1. Organization and significant accounting policies
The financial statements of the Portfolio, including the schedule of investments, are contained elsewhere in this report and should be read in conjunction with the Fund’s financial statements.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
Notes to financial statements continued
dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(f) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of August 31, 2008, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
(g) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the Fund had no reclassifications.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s and the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s and the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
Under the investment management agreement, the Fund and the Portfolio pay investment management fees, calculated daily and paid monthly, at an annual rate of 0.25% and 0.10% of the Fund’s and the Portfolio’s average daily net assets, respectively.
LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.
During the year ended August 31, 2008, the Fund had a voluntary expense limitation in place of 0.45% of the Fund’s average daily net assets.
During the year ended August 31, 2008, LMPFA waived a portion of its fee in the amount of $214,174.
Effective January 1, 2008, the manager is permitted to recapture amounts previously voluntarily forgone or reimbursed by the manager to the Fund during
14 | CitiSM Premium U.S. Treasury Reserves 2008 Annual Report
the same fiscal year if the Fund’s total annual operating expenses have fallen to a level below the voluntary fee waiver/reimbursement (“expense cap”) shown in the fee table of the Fund’s prospectus. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the Fund’s total annual operating expenses exceeding the expense cap.
Effective December 1, 2007, Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor. Prior to December 1, 2007, Citigroup Global Markets Inc. (“CGM”) and LMIS served as co-distributors of the Fund.
The Fund has adopted a Rule 12b-1 distribution and service plan under the 1940 Act, and under that plan, the Fund pays a monthly fee at an annual rate not to exceed 0.10% of the Fund’s average daily net assets. The distribution fees paid amounted to $294,161 for the year ended August 31, 2008.
Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
3. Shares of beneficial interest
The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest with a par value of $0.00001 per share.
Because the Fund has maintained a $1.00 net asset value per share from inception, the number of shares sold, shares issued in reinvestment of dividends declared, and shares repurchased, is equal to the dollar amount shown in the Statements of Changes in Net Assets for the corresponding capital share transactions.
4. Income tax information and distributions to shareholders
Subsequent to the fiscal year end, the Fund has made the following distributions:
| | | | |
RECORD DATE
PAYABLE DATE | | | | |
| | | | | |
Daily
09/30/2008 | | $ | 0.000868 | |
The tax character of distributions paid during the fiscal years ended August 31, were as follows:
| | | | | | | |
| | 2008 | | 2007 | |
| | | | | | |
Distributions paid from: | | | | | | | |
Ordinary income | | $ | 6,018,191 | | $ | 8,881,646 | |
As of August 31, 2008, there were no significant differences between the book and tax components of net assets.
CitiSM Premium U.S. Treasury Reserves 2008 Annual Report | 15
Notes to financial statements continued
5. Legal matters
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM, a former distributor of the Fund and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including Smith Barney Fund Management, LLC (“SBFM”) and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.
On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against Citigroup Asset Management (“CAM”), SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.
16 | CitiSM Premium U.S. Treasury Reserves 2008 Annual Report
On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filled in the future.
* * *
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the U.S. Securities and Exchange Commission (“SEC”) as previously described. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.
On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.
6. Other matters
On or about May 30, 2006, John Halebian, a purported shareholder of CitiSM New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliott J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit).
The Subject Trust is also named in the complaint as a nominal defendant. The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary
CitiSM Premium U.S. Treasury Reserves 2008 Annual Report | 17
Notes to financial statements continued
duty to shareholders, by virtue of the voting procedures, including “echo voting,” used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.
In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the Board of the Subject Trust, and the Board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the Board. The committee, after a thorough review, determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The Board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also determined and, adopting the recommendation of the committee, directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian has filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal is pending.
7. Recent accounting pronouncements
On September 20, 2006, the Financial Accounting Standards Board (“FASB”) released Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management has determined that there is no material impact to the Fund’s valuation policies as a result of adopting FAS 157. The Fund will implement the disclosure requirements beginning with its November 30, 2008 Form N-Q.
* * *
In March 2008, FASB issued the Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about the Fund’s derivative and hedging activities, including how such activities are accounted for and their effect on the Fund’s financial position, performance and cash flows.
18 | CitiSM Premium U.S. Treasury Reserves 2008 Annual Report
Management is currently evaluating the impact the adoption of FAS 161 will have on the Fund’s financial statements and related disclosures.
8. Subsequent events
Effective October 6, 2008, PNC Global Investment Servicing serves as co-transfer agent to the Fund, along with Boston Financial Data Services, Inc.
* * *
The Fund has enrolled in the U.S. Treasury Department’s Temporary Guarantee Program for money market funds (the “Guarantee Program”). Under the Guarantee Program, the U.S. Treasury guarantees the $1.00 dollar per share value of fund shares outstanding as of September 19, 2008, subject to certain terms and limitations.
Only shareholders who held shares as of September 19, 2008 are eligible to participate in the guarantee. Those shareholders may purchase and redeem shares in their account during the period covered by the Guarantee Program. However, the number of shares covered by the guarantee cannot exceed the number of shares held by the shareholder at the close of business on September 19, 2008. Thus, to the extent the overall value of a shareholder’s account increases after September 19, 2008, the amount of the increase will not be covered by the guarantee.
