SEC Division of Investment Management staff letter: Master Portfolio Trust

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
I
DIVISION OF
INVESTMENT MANAGEMENT
April 4,2008
Roger P. Joseph
Bingham McCutchen LLP
150 Federal Street
Boston, MA 02 1 1 0- 1726
Re: Master Portfolio Trust- Liquid Reserves Portfolio (File No. 81 1-1 0407) Dear Mr. Joseph:
Your letter of March 4,2008 requests our assurance that we would not recommend that the Commission take any enforcement action under Sections 17(a)' and 17(d12 of the Investment Company Act of 1940 (the "Act"), and the rules thereunder, if Master Portfolio Trust (the "Trust"), its separate series Liquid Reserves Portfolio (the "Fund'), and Legg Mason, Inc. ("Legg Mason"), 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, as defined in Section 2(a)(3) of the Act. The Fund 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 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. The Fund also is a master fund in a masterlfeeder fund structure. The Fund's U.S. registered feeder funds are Citi Cash Reserves (a series of Legg Mason Partners Money Market Trust), Citi Premium Liquid Reserves (a series of Legg Mason Partners Premium Money Market Trust), and Citi Institutional Liquid Reserves (a series of Legg Mason Partners Institutional Trust) (collectively, the "Feeder Funds"). 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.

You state that as of February 29,2008, approximately 1.2 percent of the Fund's total assets, or $522 million, consisted of commercial paper issued by Cheyne Finance LLC ("Cheyne CP"), a structured investment vehcle. As a result of downgrades in the credit rating of the Cheyne CP, it ceased to be an Eligible Security, as defined in rule 2a-7. Pursuant to the requirements of rule 2a-7 under the Act, the Fund previously informed the Commission of a default and Event of Insolvency, as defined in rule 2a-7, with respect to the Cheyne CP. 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 sell the Cheyne CP. You state that in order to prevent any losses realized upon the ultimate disposition of the Cheyne CP, or certain securities received in exchange for or as a replacement of the Cheyne CP (together with the Cheyne CP, the "~ecurities"),~ fiom adversely affecting the Fund's market￾based net asset value and to help maintain the net asset value of the shares of the Feeder Funds, Legg Mason would obtain fiom Citibank, N.A. ("Citibank") an inevocable standby letter of credit ("Letter of Credit") for the benefit of the Fund. The Letter of Credit would be in an amount not to exceed $150 million. The Fund could draw on the Letter of Credit if: (a) the Fund has realized a loss fiom a sale or disposition of the Securities ("Realized Loss"); (b) the Fund realizes a Restructuring Loss (as defined in your letter); (c) any of the Securities remain in the Fund's portfolio on the business day before the expiration of the Letter of Credit ("Expiration Draw"); or (d) there has been a change in the short-term credit rating of Citibank such that the obligations of Citibank under the Letter of Credit no longer qualify as First Tier Securities ("Credit Eventy7), unless Legg Mason substitutes an obligation or credit support that would be a First Tier Security within 15 calendar days from the occurrence of the Credit Event and during such 15 calendar day period Citibank's obligations continue to qualify as Second Tier Securities, as defined in rule 2a-7 under the Act. In addition to the Letter of Credit, the Fund and Legg Mason also will enter into a Letter Agreement, which would obligate the Fund to: (a) terminate the Letter of Credit upon the occurrence of certain specified event^;^ (b) make a payment to Legg Mason if the Fund has drawn on the Letter of Credit and thereafter receives, upon the ultimate disposition of the Securities, an amount that together with the amount drawn under the Letter of Credit exceeds the amortized cost of the Securities; (c) transfer the Securities to Legg Mason in compliance with 3 Your letter states that the Securities would exclude any securities that are First Tier Securities, as defined in rule 2a-7. 4 Generally, you state that the Fund would be required to terminate the Letter of Credit if (a) the Fund has
sold the Securities without a Realized Loss or has drawn on the Letter of Credit in the amount of any Realized Loss, (b) the Fund has been paid in full for the Securities, (c) the Securities have become First Tier Securities under rule 2a-7, or (d) the Securities have been exchanged into or replaced with instruments that would be First Tier Securities under rule 2a-7 the aggregate principal amount of which, plus any cash received by the Fund and any amounts drawn on the Letter of Credit, is not less than the amortized cost of the Securities.

