SEC Division of Investment Management staff letter: Legg Mason Partners Institutional Trust

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
DIVISION OF
INVESTMENT MANAGEMENT
October 22,2008
Roger P. Joseph
Bingham McCutchen LLP
1 50 Federal Street
Boston, MA 021 10-1 726
Re: Legg Mason Partners Institutional Trust- Western Asset Institutional Money Market Fund (File No. 8 1 1-06740) Dear Mr. Joseph:
Your letter of September 18,2008 requests our assurance that we would not recommend that the Commission take any enforcement action under Sections 17(a)', 17(d12 and 12(d)(3)~ of the Investment Company Act of 1940 (the "Act"), and the rules thereunder, if Western Asset Institutional Money Market Fund (the "Fund"), a separate series of the Legg Mason Partners Institutional Trust (the "Trust"), and Legg Mason, Inc. enter into the arrangement summarized below and more fully described in the letter. The Fund's investment adviser and subadviser are affiliated persons of Legg Mason, Inc., as defined in Section 2(a)(3) of the Act. The Trust is an open-end management investment company that is registered with the Commission under the Act. The Fund is a money market fund that seeks to maintain a stable net 1 Section 17(a)(l) generally makes it unlawful for any affiliated person of a registered investment company, or an affiliated person of such person, acting as principal, to knowingly sell any security or other property to the registered investment company. 2 Section 17(d) generally makes it unlawful for any affiliated person of a registered investment company, or any affiliated person of such a person, acting as principal, to effect any transaction in which the registered investment company is a joint or joint and several participant with such person in contravention of rules and regulations adopted by the Commission. 3 Section 12(d)(3) generally makes it unlawful for any registered investment company to acquire any security issued by, or any interest in the business of, any broker-dealer, any person engaged in the business of underwriting, or an investment adviser of an investment company, or an investment adviser registered under the Investment Advisers Act of 1940.

asset value per share of $1.OO and uses the amortized cost method of valuation in valuing its portfolio securities as permitted by rule 2a-7 under the Act. You state that as of September 19,2008, approximately 2.8 percent of the Fund's total assets, or $75 million, consisted of notes issued by Orion Financial USA LLC ("Orion Notes"), a structured investment vehicle. As a result of downgrades in the credit ratings of the Orion Notes, they ceased to be an Eligible Securities, as defined in rule 2a-7. You state that the Trust's Board of Trustees (the "Board") has previously determined in the exercise of its business judgment that it would not be in the best interests of the Fund to dispose of the Orion Notes. Money market funds are required by rule 2a-7 to calculate, at such intervals as the board of directors determines appropriate and reasonable in light of current market conditions, the extent of any deviation between a fund's current market-based net asset value per share fiom a fund's amortized cost price per share. This process is referred to in the rule as "shadow pricing." You state that in order to prevent any losses realized upon the ultimate disposition of the Orion Notes, or certain securities received in exchange for or as a replacement of the Orion Notes (together with the Orion Notes, the "~ecurities"),4 fiom adversely affecting the Fund's market￾based net asset value, the Fund, Legg Mason, Inc. and a subsidiary of Legg Mason, Inc. (a "Subsidiary," and together with Legg Mason, Inc., "Legg Mason") would enter into a capital support agreement (an "Agreement"), a form of which was provided to the staff. You state that the Fund would have a right to receive a cash contribution from Legg Mason under the Agreement in any of the following circumstances (each, a "Contribution Event"): (i) any sale of Securities by the Fund for cash in an amount, after deducting any commissions or similar transaction costs, less than the amortized cost value of the Securities; (ii) receipt of a final payment on any Securities in an amount less than their amortized cost value; (iii) issuance of an order by a court having jurisdiction over the matter discharging Orion Financial USA LLC fiom liability for the Orion Notes and providing for payments in an amount less than the amortized cost value of the Orion Notes; or (iv) receipt of new securities that are Eligible Securities in exchange for or in replacement of any Securities if the amortized cost value of the-new securities is less than the amortized cost value of the Securities exchanged or replaced. You represent with respect to the Agreement that:
(i) The Agreement would obligate Legg Mason upon the occurrence of a Contribution Event to make a cash contribution to the Fund (up to the maximum amount specified in the Agreement) in an amount equal to the difference between the amortized cost value of the Securities and any amount received by the Fund in connection with the Contribution Event; (ii) The Agreement would be entered into at no cost to the Fund, and Legg Mason Your letter states that the Securities would exclude any securities that are Eligible Securities. 4