The guarantee will be triggered if the market-based net asset value of the Fund is less than $0.995, unless promptly cured (a “Guarantee Event”). If a Guarantee Event were to occur, the Fund would be required to liquidate. Upon liquidation and subject to the availability of funds under the Guarantee Program, eligible shareholders would be entitled to receive payments equal to $1.00 per “covered share.” The number of “covered shares” held by a shareholder would be equal to the lesser of (1) the number of shares owned by that shareholder on September 19, 2008 or (2) the number of shares owned by that shareholder on the date upon which the Guarantee Event occurs. The coverage provided for all money market funds participating in the Guarantee Program (and, in turn, any amount available to the Fund and its eligible shareholders) is subject to an overall limit, currently approximately $50 billion.
The initial term of the Guarantee Program terminates on December 18, 2008, but may be later extended by the Treasury Department to terminate no later than September 18, 2009. If the Treasury Department extends the Program, the Board of Trustees of the Fund will consider whether to continue to participate.
In order to participate in the Guarantee Program during the initial term, the Fund has paid a participation fee of 0.01% of the Fund’s net asset value as of September 19, 2008, which is not covered by any expense cap currently in effect. Participation in any extension of the Guarantee Program would require payment of an additional fee, although there can be no assurance that any Fund will elect to participate, or be eligible to participate, in any extension of the Guarantee Program.
CitiSM Premium U.S. Treasury Reserves 2008 Annual Report | 19
Report of independent registered public accounting firm
The Board of Trustees and Shareholders
Legg Mason Partners Premium Money Market Trust:
We have audited the accompanying statement of assets and liabilities of CitiSM Premium U.S. Treasury Reserves, a series of Legg Mason Partners Premium Money Market Trust, as of August 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of CitiSM Premium U.S. Treasury Reserves as of August 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
October 24, 2008
20 | CitiSM Premium U.S. Treasury Reserves 2008 Annual Report
Additional information (unaudited)
Information about Trustees and Officers
The business and affairs of the CitiSM Premium U.S. Treasury Reserves (the “Fund”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers of the Fund is set forth below. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling Shareholder Services at 1-800-451-2010.
| | |
NON-INTERESTED TRUSTEES |
ELLIOTT J. BERV
c/o R. Jay Gerken, CFA, Legg Mason & Co., LLC (“Legg Mason”)
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1943 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1989 |
Principal
occupation(s) during
past five years | | President and Chief Executive Officer, Catalyst (consulting) (since 1984); Formerly, Chief Executive Officer, Rocket City Enterprises (media) (from 2000 to 2005) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001); Director, Lapoint Industries (industrial filter company) (since 2002); Director, Alzheimer’s Association (New England Chapter) (since 1998) |
| |
A. BENTON COCANOUGHER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1938 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1991 |
Principal
occupation(s) during
past five years | | Dean Emeritus and Professor, Texas A&M University (since 2004); Formerly, Interim Chancellor, Texas A&M University System (from 2003 to 2004); Formerly, Special Advisor to the President, Texas A&M University (from 2002 to 2003) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
CitiSM Premium U.S. Treasury Reserves | 21
Additional information (unaudited) continued
Information about Trustees and Officers
| | |
JANE F. DASHER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1949 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1999 |
Principal
occupation(s) during
past five years | | Chief Financial Officer, Korsant Partners, LLC (a family investment company) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
| |
MARK T. FINN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1943 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1989 |
Principal
occupation(s) during
past five years | | Adjunct Professor, College of William & Mary (since 2002); Principal/Member Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
| |
RAINER GREEVEN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1936 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1994 |
Principal
occupation(s) during
past five years | | Attorney, Rainer Greeven PC; President and Director, 62nd Street East Corporation (real estate) (since 2002) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
22 | CitiSM Premium U.S. Treasury Reserves
| | |
STEPHEN R. GROSS
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1947 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1986 |
Principal
occupation(s) during
past five years | | Chairman, HLB Gross Collins, PC (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); Formerly, Managing Director, Fountainhead Ventures, LLC (technology accelerator) (from 1998 to 2003) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | Director, Andersen Calhoun (assisted living) (since 1987); Formerly,
Director, ebank Financial Services, Inc. (from 1997 to 2004) |
| |
RICHARD E. HANSON, JR.