rule 17a-9 under the Act upon the occurrence of the Expiration Draw, or in connection with a Credit Event, if the amount drawn equals or exceeds the amortized cost of the Securities; and (d) provide Legg Mason with the opportunity to purchase the Securities in compliance with rule 17a￾9 under the Act upon the occurrence of a Realized Loss or a Restructuring Loss. You represent that:
(i) The Letter of Credit would be issued at no cost to the Fund, and any fees charged by Citibank would be paid by Legg Mason; (ii) The Fund will exercise its rights under the Letter of Credit when the Fund is entitled to do so and would draw: (a) any Realized Loss; (b) the Restructuring Loss; (c) an amount equal to the value of the outstanding Securities in the portfolio of the Fund at the Expiration Draw, provided that the Fund is required under the Letter Agreement to transfer to Legg Mason the Securities if the amount drawn equals or exceeds the amortized cost of the Securities; or (d) the maximum amount available to be drawn under the Letter of Credit if a Credit Event occurs, unless Legg Mason substitutes an obligation or credit support that would be a First Tier Security within 15 calendar days fi-om the occurrence of the Credit Event and during such 15 calendar day period Citibank's obligations continue to qualify as Second Tier Securities, as defined in rule 2a-7 under the Act; (iii) Citibank has the hghest short-term ratings from the Requisite NRSROs, as defined in rule 2a-7 under the Act, and the Fund's investment manager and subadviser have determined that the Letter of Credit is a First Tier Security and therefore an Eligible Security, both as defined in rule 2a-7; (iv) The Board has reviewed and approved the arrangement and concluded that it is in the best interests of the Fund and the Feeder Funds and their shareholders for Legg Mason to obtain the Letter of Credit from Citibank and for the Fund to enter into the Letter Agreement with Legg Mason; and (v) The Board has authorized the requirements in the Letter Agreement that (a) the Fund reimburse Legg Mason for any amounts received in excess of the amortized cost of the Securities if the Fund has drawn on the Letter of Credit and subsequently receives new securities or cash in an amount which when added to the amount drawn under the Letter of Credit exceeds the amortized cost of t6; ' Securities, and (b) that the Fund terminate the Letter of Credit upon the occurrence of certain specified events in order to avoid the unjust enrichment of the Fund and an unwarranted penalty to Legg Mason. On the basis of the facts and representations in your letter, we will not recommend enforcement action under Sections 17(a) and 17(d) of the Act if the Fund and Legg Mason enter

into the arrangement summarized above and more fully 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 F

truly yours,
Dalia Osman Blass
Senior Counsel
5 This letter confirms oral no-action relief provided by the undersigned to Roger P. Joseph og March 4, 2008. 6 The Division of Investment Management generally pennits 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.

Roger P.Joseph
Direct Phone: 617,951,8247
:DirectFax: 617.428.6343 irog~r.josepwbingham.bom Via Email md Federal &press Division of Investment Management $~cutiFi&and Ex~bmgeCo#mi@ion 1 00F Street,W .E. Wa~hingtm,D.C.20949-0504 Amtion; Robert E.Plm, Esq.. Aswhite DireGtar RE Request Per No-Action Assurances Ldies.mdGentlemen:
We are writing onbehalf of Msaer PortFolio Trust, a Mayland business trust (the 'Trust*'), and its separate series tiquid Reserues Portfolio (the "Fund"). The Trust seeks wumw ffom the Staff of the Division ofinvestment Managementbat it will not recommend enforcement action to the SecuritIosand Ekchange Commission under Sections 17(4 and 17Cdl of the Investment Company Act of 19411, as amended (the "1440 Ad'), and themles ththsretmdm, ifthe Fund enters into and performs the letter of credit mngment described bslow. As described below, the letter of credit mgmentwuld be entered into for the purpose of helping rntlin~n the net asset value of the shares ~fthe Pder Funds (defined below) at $1 .QOper share.

The Fund is, registered with the Conmissionunder the 1940 Act as an open￾end management investment company, sod is ti money rharket fund and a mter hnd in a rnasterlf~daetiumie~The Fund's W.S,-regisrcredFeedw Funds we: Citi Cash Reserves, a series af Legg Mason Partners Money MarketTrusC Citi Premium 1,iquld Reserves, a scrim of Legg Masun Partners Premium Money Mmket Trust; and Citi lrrstitutional Liquid Resumes, a series of Legg Masan Partners Tmtitution&lTrust. The Fund uses the amorthd cost method of valuing its portfolio securities as permitted by Rule 2a-'I under the 1940Act As of February 29,2008, apprextn;ftely 1.20% pewent of the Fund's total assets mlculated on w amorti& msf basis consisted ofcommercial paper issued by Cheyne Finance LLC (the "Commercial Paper'). The prindpal amount af the Commex~iJPager is $522 million, with $200 million of the Commercial Paper having a stated maturity at issuance nf October 24,2007, $100 million having a staled maturity at i$sumceofOctober 25,
217. $150 million having a Wed maturily at i~umwof November 26,2887, and
$72 million having a stated maturity at issuanoe af Janq 7,2008.
As a resultof downgradesof the ratings on the Commercial PPaper, the Commercial Paper caed to be an Eligible Security for purposes of Rule 2a-7, and wt?havepreviously informed the Commission of a d&uh andcar Event of lwlvency under Rule 2a-7 with respectto the Curnmemial Paper held bythe Fund. The Board of Trustees of the Trust has previously determined, in the exerciseaf its business judgment, that ii-twould not be in the best interestof the Fund to dispose of the. Cammmcial Paper, The Fund's investment manager and subadviser are amliatts ofLea Ma$an.

