Agreement, provided that the Funds shall not be indemnified against any liability (or any expenses incident to such liability) to the extent arising out of a Fund’s or its affiliates’ own willful misfeasance, bad faith, negligence or breach of this Agreement.

(e) Upon the occurrence of any event that causes or may cause any loss, damage or expense to one or more Funds or Portfolios, the Fund Accounting Agent (i) shall reasonably promptly notify each such Fund or Portfolio of the occurrence of such event and (ii) shall use commercially reasonable efforts and take reasonable steps under the circumstances to mitigate the effects of such event and to avoid continuing harm to each such Fund or Portfolio.

 

8


(f) The Fund Accounting Agent will maintain, at all times during the term of this Agreement, errors and omissions insurance, fidelity bonds and such other insurance as may be appropriate, in each case in a commercially reasonable amount sufficient to cover its potential liabilities under this Agreement. The Fund Accounting Agent agrees to provide the Funds with summaries of its applicable insurance coverage, and agrees to provide updated summaries monthly or as requested by the Funds.

(g) In order that the indemnification provisions contained in this Section 6 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party’s prior written consent.

7. COMPENSATION. As compensation for services rendered by the Fund Accounting Agent during the term of this Agreement, each Fund or each Fund on behalf of its applicable Portfolios, will pay to the Fund Accounting Agent a fee or fees as may be agreed to from time to time in writing by the Fund and the Fund Accounting Agent.

8. DURATION AND TERMINATION.

(a) Term. This Agreement shall be effective on the date first written above and shall continue in full force and effect through and including December 31, 2016 (the “Initial Term”).

(b) Termination for Cause. Notwithstanding the preceding clause (a) of this Section 8, in the event that (i) the Fund Accounting Agent or a Fund shall fail in any material respect to perform its duties and obligations hereunder pursuant to the applicable standard of care set forth herein (a “Defaulting Party”), the other party (the “Other Party”) shall have given written notice thereof to the Defaulting Party, and such material failure shall not have been remedied to the reasonable satisfaction of the Other Party within thirty (30) days after such written notice is received, or (ii) the Fund Accounting Agent shall be indicted for a crime, shall commence any bankruptcy or insolvency proceeding or have such a proceeding initiated against it which shall not be dismissed within sixty (60) days, or shall suffer any other material adverse change in its condition, operations or professional reputation that is determined by a Fund in its reasonable discretion to threaten the continuing performance of services hereunder or the reputation of the Fund, then the Other Party (in the case of termination pursuant to clause (i)) or the Fund (in the case of termination pursuant to clause (ii)) may terminate this Agreement by providing thirty (30) days written notice of such termination to the Defaulting Party (in the case of termination pursuant to clause (i)) or the Fund Accounting Agent (in the case of termination pursuant to clause (ii)). In any case of termination by reason of default, such termination shall not constitute a waiver by the Other Party of any other rights it may have hereunder against the Defaulting Party. In addition, notwithstanding the preceding clause (a) of this Section 8, this Agreement

 

9


may be terminated by one or more Funds immediately in the event of an appointment of a conservator or receiver for the Fund Accounting Agent or any parent of the Fund Accounting Agent by a regulatory agency or court of competent jurisdiction. Upon termination of the Agreement pursuant to this clause (b) with respect to any Fund or Portfolio, the Fund, on behalf of the applicable Portfolio, shall pay to the Fund Accounting Agent such compensation as shall have accrued to the effective date of such termination (the “Termination Date”).

(c) Cross-Termination for Cause. In addition, notwithstanding the preceding clause (a) of this Section 8, this Agreement may be terminated by the Fund Accounting Agent or by one or more Funds (with respect to the affected Funds or Portfolios) with no less than one hundred twenty (120) days’ notice in the case of termination of this Agreement by the Fund Accounting Agent, or thirty (30) days’ notice in the case of termination of this Agreement by a Fund, to the affected Funds or Fund Accounting Agent, as applicable, in the event of the termination of the custodian services agreement dated of even date herewith by and between the Fund(s) and State Street Bank and Trust Company, as Custodian (the “Custodian Services Agreement”), for cause pursuant to Section 9(b) thereof with respect to such Funds or Portfolios. Such termination notice must be provided by the terminating party no later than ninety (90) days after termination the relevant portion of the Custodian Services Agreement in order to be effective under this clause (c). Upon termination of the Agreement pursuant to this clause (c) with respect to any Fund or Portfolio, the Fund, on behalf of the applicable Portfolio, shall pay to the Fund Accounting Agent such compensation as shall have accrued to the Termination Date.