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1941 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1985 |
Principal
occupation(s) during
past five years | | Retired |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
| |
DIANA R. HARRINGTON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1940 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1992 |
Principal
occupation(s) during
past five years | | Professor, Babson College (since 1992) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
CitiSM Premium U.S. Treasury Reserves | 23
Additional information (unaudited) continued
Information about Trustees and Officers
| | |
SUSAN M. HEILBRON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1945 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1994 |
Principal
occupation(s) during
past five years | | Independent Consultant (since 2001) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
| |
SUSAN B. KERLEY
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1951 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1992 |
Principal
occupation(s) during
past five years | | Investment Consulting Partner, Strategic Management Advisors, LLC (investment consulting) (since 1990) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | Chairman (since 2005) and Trustee (since 2000), Eclipse Funds (3 funds); Chairman (since 2005) and Director (since 1990), Eclipse Funds Inc. (23 funds); Chairman and Director, ICAP Funds, Inc. (4 funds) (since 2006); Chairman and Trustee, The MainStay Funds (21 funds) (since 2007); and Chairman and Director, MainStay VP Series Fund, Inc. (24 funds) (since 2007) |
| |
ALAN G. MERTEN
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1941 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1990 |
Principal
occupation(s) during
past five years | | President, George Mason University (since 1996) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | Director of Cardinal Financial Corporation (since 2006); Trustee, First Potomac Realty Trust (since 2005); Formerly, Director, Xybernaut Corporation (information technology) (from 2004 to 2006); Formerly, Director, Digital Net Holdings, Inc. (from 2003 to 2004); Formerly, Director, Comshare, Inc. (information technology) (from 1985 to 2003) |
| |
24 | CitiSM Premium U.S. Treasury Reserves
| | |
R. RICHARDSON PETTIT
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue New York, NY 10018 |
Birth year | | 1942 |
Position(s) held
with Fund1 | | Trustee |
Term of office1 and
length of time served2 | | Since 1990 |
Principal
occupation(s) during
past five years | | Formerly, Duncan Professor of Finance, University of Houston (from 1977 to 2006) |
Number of portfolios
in fund complex over-
seen by Trustee | | 68 |
Other board member-
ships held by Trustee | | None |
INTERESTED TRUSTEE | | |
R. JAY GERKEN, CFA3
Legg Mason, 620 Eighth Avenue New York, NY 10018 |
Birth year | | 1951 |
Position(s) held
with Fund1 | | Trustee, President, Chairman and Chief Executive Officer |
Term of office1 and
length of time served2 | | Since 2002 |
Principal
occupation(s) during
past five years | | Managing Director of Legg Mason; Chairman of the Board and Trustee/Director of 164 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason and its affiliates; Formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management Inc. (“CFM”) (2002 to 2005); Formerly, Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (“TIA”) (from 2002 to 2005) |
Number of portfolios
in fund complex over-
seen by Trustee | | 149 |
Other board member-
ships held by Trustee | | Trustee, Consulting Group Capital Market Funds (from 2002 to 2006) |
OFFICERS |
FRANCES M. GUGGINO
Legg Mason, 55 Water Street New York, NY 10041 |
Birth year | | 1957 |
Position(s) held
with Fund1 | | Chief Financial Officer and Treasurer |
Term of office1 and
length of time served2 | | Since 2004 |
Principal
occupation(s) during
past five years | | Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; Formerly, Controller of certain mutual funds associated with Citigroup Asset Management (“CAM”) (from 1999 to 2004) |
| |
CitiSM Premium U.S. Treasury Reserves | 25
Additional information (unaudited) continued
Information about Trustees and Officers
| | |
TED P. BECKER
Legg Mason, 620 Eighth Avenue New York, NY 10018 |
Birth year | | 1951 |
Position(s) held
with Fund1 | | Chief Compliance Officer |
Term of office1 and
length of time served2 | | Since 2006 |
Principal
occupation(s) during
past five years | | Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason, LMPFA and certain affiliates (since 2006); Formerly, Managing Director of Compliance at CAM or its predecessor (from 2002 to 2005) |
| |
JOHN CHIOTA
Legg Mason, 300 First Stamford Place Stamford, CT 06902 |
Birth year | | 1968 |
Position(s) held
with Fund1 | | Chief Anti-Money Laundering Compliance Officer |
Term of office1 and
length of time served2 | | Since 2006 |
Principal
occupation(s) during
past five years | | Vice President of Legg Mason or its predecessor (since 2004); Chief Anti-Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason or its affiliates (since 2006); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse |
| |
ROBERT I. FRENKEL
Legg Mason, 300 First Stamford Place Stamford, CT 06902 |
Birth year | | 1954 |
Position(s) held
with Fund1 | | Secretary and Chief Legal Officer |
Term of office1 and
length of time served2 | | Since 2003 |
Principal
occupation(s) during
past five years | | Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); Formerly, Secretary of CFM (from 2001 to 2004) |
| |
THOMAS C. MANDIA
Legg Mason, 300 First Stamford Place Stamford, CT 06902 |
Birth year | | 1962 |
Position(s) held
with Fund1 | | Assistant Secretary |
Term of office1 and
length of time served2 | | Since 2000 |
Principal
occupation(s) during | | Managing Director and Deputy Counsel of Legg Mason (since 2005); Managing Director and Deputy General Counsel for CAM (from 1992 to 2005) |
| |
26 | CitiSM Premium U.S. Treasury Reserves
| | |
DAVID CASTANO
Legg Mason, 55 Water Street New York, NY 10041 |
Birth year | | 1971 |
Position(s) held
with Fund1 | | Controller |
Term of office1 and
length of time served2 | | Since 2007 |
Principal
occupation(s) during
past 5 years | | Vice President of Legg Mason (since 2008); Controller of certain mutual funds associated with Legg Mason (since 2007); Formerly, Assistant Treasurer of Lord Abbett mutual funds (from 2004 to 2006); Supervisor at UBS Global Asset Management (from 2003 to 2004); Accounting Manager at CAM (prior to 2003) |
| |
MATTHEW PLASTINA
Legg Mason, 55 Water Street New York, NY 10041 |
Birth year | | 1970 |
Position(s) held
with Fund1 | | Controller |
Term of office1 and
length of time served2 | | Since 2007 |
Principal
occupation(s) during
past 5 years | | Vice President of Legg Mason (since 2008); Assistant Vice President of Legg Mason or its predecessor (since 1999); Controller of certain mutual funds associated with Legg Mason (since 2007); Formerly, Assistant Controller of certain mutual funds associated with Legg Mason and its predecessors (from 2002 to 2007) |
| |
1 | Each Trustee and Officer serves until his or her successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal. |
| |
2 | Indicates the earliest year in which the Trustee or Officer became a Board Member or Officer, as applicable, for a fund in the Legg Mason Partners fund complex. |
| |
3 | Mr. Gerken is an “interested person” of the Fund as defined in the 1940 Act, because Mr. Gerken is an officer of LMPFA and certain of its affiliates. |
CitiSM Premium U.S. Treasury Reserves | 27
Important tax information (unaudited)
All of the net investment income distributions paid monthly by the Fund during the taxable year ended August 31, 2008 were attributable to interest from Federal obligations.