Securities tux$ Exchange Commi$sian
March4,2008
The Fund and Lea Muon, In& geek,to ent& ihto mmpemmt to prevent any hssm realized upon the ultimatedipashian of the Commercial Paper from rirlvetmly affectingthe Fund's: market-had net asset qdue. Themangemm't,which is described in more detail belaw, would be mk~dint~at no cost td the Fund. Arranmnq& Subjectto obtaining the no-action wsuranws ~ues~ in this Imr,Leg# Mason would obtain from Citibmk, N.A. (referredto as Citibank) an imva& Slmdby Letter sfCrdt (the "Lettg of Cdi"] for the benefd of the Fund. The Letter ofCredit woukl bt inan amount not e~ceeclSI SQ million. The Fund would enter into a sepm letter agreement (the "Lmr Agreement") with 1,egg Msan which would oontah the terns Wded below. The Letter of Crdit couM be draw11by the Fund in any ofthe follbwlng cir~mstmc~s: (a) the Fund ha& realized a loss from a sale rn dispusitiori a"f the Commercial Paper: @) any bf the Commercial Paper hers been mtrllchircd, modified. refinanced, exchanged or replacedby new debt, of which he qgregate principal amount, plus my cah recxived by the Fund in connection therewith, is lessthan thc amartkedwstof the Commercial Paper so mstructut.ed, modified, refinanced, mehangedor replaced an the date used in the.res@ucturingorother exchange tmserction to determine the @mountof securitiesto be received in smh ttansaction, or any amount (including principal and all wmed unpaid interest) of the Commercial Papt has ken fmgiven(such $hrtEalIcr forgiven m~)unt,the;"Restmwring Loss");,(elmy ofthe CommerciJ Pqw mdns~outstat~dingon the business day befose the expiration af the L&tw of Credit; or Ed) there hzbs been $ chmge in the Short tern credit rating ~TCitibBflk.such thal the obligations of Citibk under the Lttter ofCreditna longer qualify as Fb~tTier Securities(a "Credit Event"). For pqmses ofthe Letter ofCredit, including the circmnces describedabove, the Commercial Paper will include shy securities receivtd in exchange for or replacement of the Cornarcid Papr that me not First Tier Securities,as such term is defined in paragraph (.)(I 2):of Rule 2e7under the 1940A&$. If m,eventin chase [a) owursPthe Fund may draw the mount of the loss realid, and if the event in clause [b) occurs, the Fund may draw the mount ofthe Restructuting Loss. If the event in clause (GI occurs, the Fund may dmw that portion of the L&er af Credit wpmenting.thatpottir*r of the CpmaiA Pap# still held by the Fund m the date specified in clause [c),If the event in clause (d) oceuurs,the Fund may draw the maximum amountavailable undsr the Letter of Credit, taking into c~nsideraiionany ad all obr drawings that haxeken made pfiwto the date of such drawing, provided, however, that the Fund shaalI not kable to make such drawing if Legg Mason substitutes an obligation or credit suppod that satidifre61the requirement ofa First:Tier Security within 15 calendar days,from Beo.ccumce of the Credit Event, and during swh 15 day period, Citibmk's obligationg continue to qualifjr a6 Second Tier Securities
under gamgmph (a'(22) of Rule:2a-7. Subject tothe satisfactionof lhe conditionsto drawing in the Letter of Credit and Letter Agreement, the Fundwill exemhe its rights underthe Le$kr of"Crglit whun the Fund is errtkled to do so. The LetterAgreementsan states.