would not obtain any shares or other contribution fi-om the Fund in exchange for its contribution; (iii) The Fund's subadviser has determined pursuant to rule 2a-7(a)(lO)(ii) that if the Agreement is deemed to be a security within the meaning of section 2(a)(36) of the Act, it would be an Eligible Security because it is of comparable quality to a security that is an Eligible Security as described in rule 2a-7(a)(lO)(i); (iv) The Fund's subadviser has determined that the Agreement presents minimal credit risks with respect to the Fund; (v) The Fund will sell all the Securities it holds promptly on the business day immediately prior to the expiration date specified in the Agreement; (vi) The obligations of Legg Mason, Inc. and the Subsidiary under the Agreement would be joint and several; and (vii) The Board has reviewed and approved the Agreement and continues to believe that it would not be in the best interests of the Fund to dispose of the Orion Notes, and that it is in the best interests of the Fund and its shareholders for Legg Mason to provide the Agreement. You state that the Legg Mason obligations under the Agreement would be supported by a segregated account established by the Subsidiary. The segregated account would be established for the benefit of the Fund and consist of cash or cash equivalent securities equal to the maximum contribution amount under the Agreement. You represent with respect to the segregated account that:
(i) The bank at which the segregated account would be maintained would be a qualified custodian under Section 17 of the Act; (i) The segregated account would consist of cash or cash equivalents equal to the maximum contribution amount under the Agreement and may be reduced only by the amount of any capital contribution made by Legg Mason to the Fund; (ii) The assets of the segregated account would be available to the Fund by means of a transfer initiated by the Fund without the requirement of further action or consent by the Subsidiary; and (iii) The Fund will withdraw funds fi-om the segregated account if Legg Mason fails to make a capital contribution when due under the Agreement. On the basis of the facts and representations in your letter, we will not recommend enforcement action under Sections 17(a), 17(d) and 12(d)(3) of the Act if the Fund and Legg

Mason enter into the arrangement summarized above and more hlly described in your letter.5 You should note that any different facts or representations might require a different conclusion. Moreover, this response expresses the Division's position on enforcement action only and does not express any legal conclusions on the issues presented.6 Very truly yours, Dalia Osman Blass Senior Counsel 5 This letter confirms oral no-action relief provided by the undersigned to Roger P. Joseph on September 18,2008. 6 The Division of Investment Management generally permits third parties to rely on no-action or interpretive letters to the extent that the third party's facts and circumstances are substantially similar to those described in the underlying request for a no-action or interpretive letter. Investment Company Act Release No. 22587 (Mar. 27, 1997) n. 20. In light of the very fact￾specific nature of the Fund's request, however, the position expressed in this letter applies only to the entities seeking relief, and no other entity may rely on this position. Other funds facing similar legal issues should contact the staff of the Division about the availability of no-action relief.

San Franclscc
Santn ManIca
Dimf Phone; 617.951A247
Direct Fax: 617.428.6343 rogw,joseph@bingham.com Via Email and Federal Express DiWon of hveshnat Management Securitia and Exchange Commission 100 F Street, N.E. Washington, D.C. 20349-0504 Attention: Robert E.Plaze, Esq., Associate Director Re: Request for No-Action Assurances Ladies and Gentlemen:
We are writing onbehalf of Ugg Mason P-m Institutional Trust, a Maryland businesstrust Cthe "Trust3 and its separate series Western Asset InatitutionaI Money Market Fund (the "Fund"). TheTrust sceks assurancefrom the Staffofthe Division of Investment Mmgm tMit will not recommend enforcement action to the Semities and Exchange Commissionunder Sections 17(a), 17(d), and 12(d)(3) of the Investment Company Act of 1940, as amended (the "1 940Act"), and the rules thereunder, if tbe Fund enters into and perForme the capital support arrangement descriiedbelow. As described bduw,the capital support mangemat would be entered into for the purpose of maintainingthe net as& value of the shares of the Fund at $1.00 pa share. The Fund is registered with the Commission under the 1940 Act as an openad management invcsestmcnt company, and isa money market fund. TheFund uses the amortized cost method ofvaluing its portfolio securities as ptnnittdby Rule 2a-7 under the I940 Act, The Fund holdsmedim term notes (the"Notes") ofvarious maturities imedby Orion Financial USA LLC (the "Issuef'), As ofSeptember 19,2008,approxirmtely2.8 percent of the Fund's total assets calculated on an amortized cost basis con~istedof the Notes. Thepriacipd mount of the Notes is $75 million. As a resdt of downgrades of the ratings on the Notes, the Notes casedto be Eligible Securities far purposes of Rule 2a-7. The Board of Trust- of the Trust (the "Board")has previously det-ed, inthe exerciseof its businessjudgment, that it wauld not be in the best inkrest of the Fund to dispose of the Nates* TheFund's investmentmanager md subadviserare affiliates of LqgMason. The Fund,LeggMason, Inc. and a subsidmy of Lcgg Mason, Inc.(the "Subsi- 'and, together withLegg Mason, h~,,'%eggMaon" seek to enter into an