The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. We recommend that you consult with your tax adviser to determine if any portion of the dividends you received is exempt from state income taxes.
The following information is applicable to non-U.S. resident shareholders:
All of the ordinary income distributions paid monthly by the Fund represent Qualified Net Interest Income and Qualified Short-Term Gain eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations.
Please retain this information for your records.
28 | CitiSM Premium U.S. Treasury Reserves
Schedule of investments
August 31, 2008
| | | | | | | |
U.S. TREASURY RESERVES PORTFOLIO |
|
FACE
AMOUNT | | SECURITY | | VALUE | |
| | | | | | | | |
SHORT-TERM INVESTMENTS — 100.0% |
| | | | | | |
| | | U.S. Treasury Notes — 2.7% | | | | |
| | | U.S. Treasury Notes: | | | | |
$ | 150,000,000 | | 3.125% due 9/15/08 | | $ | 150,089,627 | |
| 100,000,000 | | 4.625% due 9/30/08 | | | 100,226,562 | |
| 130,000,000 | | 4.875% due 10/31/08 | | | 130,614,411 | |
| | | | | | | | |
| | | Total U.S. Treasury Notes | | | | |
| | | (Cost — $380,930,600) | | | 380,930,600 | |
| | | | | | | | |
| | | U.S. Treasury Bills — 97.3% | | | | |
| 1,080,518,000 | | U.S. Cash Management Bills, 1.611- 1.938% due 9/15/08 (a) | | | 1,079,748,488 | |
| | | U.S. Treasury Bills: | | | | |
| 1,466,843,000 | | 1.587 - 1.828% due 9/4/08 (a) | | | 1,466,631,403 | |
| 1,306,530,000 | | 1.733 - 1.919% due 9/11/08 (a) | | | 1,305,868,064 | |
| 2,046,994,000 | | 1.702 - 2.056% due 9/18/08 (a) | | | 2,045,206,829 | |
| 1,140,000,000 | | 1.707 - 1.859% due 9/25/08 (a) | | | 1,138,691,867 | |
| 400,000,000 | | 1.889 - 1.904% due 10/2/08 (a) | | | 399,350,507 | |
| 572,776,000 | | 1.759 - 1.869% due 10/9/08 (a) | | | 571,678,583 | |
| 129,954,000 | | 1.612% due 10/16/08 (a) | | | 129,693,280 | |
| 8,060,000 | | 1.521% due 10/23/08 (a) | | | 8,042,362 | |
| 700,000,000 | | 1.697 - 1.707% due 10/30/08 (a) | | | 698,057,918 | |
| 575,000,000 | | 1.712 - 1.755% due 11/6/08 (a) | | | 573,196,458 | |
| 507,065,000 | | 1.862 - 2.215% due 11/13/08 (a) | | | 505,088,153 | |
| 400,000,000 | | 1.854 - 1.898% due 11/20/08 (a) | | | 398,351,666 | |
| 362,602,000 | | 1.707 - 1.934% due 11/28/08 (a) | | | 361,038,812 | |
| 200,000,000 | | 1.752 - 1.964% due 12/4/08 (a) | | | 199,037,806 | |
| 200,000,000 | | 1.949 - 2.066% due 12/11/08 (a) | | | 198,868,660 | |
| 350,000,000 | | 1.724 - 2.373% due 12/18/08 (a) | | | 347,993,000 | |
| 285,000,000 | | 1.740 - 2.276% due 12/26/08 (a) | | | 283,213,882 | |
| 100,000,000 | | 2.153% due 1/2/09 (a) | | | 99,272,250 | |
| 392,331,000 | | 1.821 - 2.077% due 1/8/09 (a) | | | 389,635,286 | |
| 709,120,000 | | 1.772 - 1.969% due 1/15/09 (a) | | | 704,103,899 | |
| 50,000,000 | | 1.934% due 1/22/09 (a) | | | 49,619,660 | |
| 235,525,000 | | 1.827 - 1.893% due 1/29/09 (a) | | | 233,703,847 | |
| 171,959,000 | | 1.888 - 1.934% due 2/5/09 (a) | | | 170,527,189 | |
| 150,000,000 | | 2.036% due 2/12/09 (a) | | | 148,623,084 | |
| 225,000,000 | | 1.918 - 1.995% due 2/19/09 (a) | | | 222,915,937 | |
| 100,000,000 | | 1.939% due 2/26/09 (a) | | | 99,050,666 | |
| 150,000,000 | | 2.148 - 2.448% due 6/4/09 (a) | | | 147,471,917 | |
| 25,000,000 | | 2.350% due 7/2/09 (a) | | | 24,515,500 | |
| 25,000,000 | | 2.355% due 7/30/09 (a) | | | 24,469,722 | |
| | | | | | | | |
| | | Total U.S. Treasury Bills | | | | |
| | | (Cost — $14,023,666,695) | | | 14,023,666,695 | |
| | | | | | | | |
| | | TOTAL INVESTMENTS — 100.0% (Cost — $14,404,597,295#) | | | 14,404,597,295 | |
| | | Other Assets in Excess of Liabilities — 0.0% | | | 5,115,114 | |
| | | | | | | | |
| | | TOTAL NET ASSETS — 100.0% | | $ | 14,409,712,409 | |
| | | | | | | | |
| |
(a) | Rate shown represents yield-to-maturity. |
| |
# | Aggregate cost for federal income tax purposes is substantially the same. |
See Notes to Financial Statements.