(d) Deemed Cross-Termination for other than Cause. In addition, notwithstanding the preceding clause (a) of this Section 8, this Agreement may be terminated by the Fund Accounting Agent or by one or more Funds (with respect to the affected Funds or Portfolios) with no less than one hundred twenty (120) days’ notice in the case of termination of this Agreement by the Fund Accounting Agent, or thirty (30) days’ notice in the case of termination of this Agreement by a Fund, to the affected Funds or Fund Accounting Agent, as applicable, in the event of the termination by the other party or parties of the Custodian Services Agreement with respect to such party or parties other than for cause pursuant to Section 9(b) of such Custodian Services Agreement. Such termination notice must be provided by each terminating party no later than ninety (90) days after termination the relevant portion of the Custodian Services Agreement in order to be effective under this clause (d). Upon termination of this Agreement pursuant to this clause (d) by any Fund or Portfolio as a result of the Custodian’s termination of the Custodian Services Agreement other than for cause, the applicable Fund shall pay to the Fund Accounting Agent such compensation as shall have accrued to the Termination Date.

(e) Change of Control of Fund Accounting Agent. The Fund Accounting Agent shall notify the Funds promptly following the execution of any agreement that would result in, or would be expected to result in, a change of control of the Fund Accounting Agent or any parent of the Fund Accounting Agent. Notwithstanding clause (a) of this Section 8, this Agreement may be terminated by one or more Funds upon at least sixty (60) days written notice following notice of execution of any such agreement.

(f) Termination for Non-Ordinary Course Transaction. Notwithstanding the preceding clause (a) of this Section 8, this Agreement may be terminated by a Fund, with respect

 

10


to any Fund or Portfolio, upon written notice to the Fund Accounting Agent, in the event that the applicable Board approves (i) the liquidation or dissolution of the Fund or Portfolio, (ii) the merger of the Fund or Portfolio into, or the consolidation of the Fund or Portfolio with, another entity, or (iii) the sale by the Fund or Portfolio of all, or substantially all, of its assets to another entity. Upon termination of this Agreement pursuant to this clause (f), the applicable Fund shall pay to the Fund Accounting Agent such compensation as shall have accrued to the Termination Date.

(g) Any Fund may terminate this Agreement with respect to such Fund or its Portfolio(s) for any reason other than as set forth in clauses (b), (c) (d), (e) or (f) of this Section 8 provided that (i) the applicable Fund shall be required to provide the Fund Accounting Agent at least six (6) months’ notice of the Termination Date; (ii) on the Termination Date, the applicable Fund shall pay the Fund Accounting Agent its compensation due through the Termination Date and shall reimburse Fund Accounting Agent for its reasonable costs, expenses and disbursements incurred through the Termination Date; provided, however, that if the applicable Fund provides less than six (6) months’ notice of the Termination Date, then on the Termination Date the Fund shall pay the Fund Accounting Agent its compensation due through the date occurring six (6) months after the date of delivery of such lesser notice (based upon the average compensation previously earned by Fund Accounting Agent with respect to such Fund or Portfolio for the three (3) calendar months most recently preceding the delivery date of such notice) and shall reimburse the Fund Accounting Agent for its reasonable costs, expenses and disbursements incurred through the Termination Date; and (iii) notwithstanding the foregoing, if the end of the Term (as defined in clause (a) of this Section 8) is to occur less than six (6) months from the date of notice of termination, the applicable Fund shall provide such lesser notice as may be reasonably practicable, and on the Termination Date the applicable Fund shall pay the Fund Accounting Agent its compensation due through the Termination Date and shall reimburse Fund Accounting Agent for its reasonable costs, expenses and disbursements incurred through the Termination Date. Upon receipt of such payment and reimbursement as is due to the Fund Accounting Agent pursuant to this Section 8(g), the Fund Accounting Agent will deliver such Fund’s or Portfolio’s securities and cash as set forth hereinbelow.