Securities and Exchange Commission
September 18,2008 arrangementto prevent any losses realized upon the dtimate disposition oftheNotes (collectiwlywith any securities received in exchange for,or as a replacement of, the Notes that da mt qaify as "eligiblesecurities" as defined inparagraph (a)( 1Q) of Rde 2a-7, Tligibla Notes") from adversely affecting the Fund's market-based net agset value, The mangment, which io described in more detailbelow, would be enter4 into at no cost to the Fd. Legg Mason would not obtainany shms orother msideration from the Fund for my contribution to the Fund it may makeunder the manpmmt. Arrangement. Subjed to obtaining the no-action asaura~msquested in this letter,LeggMason would enter inm a capital support apemmt (a "Capital Support Agreement") with the. Fund. The,&pital Support Agreement would be for an aggregate amount up to $20million (the "Maximum Contribution Amount")). The obligation of LqggMaw to make contributions of capital under the Capital Support Agreement ("CapitalContributionsy')would tamhate upon the earliest of: (i) Legg Mason having made Capital Contributions qua1 to the Maximum ContributionAmount; (ii) thedate on which the Fund no longer holds my Eligible Notes; or (iii) the expiratian date of the Capital Support Agreement (each, a "Tumjnation ~vcnt'~).' The Fund will promptly sell my Eligible Notes that it holds on the business day immediately prior to the expimtion date ofthe Capital Support Agreement. TheFund wadd have a ri&t to obtain a Capital Contribution under the Capital Support Agreement in any of the following cucumtances (each, a "Contribution Event"):
[i)any sale ofEligible Notes by the Fund forcrash in anarnatmt, &er deductingmy cammissians or similar transaction casts, less thm the amortized cast value ofthe Eligible Notes (calculatedinaccordance with Rule 2a-7) sold as ofthe date of settlement; (ii) receipt of final ppmt on Eligible Mae= in an amount less thanthe amortized cost value ofsuchEligible Note as af the date suchpayment is received; (iii) issuance ofan order by a wm-&haviagjurisdiction overtbe matter dischging the ksuw from liability for the EligibleNotes and providing for payments on such Eligible Notes in an amount less than theamortized EOS~value ofsuch Eligible Nota as ofthe date such payment is rsceived; or (iv] receipt of new securities that are "Eligible Securities"as definedin paragraph (a)( 10) ofRule 2a-7, in exchange for or in replacement of Eligible Notee if thc amortizedcost value of such new securitiesis les than the amortid cost value of the Eligiile Notes m the date of exchange or replaamat. If a Contribution Event occurs before the Termination Event, Legg Mason would make a Capital Contribution in an amount qua1to the lowest of (i)the loss (Tossy~ incurred as a d t of suchContributionEvmt (it.,the excess of the mortixd cost value of the EIigible Notes subject to a Contribution Event over the amount received by the Fund in connection with such ContributionEvent);or (ii) the Maximum Contribution The obligations ofLegg Mason and its Subsidiary under the Capita1 Support Agreement would bejoint and several. Any Capital ContributionunderheCapid Support Agreement could be made by eihr hgg Mason or tha Sub~idiaryii~ita wle diseretim. Blnghem MrCutrhan LLP blnabam.com

Securitiesand ExchangeCornmission
September 13,2008
Amount reduced by the amount of my Capital Contributionpreviously d e by Legg Mason to the Fund. SoIely for purposes of calculating the mount ofany Loss, the amortizedcost value of anEligible Note that is receivedin an exchange or restructuringwill be increased by the excess, if my, of the amortized cast value of the replaced or restructured Eligible Note as of the time immediately preceding the exchange or restrzlcMng over the mruof the amortized cost value of such new Eligible Note and any ash received. Ifan event muld constitute both a TerminationEvent and a Contribution Event, thenthe Tdation Emt would not be deemed to haveoccurred until Legg Mason made any Capital Contributions required with respect to that ContributionEvent. Thc Capital Support h n t would provide that the Fund must offerLcgg Mason an opportunity to purchase Eligible Natesincertain circumstances described in the Capital Support Agreement. Any suchphase would be for cash ad would be at a purchase price equal to the greater of the amortized wst or the market price ofsuch EligibIeNotes (ineach case, including accmd interest), in accordancewith Rule 1%-9 under the 1940Act, The Subsidiary would establish a segregated account with abank qualifiedunder
Section 17(f) ofthe 1940 Act to sme as a custodian ofthe Fund's assets. The segregatad
account would consist of cash or cash equivalents equal to the M h Contribution Amount reducedby the amount of any Capital Contributionpreviously made by Idegg Mason. Theassets of thexgreptcd account would be available to the Fund by meam of a transfer initiated by the Fund with~utthe requhmeht of further action or mnsent by the Subsidiary. The Fund will make a withdrawal from the segregatedaccount if kgg Mason fails to make a Capital Cmtl-ibutianwhen dueunderthe Capital Suppon ~greement? Discussion Tha mgement d~eriieddove may inwlvejoint crr affiliated Irmsactiansprohibited by Sections 170 andlor 17(d) ofthe 1940 Act, and the rules 2 We note that the Capital Support Agrbcmemt may be deemed to be a "wcurity" within the medng ofSection2(a)(36) of th1940 Act. Thc obligations af Ltgg Mm under the Capital Support Amemeat would be llIy suppodby a compodiag segregated account containing cashor cash equivalents, and the Fund would be able to access the segregated account without my fUrtheraction or comt by Legg Mason. We furthernote that the Fund's subadviser,pursuant to delegated authority,has himined purrmnnt to paragraph ()(lO)(ii') of Rule 2a-7 that the Capital Support Agreement isofcompw&le quality to seeuriticsthat are 'Eligible Securities" as described inparagraph (a)(lO)(i)ofRule 2a-7. Accdhgly, if deemed to be a security, the Capital Support Agre~mtntwould be m"EligibleSecurity" for purposes of Rule 2a-7. The Fund's subadviseralso has determinod, pursuant to delegated authority, that the CapiUl Support Agreement presents minimal credit risksin acmrdanae with pmgaph (4(3)(i) of Rule 2a-7under the 1840 At.