U.S. Treasury Reserves Portfolio 2008 Annual Report | 29
Statement of assets and liabilities U.S. Treasury Reserves Portfolio
August 31, 2008
| | | | |
| | | | | |
ASSETS: | | | | |
Investments, at amortized cost | | $ | 14,404,597,295 | |
Cash | | | 795 | |
Interest receivable | | | 6,246,922 | |
Prepaid expenses | | | 142,301 | |
| | | | | |
Total Assets | | | 14,410,987,313 | |
| | | | | |
LIABILITIES: | | | | |
Investment management fee payable | | | 1,158,604 | |
Trustees’ fees payable | | | 44,000 | |
Accrued expenses | | | 72,300 | |
| | | | | |
Total Liabilities | | | 1,274,904 | |
| | | | | |
TOTAL NET ASSETS | | $ | 14,409,712,409 | |
| | | | | |
REPRESENTED BY: | | | | |
Paid-in capital | | $ | 14,409,712,409 | |
| | | | | |
See Notes to Financial Statements.
30 | U.S. Treasury Reserves Portfolio 2008 Annual Report
U.S. Treasury Reserves Portfolio
For the Year Ended August 31, 2008
| | | | |
| | | | | |
INVESTMENT INCOME: | | | | |
Interest | | $ | 219,883,514 | |
| | | | | |
EXPENSES: | | | | |
Investment management fee (Note 2) | | | 9,645,754 | |
Trustees’ fees | | | 179,010 | |
Legal fees | | | 177,504 | |
Custody fees | | | 60,215 | |
Insurance | | | 32,878 | |
Audit and tax | | | 24,900 | |
Miscellaneous expenses | | | 33,923 | |
| | | | | |
Total Expenses | | | 10,154,184 | |
Less: Fee waivers and/or expense reimbursements (Note 2) | | | (506,058 | ) |
Fees paid indirectly (Note 1) | | | (2,372 | ) |
| | | | | |
Net Expenses | | | 9,645,754 | |
| | | | | |
NET INVESTMENT INCOME | | | 210,237,760 | |
| | | | | |
NET REALIZED GAIN ON INVESTMENT TRANSACTIONS | | | 111,668 | |
| | | | | |
INCREASE IN NET ASSETS FROM OPERATIONS | | $ | 210,349,428 | |
| | | | | |
See Notes to Financial Statements.
U.S. Treasury Reserves Portfolio 2008 Annual Report | 31
Statements of changes in net assets U.S. Treasury Reserves Portfolio
| | | | | | | |
FOR THE YEARS ENDED AUGUST 31, | | 2008 | | 2007 | |
| | | | | | |
OPERATIONS: | | | | | | | |
Net investment income | | $ | 210,237,760 | | $ | 83,196,299 | |
Net realized gain | | | 111,668 | | | 4,160 | |
| | | | | | | | |
Increase in Net Assets From Operations | | | 210,349,428 | | | 83,200,459 | |
| | | | | | | | |
CAPITAL TRANSACTIONS: | | | | | | | |
Proceeds from contributions | | | 28,002,585,878 | | | 10,105,899,574 | |
Value of withdrawals | | | (18,229,220,393 | ) | | (7,253,588,398 | ) |
| | | | | | | | |
Increase in Net Assets From Capital Transactions | | | 9,773,365,485 | | | 2,852,311,176 | |
| | | | | | | | |
INCREASE IN NET ASSETS | | | 9,983,714,913 | | | 2,935,511,635 | |
| | | | | | | | |
NET ASSETS: | | | | | | | |
Beginning of year | | | 4,425,997,496 | | | 1,490,485,861 | |
| | | | | | | | |
End of year | | $ | 14,409,712,409 | | $ | 4,425,997,496 | |
| | | | | | | | |
See Notes to Financial Statements.