Securitiesand Exchange Commission
Mmh 4,2098
The Letter ofCrkd&would be issued at no cast tothe Fmd:my fm&mged by Citihank would be paid by Legg Mmn. However, under the terms ofthe Letter Agreement, the Fund would be requiredto take certain ao~orrsand/or (inone ~itciuhstmtce)makc:a payment-ra atmehtthe Fimd does notrecdui:awindfall (meaning,essentialIy,that the Fund does not get paid twice for the Commercial Paper), m,dscuswdin more detail below. The Fund would be required to terminate' the Letter of Credit in the fallowing~i,ircumsm:s: (4the Fund hsns sold ar dispwed icYfth~Commercial Paper and either has not realized rt loss at hwdmn under the Letter of Credit in,thc amount of the loa~;(b] the Gclmmwial Paper has been rmctuwd, modified, rehand, emhanged into or replacedwith instruments that wuld be First Tier securities under Rule 2.a-7 sf which the aggregate principdl amount, plus the mount of my crash meived hy the Fund in cannectim tbt~withand amounts drawn under the Lam of Credit as n tmltsfthe tmsactisol, isno kssthan the amortized wst of the Commcreisll Paper so restructured, modified, refinanced, exchanged or replacd on the date wed in the wbucturing or other exchangetransaction to determine the amount of smurities to be received in such trmsactian;(c) the Fund has been pdd in hll for the Cornmwcial Paper; or (dl the Commercial Paper is rated A- I or higher by S&Por P-1 or higher by Moady's. 10 certain instance& the Fund,if it were ta receive an mount En excess qf thc ammized cust of the Cmmercid Pww, would be requitedt~make apayment to Leg Masonunder tRc Letter Agreement, SpecificaIly, If the Fund has drawn an the Letter of Creditat it$ termination or in comeotian with a Credit Even$ and if thereafter, dte sum of the cash rrscejvsd by the Fund from any sale, diswition of repayment of the Cmmercid Paper plus the aggregateprincipal amount of any new debt rdvd breplacace the Commercial Paper plus the drawings under the Letter af Credit, exceeds the bum of the amohtized mat of the CommerciaIPaper suld, repaid or refinanced, the Fund would paythe excess to Legg Mason. The tartar Agreement also provides that if the Fund dmws on thc I,etter of Credit because the Comme~ialPolper remdnp in the Fund on the &y ,heforethe expintdon of tbe Lett:er,afCrdit or iq mnnectbn with a CrPdi Event, md the amount drawn equals or exceeds the arnoflized coat of the Commercial Paper, the:
Fufid will #rwfeI'the CommemiaI Papv to Leg& Mwn. Hcywf:\tm,the Fund must receive(ificludingthe mount drawn under €he Letter of Credit) the greaterof amortized coM or market w1w ofthe Commercial Paper, In addition, the Letter Agreement provides a"a€before the Fund draws on the Letter of Cedit to mwer a realid loss or a ResbvcturingLoss on the Commercid Paper, the Fund will giw LeggMamn the opportunily 'to purchase the Commercial Paper from the Fund at the greater of amortized cost or market value. RnaIIy,?heFund will give Lqgg Mason the opportunity to purchase the Commercial Paper from the Fund at the greater of amortized cost or market value if the tern of Credjt is about to expira, provided that 1 Terminationis accmplished by delivery ~f the kfwr afCdt to Qtibmk with rn instructionto terminate the Letter of Credit. 8Tttthsrm &E'.Cutch.&31LIP wiigpam.cq

the Fufid's Board of Trustees determines that such a sale would kin the best interest of the Fund. If the Frnd hsreceivedmy CommereiaI Paper inexchange for or as a replacement of other Commercial Paper. and such Commercial Paper is not, or has not become, "Eligible Securities" within the meaning of Rule 2a-7, the Fund will sell or othwwisa dispose ofsuch Commercial Paper on the business day immediately prior to the termination date of the Letter of Credit, to the extent that it has not drdy done so. The Fund woutd be entitled to draw on the Letter of Credit (to the extent of any remaining available balance) to cover my loss an such sale or disposition. As used in the Letter of Credit and the Letter Agreement, and as used in this letter, the term "amortkrl cost: when used with respect to the Commercial Paper, is understood to include all accrued and unpaid interest on the Commmial Paper. Discussion. The mmgement described above may involve joint or afilinted transactions prohibited by Sections 17fa) andlor 17(d] of the 1g40 Act, and the rulcs thereunder. The undertakingsby the Fund for the Letter of Credit could be viewed as considemtion fir the.issuance of the Lettmof Credit. Thus, the overall arrangement could be deemed to involve a sale of security or other property or dternativcIy m a joint arrangement, The transactions in which the Fund would be required to terminate the Letter of Credit andlor repay any mount that ~c~ the amortized cosr of the Commercial Paper may raise issues under Section 17 because they arguably ~ouldbe deemed to involve the transfer of securities or other property or dtcrnatiuely be deemed ajoint arrangement. Any maction covered by Rule 17a-9, however, (i.r., my transfer of the Commercial Paper) would comply with the Rule's terms. As described above, the Lemr Agreement provides that before the Fund draws on the Lerter of Credit to recover a realized loss or a RestructuringLoss on the Commercial Paper or because the Letter ofCredit is about to expire, the Fund will give Legg Mason the opportunity to purchase the Commercial Paper fromthe Fund at the greater of amortized cost or market value. Such a transaction would fall within Rule 17a-9.' The LemrAgmment dm provides that if the Funddraws on the Letter of Credit because the Commercial Paper remains in the Fund on the day before the expiration of the Letter of Credit or in connection with a Wit Event, and the amwnt dram equals or exceeds the amortized cat of the Carnmercid Paper. the Fund will transfer the Commercial Paperto Lugg Mason in accordance with R ute 17a-9 (i.~., the Fund must receive the greater of rimortized cost or market value including the amount drawn under the Letter of CreditJ. We believe this bansaction would be consistent with Rule t7a-9. 2 Webelieve no reIief is required, nor ismy sou&Mhereby, with respeat to such a transaction.