(h) Termination of this Agreement with respect to the coverage of any one particular Fund or Portfolio shall in no way affect the rights and duties under this Agreement with respect to any other Fund or Portfolio.

(i) In accordance with Section 3(g) hereof, all reasonable out-of-pocket expenses associated with the transfer of books and records upon any termination of this Agreement or of services hereunder with respect to any Fund or Portfolio shall be borne by the Fund Accounting Agent (except as may be specifically agreed in writing by the Fund in relation to special or unduly burdensome arrangements).

(j) Notwithstanding any provision of this Section 8 to the contrary, in the event that this Agreement is terminated in its entirety, the parties agree to continue operating under the terms of this Agreement as if this Agreement remained in full force and effect for one year or for such shorter period of time as the parties may mutually agree is necessary for the Fund Accounting Agent to deliver the books and records and any other properties of the Funds held hereunder by Sub-Accounting Agent to a successor provider of accounting services in an orderly manner.

 

11


(k) Any termination of services under this Agreement shall not affect the rights and obligations of the parties under Sections 5, 8 and 9 hereof.

9. CONFIDENTIALITY.

(a) The Fund Accounting Agent agrees to keep confidential, and to cause its employees and agents to keep confidential, all records of the Funds and information relating to the Funds, including without limitation information as to their respective shareholders and their respective portfolio holdings, unless the release of such records or information is made in connection with the services provided under this Agreement, at the written direction of the applicable Funds or Managers or otherwise consented to, in writing, by the such Funds or Managers. Each Fund agrees that such consent shall not be unreasonably withheld where the Fund Accounting Agent may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, or that is independently derived by any party hereto without the use of any information derived in connection with the services provided under this Agreement. Notwithstanding the foregoing, the Fund Accounting Agent may aggregate Fund or Portfolio data with similar data of other customers of the Fund Accounting Agent (“Aggregated Data”) and may use Aggregated Data for purposes of constructing statistical models so long as such Aggregated Data represents such a sufficiently large sample that no Fund or Portfolio data can be identified either directly or by inference or implication.

(b) Notwithstanding any provision herein to the contrary, each party hereto agrees that any Nonpublic Personal Information, as defined under Section 248.3(t) of Regulation S-P (“Regulation S-P”), promulgated under the Gramm-Leach-Bliley Act (the “GLB Act”), disclosed or otherwise made accessible by a party hereunder is for the specific purpose of permitting the other party to perform its duties as set forth in this Agreement. Each party agrees that, with respect to such information, it will comply with Regulation S-P and the GLB Act and that it will not disclose any Nonpublic Personal Information received in connection with this Agreement to any other party, except to the extent necessary to carry out the services set forth in this Agreement or as otherwise permitted by Regulation S-P or the GLB Act.

(c) Without limiting the generality of the preceding clause (a), the Fund Accounting Agent acknowledges and agrees that the Funds are prohibited by law from making selective public disclosure of information regarding portfolio holdings, that disclosure of any and all such information to the Fund Accounting Agent hereunder is made strictly under the conditions of confidentiality set forth in this Section 9 and solely for the purposes of the performance of accounting services hereunder, that any misuse of such information (including without limitation any disclosure to others by the Fund Accounting Agent or any of its employees or agents, or any trading on the basis of such information by anyone in receipt of such information) may constitute a criminal offense of trading on or tipping of material inside information regarding publicly traded securities, that access to any and all such information regarding portfolio holdings of the

 

12


Funds shall be restricted to those persons needing such information in the course of the performance of duties hereunder, and that the Fund Accounting Agent shall apprise all such persons having access of the obligation hereunder and under applicable law to prevent unauthorized disclosure of such confidential information.

(d) The Fund Accounting Agent acknowledges and agrees that any breach or threatened breach of this Section 9 would cause not only financial damage, but irreparable harm to the Funds, for which money damages will not provide an adequate remedy. Accordingly, in the event of a breach or threatened breach of this Section 9, the Funds shall, in addition to all other rights and remedies they may have, be entitled to an injunction (without the necessity of posting any bond or surety) restraining disclosure or misuse, in whole or in part, of any confidential information.