32 | U.S. Treasury Reserves Portfolio 2008 Annual Report
U.S. Treasury Reserves Portfolio
|
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING FOR EACH YEAR ENDED AUGUST 31: |
| | | | | | | | | | | | | | | | |
|
| | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | |
| | | | | | | | | | | | | | | | | |
NET ASSETS,
END OF YEAR (000s) | | $ | 14,409,712 | | $ | 4,425,997 | | $ | 1,490,486 | | $ | 1,218,904 | | $ | 1,562,711 | |
| | | | | | | | | | | | | | | | | |
Total return1 | | | 2.59 | % | | 4.96 | % | | 4.21 | % | | 2.25 | % | | 0.92 | % |
| | | | | | | | | | | | | | | | | |
RATIOS TO AVERAGE NET ASSETS: | | | | | | | | | | | | | | | | |
Gross expenses | | | 0.11 | % | | 0.12 | %2 | | 0.13 | % | | 0.18 | % | | 0.18 | % |
Net expenses3,4,5 | | | 0.10 | | | 0.10 | 2 | | 0.10 | | | 0.10 | | | 0.10 | |
Net investment income | | | 2.18 | | | 4.76 | | | 4.16 | | | 2.16 | | | 0.91 | |
| |
1 | Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
| |
2 | Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would not have changed. |
| |
3 | Reflects fee waivers and/or expense reimbursements. |
| |
4 | There was no impact to the expense ratio as a result of fees paid indirectly. |
| |
5 | As a result of a voluntary expense limitation, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses, to average net assets of shares will not exceed 0.10%. |
See Notes to Financial Statements.
U.S. Treasury Reserves Portfolio 2008 Annual Report | 33
Notes to financial statements
1. Organization and significant accounting policies
U.S. Treasury Reserves Portfolio (the “Portfolio”) is a no-load, diversified investment series of Master Portfolio Trust (the “Trust”). The Trust, a Maryland business trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. At August 31, 2008, all investors in the Portfolio were funds advised or administered by the manager of the Portfolio and/or its affiliates.
The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment valuation. Money market instruments are valued at amortized cost, in accordance with Rule 2a-7 under the Investment Company Act of 1940, which approximates market value. This method involves valuing portfolio securities at their cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Portfolio’s use of amortized cost is subject to its compliance with certain conditions as specified by Rule 2a-7 of the 1940 Act.
The fair value of the security may be different than the amortized cost value reported in the Schedule of Investments. As of the date of this report, the Portfolio continued to meet the requirements of Rule 2a-7 that permit the Portfolio to utilize amortized cost to value its securities.
(b) Interest income and expenses. Interest income consists of interest accrued and discount earned (including both original issue and market discount adjusted for amortization of premium) on the investments of the Portfolio. Expenses of the Portfolio are accrued daily. The Portfolio bears all costs of its operations other than expenses specifically assumed by the manager.
(c) Fees paid indirectly. The Portfolio’s custody fees are reduced according to a fee arrangement, which provides for a reduction based on the value of cash deposited with the custodian by the Portfolio. If material, the amount is shown as a reduction of expenses on the Statement of Operations.
(d) Income taxes. The Portfolio is classified as a partnership for Federal income tax purposes. As such, each investor in the Portfolio is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Therefore, no Federal income tax provision is required. It is intended that the Portfolio’s assets will be managed so an investor in the Portfolio can satisfy the requirements of the subchapter M of the Internal Revenue Code.
34 | U.S. Treasury Reserves Portfolio 2008 Annual Report
Management has analyzed the Portfolio’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of August 31, 2008, no provision for income tax would be required in the Portfolio’s financial statements. The Portfolio’s federal and state income tax return for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
(e) Other. Purchases, maturities and sales of money market instruments are accounted for on the date of the transaction. Realized gains and losses are calculated on the identified cost basis.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) is the Portfolio’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.10% of the Portfolio’s average daily net assets.
LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Portfolio.
During the year ended August 31, 2008, the Portfolio had a voluntary expense limitation in place of 0.10% of the Portfolio’s average daily net assets.
During the year ended August 31, 2008, the manager waived a portion of its fee in the amount of $506,058.
Effective January 1, 2008, the manager is permitted to recapture amounts previously voluntarily forgone or reimbursed by the manager to the Portfolio during the same fiscal year if the Portfolio’s total annual operating expenses have fallen to a level below the voluntary fee waiver/reimbursement (“expense cap”). In no case will the manager recapture any amount that would result, on any particular business day of the Portfolio, in the Portfolio’s total annual operating expenses exceeding the expense cap.
Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
U.S. Treasury Reserves Portfolio 2008 Annual Report | 35
Notes to financial statements continued
3. Legal matters
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (“CGM”), a former distributor of the Fund and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including Smith Barney Fund Management, LLC (“SBFM”) and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.
On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against Citigroup Asset Management (“CAM”), SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Portfolio was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.
36 | U.S. Treasury Reserves Portfolio 2008 Annual Report
On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filled in the future.
* * *
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the U.S. Securities and Exchange Commission (“SEC”) as previously described. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.
On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint and judgment was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.
4. Other matters
On or about May 30, 2006, John Halebian, a purported shareholder of CitiSM New York Tax Free Reserves, a series of Legg Mason Partners Money Market Trust, formerly a series of CitiFunds Trust III (the “Subject Trust”), filed a complaint in the United States District Court for the Southern District of New York against the independent trustees of the Subject Trust (Elliott J. Berv, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten and R. Richardson Pettit).