Securities and ExchangeCommission
September 18,2008 thmmder. Leg Mason is an "affiliated@on sfan affiliated pmon'kder Section 2(a)(3) ofthe 1940 Act because ofits affiliationwith the Fund's investment manager and subadviser. The ~~~&rtakings by the Fund for the Capifai Suppbrt Ageanent could be viewed as consideration by the Fwd for the Capital Support Agreement. Thus,the overall arrangement could be deemed to involve a sale of security or other property or alternativelyas a joint arrangement. As dexibed above, however, if Legg Mason were to purchasethe Eligible Notes hm the Fund, the Capital SupportAgreement would obligate Legg Mason to pay the Fund an mount equal to the greaterofthe amortizedcost or market value of the Eligible Notes. Such a transadon would fall w'ithh Rule 17a-9 md would wmply with the Rule's termsa3 It is important to note that the Fund wodd benefit from the receipt of the Capital Support Agreement, Upon entry into the Capital Support Agreement, the Fund's net ass& value will be dcdated taking into muntthe Capital Support Agreement. Also, hc Fund will not pay to obtain the Capital SupportAgreement. Legg Mason's operations include subsidiaries that act as brokerdders and investment advisers registered with the Commission. As a result, the Capital Support Agreement itsdf my be subject to Section l2(6)(3) of the 19.U) Act, which makes it unlawfulfor a registered investment company to purchase or otherwise acquire any security issued by or any oXhw interestinthe business ofany person who acts as a broker, dealer, or registered investmat adviser. TheFundcould not rely upon the exemption provided under Rub 12d3-1 because the exemption does not extend to affiliatedpersons oTthe Fund's investment adviser. TheBoardhas reviewed and approved the Cqital SupportAgremmt, and believes that it is in the best interestsof the Fund and its shareholders for LeggMason to provide the Capita1 Support Agreement, The Board continuesto believe that it would not he in the interest ofthe Fwd to dispose of the Npw. Summary. As describedabove, Legg Masmis a second-tier amiate of the Fund beoauseof its affdiation with the Fund's in~stmeatmanager adsubadviser. Given this affiliation and because in certain circumstances the Fund would receive Capital Contributions fimLegg Masan, the arrangement mntemplated by the Capital Suppaff Agreement may involvej oint or affiliated transa~tionsprohibited by Soctions 17(a) and/or 17Cd) of the 1940 Act, andthe rules thereunder. In addition, the Capital Support Ageamit itself my not be permitted by Section 12fd)43). TheBoard snd kgg Masun believe it will be inthc best intereat of the Fund and its shareholders if the Fund enters into and perfom the arrangement described her&. Onbehalf of the Fund and Legg Mason, we hereby request that the Staff ofthe Division give its assurance that it wilI not ' Webelieve no relief is mquired, nor is any sought her&by,with raspect to such a bansactian.

Secwitiesand &&age Commission
September 18,2098 re~ommendthat the Commission take enforcement action against the Fund or Legg Mason if the Fund and Legg Mason enter into the mmgemmtas describedherein. hFund m& to act quickly in this matter, and mrdingly we would ~ppreciateheerring fromyou at your earliest convenience. Please call me at (617) 95 1- 8247, or my partner LeaAnne Copenheferat (617) 951-85 15, if you have my questions or if wecan otherwise assist in resoIvhg this matter. SifleereIy yours, cc: DaIia Oman Blass, Esq. Lea Anne Copenhefa,Esq.