(e) The Fund Accounting Agent will implement and maintain a written information security program that contains appropriate security measures to safeguard confidential records and information of the Funds, including the personal information of the Funds’ shareholders, employees, directors and/or officers that the Fund Accounting Agent receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. For these purposes, “personal information” shall mean (i) an individual’s name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) drivers license number, (c) state identification card number, (d) debit or credit card number, (e) financial account number or (f) personal identification number or password that would permit access to a person’s account or (ii) any combination of the foregoing that would allow a person to log onto or access an individual’s account. Notwithstanding the foregoing “personal information” shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.

10. NOTICES.

(a) All notices and other communications, excluding Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. Notices shall be addressed,

if to the Fund Accounting Agent, to:

Neal J. Chansky, Senior Vice President

State Street Bank and Trust Company

U.S. Investor Services Division, LCC/2S

Lafayette Corporate Center

2 Avenue de Lafayette

Boston, Massachusetts 02111-1724

Tel: (617) 662-1376

Fax: (617)

 

13


with a copy to:

Mary Moran Zeven, Senior Vice President and Senior Managing Counsel

State Street Bank and Trust Company

Legal Division, LCCI2S

Lafayette Corporate Center

2 Avenue de Lafayette

Boston, Massachusetts 02111-1724

Tel: (617) 662-1783

Fax: (617) 662-2702

if to the Fund, to:

Legg Mason & Co., LLC

Attn: General Counsel

100 First Stamford PI., 6th FI.

Stamford, CT 06902

or at such other address as shall have been provided by like notice to the sender of any such notice or other communication by the other party.

11. MISCELLANEOUS.

(a) This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought.

(b) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement may not be assigned by either party, nor may the duties of either party hereunder be delegated, without the prior written consent of the other party, except that the Fund Accounting Agent may assign or delegate certain of its obligations hereunder to an affiliate or subsidiary of the Fund Accounting Agent without the Funds’ prior written consent, provided that the Fund Accounting Agent shall remain responsible for the actions and omissions of such affiliate or subsidiary as if such actions or omissions were taken by the Fund Accounting Agent.

(c) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and all schedules, exhibits, appendices, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

 

14


(d) Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

(e) This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof.

(f) The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

(g) This Agreement shall be deemed to be a contract made in the Commonwealth of Massachusetts and governed by laws of the Commonwealth of Massachusetts, without regard to principles of conflicts of law.

(h) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

(i) Regulation GG. Each Fund hereby represents and warrants that it does not engage in an “Internet gambling business,” as such term is defined in Section 233.2(r) of Federal Reserve Regulation GG (12 CFR 233) (“Regulation GG”). For the avoidance of doubt, the term “engage” shall not be deemed to include a passive investment made in the ordinary course of business. Each Fund hereby covenants and agrees that it shall not engage in an Internet gambling business. In accordance with Regulation GG, each Fund is hereby notified that “restricted transactions,” as such term is defined in Section 233.2(y) of Regulation GG, are prohibited in any dealings with the Fund Accounting Agent pursuant to this Agreement or otherwise between or among any party hereto.

12. FUNDS AS PARTIES; LIMITATION ON FUND LIABILITIES.

(a) The Fund Accounting Agent acknowledges and agrees that the obligations assumed by each of the Funds hereunder shall be limited in all cases to the assets of the Fund and that the Fund Accounting Agent may not seek satisfaction of any such obligation from the officers, agents, employees, trustees, directors or shareholders of the Fund or of any Portfolio of the Fund, and to the extent such trustees or officers are regarded as entering into this Agreement, they do so only as trustees or officers and not individually and that the obligations of this Agreement are not binding upon any such trustee, officer, employee or shareholder individually, but are binding only upon the assets and property of said Fund (or Portfolio thereof). The Fund Accounting Agent hereby agrees that such trustees, officers, employees or shareholders shall not be personally liable under this Agreement and that the Fund Accounting Agent shall look solely to the property of the Fund (or Portfolio thereof) for the performance of the Agreement or payment of any claim under the Agreement.

(b) This Agreement is an agreement entered into between the Fund Accounting Agent and each of the Funds with respect to each Portfolio. With respect to any obligation of the Fund on behalf of any Portfolio arising out of this Agreement, the Fund Accounting Agent shall look

 

15


for payment or satisfaction of such obligation solely to the assets of the Portfolio to which such obligation relates with the same effect as if the Fund Accounting Agent had separately contracted with the Fund by separate written instrument with respect to each Portfolio.