The Subject Trust is also named in the complaint as a nominal defendant. The complaint alleges both derivative claims on behalf of the Subject Trust and class claims on behalf of a putative class of shareholders of the Subject Trust in connection with the 2005 sale of Citigroup’s asset management business to Legg Mason and the related approval of new investment advisory agreements by the trustees and shareholders. In the derivative claim, the plaintiff alleges, among other things, that the independent trustees breached their fiduciary duty to the Subject Trust and its shareholders by failing to negotiate lower fees or seek competing bids from other qualified investment advisers in connection with Citigroup’s sale to Legg Mason. In the claims brought on behalf of the putative class of shareholders, the plaintiff alleges that the independent trustees violated the proxy solicitation requirements of the 1940 Act, and breached their fiduciary duty to shareholders, by virtue of the voting procedures, including “echo voting,”
U.S. Treasury Reserves Portfolio 2008 Annual Report | 37
Notes to financial statements continued
used to obtain approval of the new investment advisory agreements and statements made in a proxy statement regarding those voting procedures. The plaintiff alleges that the proxy statement was misleading because it failed to disclose that the voting procedures violated the 1940 Act. The relief sought includes an award of damages, rescission of the advisory agreement, and an award of costs and attorney fees.
In advance of filing the complaint, Mr. Halebian’s lawyers made written demand for relief on the Board of the Subject Trust, and the Board’s independent trustees formed a demand review committee to investigate the matters raised in the demand, and subsequently in the complaint, and recommend a course of action to the Board. The committee, after a thorough review, determined that the independent trustees did not breach their fiduciary duties as alleged by Mr. Halebian, and that the action demanded by Mr. Halebian would not be in the best interests of the Subject Trust. The Board of the Subject Trust (the trustee who is an “interested person” of the Subject Trust, within the meaning of the 1940 Act, having recused himself from the matter), after receiving and considering the committee’s report and based upon the findings of the committee, subsequently also determined and, adopting the recommendation of the committee, directed counsel to move to dismiss Mr. Halebian’s complaint. A motion to dismiss was filed on October 23, 2006. Opposition papers were filed on or about December 7, 2006. The complaint was dismissed on July 31, 2007. Mr. Halebian has filed an appeal in the U.S. Court of Appeals for the Second Circuit. The appeal is pending.
5. Recent accounting pronouncements
On September 20, 2006, the Financial Accounting Standards Board (“FASB”) released Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management has determined that there is no material impact to the Portfolio’s valuation policies as a result of adopting FAS 157. The Portfolio will implement the disclosure requirements beginning with its November 30, 2008 Form N-Q.
* * *
In March 2008, FASB issued the Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about the Portfolio’s derivative and hedging activities, including how such activities are accounted for and their effect on the Portfolio’s financial position, performance and cash flows. Management is currently evaluating the impact the adoption of FAS 161 will have on the Portfolio’s financial statements and related disclosures.
38 | U.S. Treasury Reserves Portfolio 2008 Annual Report
Report of independent registered public accounting firm
The Board of Trustees and Investors
Master Portfolio Trust:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of U.S. Treasury Reserves Portfolio, a series of Master Portfolio Trust, as of August 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Portfolio’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2008, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of U.S. Treasury Reserves Portfolio as of August 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
October 24, 2008
U.S. Treasury Reserves Portfolio 2008 Annual Report | 39
Additional information (unaudited)
The Trustees and Officers of the Fund also serve as the Trustees and Officers of the Portfolio. Information about the Trustees and Officers of the Fund can be found on pages 21 through 27 of this report.
40 | U.S. Treasury Reserves Portfolio
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| | CitiSM Premium U.S. Treasury Reserves | | |
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| | Trustees | | Distributor | | |
| | Elliott J. Berv | | Legg Mason Investor Services, LLC | | |
| | A. Benton Cocanougher | | | | |
| | Jane F. Dasher | | Custodian | | |
| | Mark T. Finn | | State Street Bank and Trust | | |
| | R. Jay Gerken, CFA | | Company | | |
| | Chairman | | | | |
| | Rainer Greeven | | Transfer agents | | |
| | Stephen R. Gross | | Boston Financial Data Services, Inc. | | |
| | Richard E. Hanson, Jr. | | 2 Heritage Drive | | |
| | Diana R. Harrington | | North Quincy, Massachusetts 02171 | | |
| | Susan M. Heilbron | | | | |
| | Susan B. Kerley | | PNC Global Investment Services | | |
| | Alan G. Merten | | (formerly, PFPC, Inc.) | | |
| | R. Richardson Pettit | | 4400 Computer Drive | | |
| | | | Westborough, Massachusetts 01581 | | |
| | Investment manager | | | | |
| | Legg Mason Partners Fund | | Independent registered | | |
| | Advisor, LLC | | public accounting firm | | |
| | | | KPMG LLP | | |
| | Subadviser | | 345 Park Avenue | | |
| | Western Asset Management | | New York, New York 10154 | | |
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| CitiSM Premium U.S. Treasury Reserves | |
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| The Fund is a separate investment series of Legg Mason Partners Premium Money Market Trust, a Maryland business trust. | |
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| CITISM PREMIUM U.S. TREASURY RESERVES
55 Water Street
New York, New York 10041 | |
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| The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-800-451-2010. | |
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| Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ending June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov. | |
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| This report is submitted for the general information of the shareholders of CitiSM Premium U.S. Treasury Reserves. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus. | |
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| Investors should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing. | |
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| www.leggmason.com/individualinvestors | |
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| © 2008 Legg Mason Investor Services, LLC | |
| Member FINRA, SIPC | |
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| | BUILT TO WINSM | | 
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| At Legg Mason, we’ve assembled a collection of experienced investment management firms and empowered each of them with the tools, the resources and, most importantly, the independence to pursue the strategies they know best. | | | |
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| • | Each was purposefully chosen for their commitment to investment excellence. | | | |
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| • | Each is focused on specific investment styles and asset classes. | | | |
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| • | Each exhibits thought leadership in their chosen area of focus. | | | |