Securities and Exchange Commission
Much 4,2008
The Fund would be required to make .a paymen1to Legg Mason if the Fund has drawn on the Letter of Credit at termination and subsequently receives new swurities andlor cash in mamount which when added to the amount drawn under the Lettm of Cteklitexceeds the amortized cost of theCommercid Paper. This transaction is not covered by Rule 17a-9 because the Fund would be paying cash to Legg Masan. Lastly, the Fund would be required to terminate the Letter of CMit upon the occurrence of certain spwifhd events enumerated in the Letter Agreement. This termination also would not be covered by Rule 17a-9.3 We believe that all of the foregoing transactions should nonethelessk permjasible because they are simply intended to prevent the Fund from obtaining a windfall andlor essentially getting paid twice hr the same securiy. It 3s importanr.to note that the Fund would benefit from the reaeipt of the Letter of Credit. Upon entry into the mangment described herein, the Fund's net asset value will be,alculated taking into accmt the Letter of Credit, Also, the Fund is not paying to obtain the Letter of Credit. The Fund's Board has authorized the undertakings in the Letter Agreement to avoid unjust enrichment:of the Fund and an unwmted penalty to Legg Mason. Citibank has the highest short tern ratings from the Requisite NRSROs, as that term is defined in Rule 2a-7. The investment manager and suhadviser have determined that the Letter of Credit is a First Tier Security and therefore an Eligible Securiv, bbth &$ defined in Rule 2a-7. Thk Fund's Board of Trusteeshm reviewedand ripproved these mgements. and believesthat it is in the best interests of the Fund and the Feeder Funds and their shareholders far Legg Mason to obtain the Letter of Credit from Citibank and to enter inb the Mer Agreement. The Board caritinurnto believe tkdt it would not be in the interest of the Fund to dispose of the Commercial Paper. $maw. As described above, LeggMason is an "affiliated person of an affiliated person" under Section 2(a)(3) of the f 940 Act because of its affiliation with the Fund's investment manager and subdvise~.Given the affiliatimsmong the parties and because in certain circwrrstancsthe Fund would be required to del ivw the Commercial Paper to Legg Mason,the arrangement cnntemplated by the Letter of Credit and the Letter Agreement:,ma?involvejojnt or afiliated trslnsac?iatr.s prohibited by Section$ 17@)andlor 1T(d) of the 1940 Act, and the rules thereunder. Not all of these transactions fall within Rule 178-9. The Fund's Board and Legg Mason believe it would be in the best interest apthe Fund and the Feeder Funds and their shareholders if the Fund enters into and performs the mangelnmtdescribed herein. On behalf of the Fund and Legg Mason, we hereby request that the Staff of the Division give its assurance that it will not recommend that the Cornrnissiofi take enforcement action against the Fund or Legg Mason if the Fund and Legg Mason enter into the atrangment as
describedherein. Ahmnatively, the termination could simply be viewed as tarnilrating the right ofthc Fund to draw on the Letter of Credit, and thus not implicating Section 17.

SeburitIsarrd Exchange C~mnli~i~n
March 4,2008
The Fund needs to act quickly in this matter, and ecardingly we would appreciate hearing from you at your aarliest convenience. Please call me at (617) 95148247, or my partner Lea Anne Copenhefer at (617) 951-8515, if you have any questions or if we can otherwise assist in resolvingthis matter, Sinmely yours. Roger P.Joseph hlisOsmm Blass, Esq.

Leol Anne Copenhefer, Esq,