(c) Additional management investment companies (each a “New Fund”) and additional portfolios or series of existing management investment companies that are listed on Exhibit A hereto or of New Funds (each a “New Portfolio”) may from time to time be added as Funds and Portfolios serviced under this Agreement by (A) delivery to the Fund Accounting Agent of (i) an executed instrument of adherence by the New Fund or the existing Fund of which the New Portfolio is a series, pursuant to which such New Fund or Fund, as applicable, agrees to become bound by and party to this Agreement with respect to the New Portfolio, (ii) an amendment and restatement of Exhibit A setting forth the appropriate information as to such New Fund and its series or portfolios or as to such New Portfolio, and (iii) copies of the Governing Documents of such New Fund and/or New Portfolio and (B) the Fund Accounting Agent’s receipt of the foregoing documents, whereupon the Fund Accounting Agent, subject to satisfactory completion of its customary due diligence, may agree in writing to the addition of such New Fund and its series or portfolios or such New Portfolio, which agreement shall not be unreasonably withheld, it being understood that the Fund Accounting Agent shall not be deemed to be unreasonable in the event that (i) the Fund Accounting Agent’s ability to provide services hereunder to the New Fund or the New Portfolio is otherwise restricted by regulatory requirements or its internal risk profiles or policies, which may include consideration of material changes to the risks contemplated by the provision of the services under this Agreement to a New Fund or New Portfolio or (ii) the Fund Accounting Agent does not generally offer fund accounting and financial administration services to institutional clients regarding the particular type of fund or assets.

 

16


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

STATE STREET BANK AND TRUST COMPANY
By  

LOGO

Name:   Michael F. Rogers
Title:   Executive Vice President
EACH MANAGEMENT INVESTMENT COMPANY IDENTIFIED ON EXHIBIT A HERETO
By  

 

Name:  
Title:  

 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

STATE STREET BANK AND TRUST COMPANY
By  

 

Name:   Michael F. Rogers
Title:   Executive Vice President
EACH MANAGEMENT INVESTMENT COMPANY IDENTIFIED ON EXHIBIT A HERETO
By:  

LOGO

Name:  
Title:  

 


Exhibit A

Legg Mason Partners Equity Trust

Legg Mason Batterymarch Global Equity Fund

Legg Mason Batterymarch S&P 500 Index Fund

Legg Mason Batterymarch U.S. Large Cap Equity Fund

Legg Mason Capital Management All Cap Fund

Legg Mason ClearBridge Aggressive Growth Fund

Legg Mason ClearBridge Appreciation Fund

Legg Mason ClearBridge Equity Fund

Legg Mason ClearBridge Equity Income Builder Fund

Legg Mason ClearBridge Fundamental All Cap Value Fund

Legg Mason ClearBridge Large Cap Growth Fund

Legg Mason ClearBridge Large Cap Value Fund

Legg Mason ClearBridge Mid Cap Core Fund

Legg Mason ClearBridge Mid Cap Growth Fund

Legg Mason ClearBridge Small Cap Growth Fund

Legg Mason ClearBridge Small Cap Value Fund

Legg Mason ClearBridge Tactical Diversified Income Fund (fka Legg Mason ClearBridge

Diversified Large Cap Growth Fund)

Legg Mason Dynamic Multi-Strategy Fund

Legg Mason Esemplia Emerging Markets Long-Short Fund

Legg Mason Global Currents International All Cap Opportunity Fund

Legg Mason Global Currents International Small Cap Opportunity Fund

Legg Mason Investment Counsel Financial Services Fund

Legg Mason Investment Counsel Social Awareness Fund

Legg Mason Lifestyle Allocation 85%

Legg Mason Lifestyle Allocation 70%

Legg Mason Lifestyle Allocation 50%

Legg Mason Lifestyle Allocation 30%

Legg Mason Permal Tactical Allocation Fund

Legg Mason Target Retirement 2015

Legg Mason Target Retirement 2020

Legg Mason Target Retirement 2025

Legg Mason Target Retirement 2030

Legg Mason Target Retirement 2035

Legg Mason Target Retirement 2040

Legg Mason Target Retirement 2045

Legg Mason Target Retirement 2050

Legg Mason Target Retirement Fund

Legg Mason Partners Income Trust

Western Asset Adjustable Rate Income Fund

Western Asset California Municipals Fund

Western Asset Corporate Bond Fund

Western Asset Global High Yield Bond Fund

Western Asset High Income Fund

Western Asset Intermediate Maturity California Municipals Fund

Western Asset Intermediate Maturity New York Municipals Fund

Western Asset Intermediate-Term Municipals Fund

Western Asset Managed Municipals Fund

 