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| Together, we’ve built a powerful portfolio of solutions for financial advisors and their clients. And it has made us a world leader in money management.* | | | |
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| * | Ranked ninth-largest money manager in the world, according to Pensions & Investments, May 26, 2008, based on 12/31/07 worldwide assets under management. | | | |
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| | www.leggmason.com/individualinvestors | | | |
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| | © 2008 Legg Mason Investor Services, LLC Member FINRA, SIPC | | | |
| | FDXX010351 10/08 SR08-680 | | | |
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| NOT PART OF THE ANNUAL REPORT | | | |
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| ITEM 2. | | CODE OF ETHICS. |
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| | | The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller. |
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| ITEM 3. | | AUDIT COMMITTEE FINANCIAL EXPERT. |
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| | | The Board of Trustees of the registrant has determined that Stephen R. Gross the Chairman of the Board’s Audit Committee and Jane F. Dasher, possess the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as “audit committee financial experts,” and have designated Mr. Gross and Ms. Dasher as the Audit Committee’s financial experts. Mr. Gross and Ms. Dasher are “independent” Trustees pursuant to paragraph (a) (2) of Item 3 to Form N-CSR. |
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| ITEM 4. | | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
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| | | a) Audit Fees. The aggregate fees billed in the last two fiscal years ending August 31, 2007 and August 31, 2008 (the "Reporting Periods") for professional services rendered by the Registrant's principal accountant (the "Auditor") for the audit of the Registrant's annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $30,350 in 2007 and $31,600 in 2008. b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $9,000 in 2007 and $0 in 2008. These services consisted of procedures performed in connection with the Re-domiciliation of the various reviews of Prospectus supplements, and consent issuances related to the N-1A filings for the Legg Mason Partners Premium Money Market Trust. In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason Partners Premium Money Market Trust (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to May 6, 2003 services provided by the Auditor were not required to be pre-approved). (c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning ("Tax Services") were $8,600 in 2007 and $4,800 in 2008. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held. There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee. d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Legg Mason Partners Premium Money Market Trust. All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”) and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Legg Mason Partners Premium Money Market Trust requiring pre-approval by the Audit Committee in the Reporting Period. (e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X. (1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee. |
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| | | The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (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 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 the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit. (2) For the Legg Mason Partners Premium Money Market Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2007 and 2008; Tax Fees were 100% and 0% for 2007 and 2008; and Other Fees were 100% and 0% for 2007 and 2008. (f) N/A (g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Premium Money Market Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason Partners Premium Money Market Trust during the reporting period were $0 in 2008. (h) Yes. Legg Mason Partners Premium Money Market Trust’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant's independence. All services provided by the Auditor to the Legg Mason Partners Premium Money Market Trust or to Service Affiliates, which were required to be pre-approved, were pre-approved as required. |
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| ITEM 5. | | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
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| | | a) | The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act. The Audit Committee consists of the following Board members: |
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| | | | Elliott J. Berv |
| | | | A. Benton Cocanougher |
| | | | Jane F. Dasher |
| | | | Mark T. Finn |
| | | | Rainer N. K. Greeven |
| | | | Stephen R. Gross |
| | | | Richard E. Hanson, Jr. |
| | | | Diana R. Harrington |
| | | | Susan M. Heilbron |
| | | | Susan B. Kerley |
| | | | Alan G. Merten |
| | | | R. Richardson Pettit |
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| | | b) | Not applicable. |
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| ITEM 6. | | SCHEDULE OF INVESTMENTS. |
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| | | Included herein under Item 1. |
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| ITEM 7. | | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
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| | | Not applicable. |
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| ITEM 8. | | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
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| | | Not applicable. |
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| ITEM 9. | | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
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| | | Not applicable. |
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| ITEM 10. | | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
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| | | Not applicable. |
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| ITEM 11. | | CONTROLS AND PROCEDURES. |
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| | | (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
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| | | (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
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| ITEM 12. | | EXHIBITS. |
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| | | (a)(1) Code of Ethics attached hereto. |
| | | Exhibit 99.CODE ETH |
| | | (a)(2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto. |
| | | Exhibit 99.CERT |
| | | (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto. |
| | | Exhibit 99.906CERT |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
| Legg Mason Partners Premium Money Market Trust |
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| By: | | /s/ R. Jay Gerken |
| | | R. Jay Gerken |
| | | Chief Executive Officer of |
| | | Legg Mason Partners Premium Money Market Trust |
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| Date: November 07, 2008 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | | /s/ R. Jay Gerken |
| | | R. Jay Gerken |
| | | Chief Executive Officer of |
| | | Legg Mason Partners Premium Money Market Trust |
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| Date: November 07, 2008 |
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| By: | | /s/ Frances M. Guggino |
| | | Frances M. Guggino |
| | | Chief Financial Officer of |
| | | Legg Mason Partners Premium Money Market Trust |
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| Date: November 07, 2008 |