A-1


Western Asset Massachusetts Municipals Fund

Western Asset Mortgage Backed Securities Fund

Western Asset Municipal High Income Fund

Western Asset New Jersey Municipals Fund

Western Asset New York Municipals Fund

Western Asset Oregon Municipals Fund

Western Asset Pennsylvania Municipals Fund

Western Asset Short Duration Municipal Income Fund

Western Asset Short-Term Bond Fund

Western Asset Emerging Markets Debt Fund

Western Asset Short Term Yield Fund

Legg Mason Partners Variable Equity Trust

Legg Mason ClearBridge Variable Aggressive Growth Portfolio

Legg Mason ClearBridge Variable Appreciation Portfolio

Legg Mason ClearBridge Variable Equity Income Builder Portfolio

Legg Mason ClearBridge Variable Fundamental All Cap Value Portfolio

Legg Mason ClearBridge Variable Large Cap Growth Portfolio

Legg Mason ClearBridge Variable Large Cap Value Portfolio

Legg Mason ClearBridge Variable Mid Cap Core Portfolio

Legg Mason ClearBridge Variable Small Cap Growth Portfolio

Legg Mason Dynamic Multi-Strategy VIT Portfolio

Legg Mason Investment Counsel Variable Social Awareness Portfolio

Legg Mason Variable Lifestyle Allocation 50%

Legg Mason Variable Lifestyle Allocation 70%

Legg Mason Variable Lifestyle Allocation 85%

Legg Mason Partners Variable Income Trust

Legg Mason Western Asset Variable Global High Yield Bond Portfolio

Legg Mason Western Asset Variable High Income Portfolio

Legg Mason Western Asset Variable Strategic Bond Portfolio

Legg Mason Partners Money Market Trust

Western Asset California Tax Free Money Market Fund (f/k/a Western Asset California Tax Free Reserves)

Western Asset Connecticut Municipal Money Market Fund (f/k/a Western Asset Connecticut Tax Free Reserves)

Western Asset Government Reserves

Western Asset Liquid Reserves

Western Asset New York Tax Free Money Market Fund

Western Asset Tax Free Reserves

Western Asset U.S. Treasury Reserves

Legg Mason Partners Institutional Trust

Western Asset Institutional AMT Free Municipal Money Market Fund

Western Asset Institutional Cash Reserves

Western Asset Institutional Government Reserves

Western Asset Institutional Liquid Reserves

Western Asset Institutional Tax Free Reserves

Western Asset Institutional U.S. Treasury Reserves

Western Asset SMASh Series C Fund

Western Asset SMASh Series EC Fund

Western Asset SMASh Series M Fund

 

A-2


Legg Mason Partners Premium Money Market Trust

Western Asset Premium Liquid Reserves

Western Asset Premium U.S. Treasury Reserves

Western Asset Premium Tax Free Reserves

Master Portfolio Trust

Government Portfolio

Liquid Reserves Portfolio

Prime Cash Reserves Portfolio

Short Term Yield Portfolio

Tax Free Reserves Portfolio

U.S. Treasury Reserves Portfolio

ClearBridge Energy MLP Fund Inc.

ClearBridge Energy MLP Opportunity Fund Inc.

ClearBridge Energy MLP Total Return Fund Inc.

Legg Mason BW Global Income Opportunities Fund Inc.

Legg Mason Permal Alternatives Fund Inc. *

LMP Capital & Income Fund Inc.

LMP Corporate Loan Fund Inc.

LMP Real Estate Income Fund Inc.

Western Asset Emerging Markets Debt Fund Inc.

Western Asset Emerging Markets Income Fund Inc.

Western Asset Global Corporate Defined Opportunity Fund Inc.

Western Asset Global High Income Fund Inc.

Western Asset Global Partners Income Fund Inc.

Western Asset High Income Fund Inc.

Western Asset High Income Fund II Inc.

Western Asset High Income Opportunity Fund Inc.

Western Asset High Yield Defined Opportunity Fund Inc.

Western Asset Inflation Management Fund Inc.

Western Asset Intermediate Muni Fund Inc.

Western Asset Investment Grade Defined Opportunity Trust Inc.

Western Asset Managed High Income Fund Inc.

Western Asset Managed Municipals Fund Inc.

Western Asset Middle Markets Debt Fund Inc.

Western Asset Middle Market & High Yield Fund Inc.*

Western Asset Mortgage Defined Opportunity Fund Inc.

Western Asset Municipal Defined Opportunity Trust Inc.

Western Asset Municipal High Income Fund Inc.

Western Asset Municipal Partners Fund Inc.

Western Asset Variable Rate Strategic Fund Inc.

Western Asset Worldwide Income Fund Inc.

 

* Fund has not commenced operations

 

A-3


Legg Mason Global Asset Management Trust

Legg Mason Batterymarch Emerging Markets Trust

Legg Mason Batterymarch International Equity Trust

Legg Mason Batterymarch U.S. Small Capitalization Equity Portfolio

Legg Mason BW Diversified Large Cap Value Fund

Legg Mason Capital Management Disciplined Equity Research Fund

Legg Mason Capital Management Growth Trust

Legg Mason Capital Management Special Investment Trust

Legg Mason Capital Management Value Trust

Legg Mason Strategic Real Return Fund

Legg Mason Investment Trust

Legg Mason Capital Management Opportunity Trust

Legg Mason Tax-Free Income Fund

Legg Mason Investment Counsel Maryland Tax-Free Income Trust

Western Asset Funds, Inc.

Western Asset Core Bond Fund

Western Asset Core Plus Bond Fund

Western Asset Enhanced Equity Fund

Western Asset Global Government Bond Fund

Western Asset Global Multi-Sector Fund

Western Asset High Yield Fund

Western Asset Inflation Indexed Plus Bond Fund

Western Asset Intermediate Bond Fund

Western Asset Global Government Bond Fund

Western Asset Total Return Unconstrained Fund

Western Asset Income Fund

Western Asset/Claymore U.S. Inflation Protected Securities Fund

Western Asset/Claymore U.S. Inflation Protected Securities Fund 2

Western Asset Premier Bond Fund

Real Return Fund, Ltd.

Tactical Allocation Fund, Ltd.

 

A-4


Exhibit B

Updated as of February 2012

Pricing Agent Authorization Matrix

 

Security Type

  

Primary Source

  

Secondary Source

  

Pricing Logic

  

Pricing Default Logic**

  

Tolerance

EQUITIES

              

U. S. Listed Equities

(NYSE, AMEX)

   Thomson Reuters    IDC/Bloomberg/ Broker4/Fair Value (“FV”)    Last Sale or Official Close1   

Long Positions - Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   5%

U.S. OTC Equities

(Nasdaq)

   Thomson Reuters    IDC/ Bloomberg/ Broker4/FV    Last Sale or Official Close1   

Long Positions - Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   5%

Foreign Equities3

   Thomson Reuters    IDC/ Bloomberg/ Broker4/FV    Last Sale or Official Close1   

Long Positions - Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   5%

Listed ADR’s

   Thomson Reuters    IDC/ Bloomberg/ Broker4/FV    Last Sale or Official Close1   

Long Positions – Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   5%


Security Type

  

Primary Source

  

Secondary Source

  

Pricing Logic

  

Pricing Default
Logic**

  

Tolerance

Non Listed ADR’s

   IDC    Thomson Reuters/Bloomberg/ Broker4/FV    Last Sale or Official Close1   

Long Positions - Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   5%

FIXED INCOME

              

Municipal Bonds

   IDC    S&P/Bloomberg/ Broker4/FV   

Long Positions – Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   N/A5    2%

US Bonds

   IDC    PricingDirect/Thomson Reuters/ Bloomberg/ Broker4/FV   

Long Positions – Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   N/A5    2%

Emerging Market Bonds

   IDC    PricingDirect /Thomson Reuters/Bloomberg/ Broker4/FV    Long Positions – Bid Short Positions – Ask2,9 -or- All Positions – Mean2,9    N/A5    2%

Eurobond/Foreign Bonds

   IDC    PricingDirect/ Bloomberg/Thomson Reuters/ Broker4/FV   

Long Positions – Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   N/A5    2%


Security Type

  

Primary Source

  

Secondary Source

  

Pricing Logic

  

Pricing Default
Logic**

  

Tolerance

OTHER ASSETS

              
Options    Thomson Reuters    Bloomberg/ IDC/ Broker4/FV    Last Sale   

Long Positions - Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   5%
Futures on Fixed Income Instruments (including options on futures)    Thomson Reuters    Bloomberg/ IDC/Broker4/ FV    Settlement    N/A5    2%
Futures on Equity Instruments(including options on futures)    Thomson Reuters    Bloomberg/ IDC/Broker4/FV    Settlement    N/A5    5%
Swaps    MarkitPartners    PricingDirect/ IDC/ Broker4/ FV    Mean9    N/A5    2%
Warrants    IDC    Broker4/ FV    Last Sale    N/A5    2%
Bank Loans    Thomson Reuters (Loan Pricing Corp.)    Broker4/ FV   

Long Positions - Bid Short Positions – Ask2,9

-or-

All Positions – Mean2,9

   N/A5    2%
Money Market Instruments    IDC6    Broker4/FV    Bid9    N/A5    N/A4
Mutual Funds/Hedge Funds    NAV7    FV    Offer Price    N/A5    N/A5
EXCHANGE RATES               
   WM Company    IDC/Bloomberg    4:00 PM8    N/A5    2%


Security Type

  

Primary Source

  

Secondary Source

  

Pricing Logic

  

Pricing Default
Logic**

  

Tolerance

FORWARD POINTS               
   WM Company    IDC    4:00 PM8    N/A5    2%

NOTES:

 

1  Each market’s official closing price will be used where available. For markets that either do not offer an official closing price or where the official closing price may not be representative of the overall market, the security’s Last Sale price will be used.
2  Certain Funds or Fund families in the Legg Mason complex were organized using bid prices to value their long positions and the asked price to value their short positions while other Funds in the complex were organized using the mean between the bid and the asked prices to value both long and short positions. LMGFP and the Pricing Agent are responsible for maintaining a record of the policy adopted by each Fund, as it may be amended from time to time, and ensuring that the respective policies are adhered to when valuing the Funds’ portfolio holdings.
3  ITG is used to value foreign equities on the days the Russell 1000 moves + or - a predetermined level and in certain instances when a foreign market is closed. Price supplied by the primary pricing source is adjusted by a factor provided by ITG.
4  Broker quoted prices are provided by a Pricing Broker. (If security has 2 broker quotes then average of the 2 quotes will be used.).
5  N/A – not applicable
6  Money Market Funds will mark to market their investments weekly and at month end with prices provided by IDC. Instruments with more than 60 days to maturity in non-money market funds will be valued daily.
7  The mutual funds’ net asset value per share price.
8  On an early close of the US markets, an earlier foreign exchange rate may be used.
9  For certain securities, only a single price quotation is reasonably available, and the source may or may not designate whether it is a bid price or a mean price. In such circumstances, all Funds may use that price, regardless of whether their procedures specify the use of bid or mean prices.
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SIMPSON THACHER & BARTLETT LLP

425 Lexington Avenue

New York, New York

January 12, 2016

VIA EDGAR

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549

Attn: Filing Desk

Re: Western Asset High Income Opportunity Fund Inc. (811-07920)

Ladies and Gentlemen:

On behalf of Western Asset High Income Opportunity Fund Inc. (“HIO”), and pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, we submit for filing HIO’s preliminary Registration Statement on Form N-14 by direct electronic transmission.

This Registration Statement on Form N-14 is being filed in connection with the proposed merger of Western Asset Managed High Income Fund Inc. with and into HIO pursuant to the Maryland General Corporation Law.

If you have any questions in connection with this filing, please call Rafael Vasquez (212-455-3566) or Alexander Lebow
(212-455-3925) of this firm.

Very truly yours,

/s/ Simpson Thacher & Bartlett LLP

Simpson Thacher & Bartlett LLP