Investment Company Act of 1940 – Sections 15(f), 2(a)(3)(C), and 2(a)(19)(B) 

Rule 12b-1 

Citigroup Inc 

July 26, 2006 

 Our Ref. No. 20051111427 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Citigroup Inc. 

DIVISION OF INVESTMENT MANAGEMENT File No. 801-3387

Your letter dated July 26, 2006 requests that we concur with your view that (1) certain 

payments received (and to be received) by Citigroup Global Markets Inc. (“CGMI”) and 

PFS Investments, Inc. (“PFSI”), each a subsidiary of Citigroup Inc. (“Citigroup”), and (2) 

certain payments made (and to be made) (i) by CGMI and PFSI to their employees, (ii) 

by CGMI to certain broker-dealers affiliated with Citigroup (“Affiliated Dealers”) and 

(iii) by the Affiliated Dealers to their employees, constitute “ordinary compensation as 

principal underwriter” for purposes of Section 15(f)(2)(B)(i) of the Investment Company 

Act of 1940 (the "1940 Act"). Your letter also requests that we concur with your view 

that certain sub-accounting services provided (and to be provided) by Citigroup or certain 

of its affiliates, as described below, to certain registered investment companies constitute 

“other services” for purposes of Section 15(f)(2)(B)(ii) of the 1940 Act.1

 

Facts 

You state that on December 1, 2005 (“Closing Date”), Citigroup sold to Legg Mason, 

Inc. ("Legg Mason") substantially all of its business of acting as investment adviser 

through one or more of its affiliated investment advisers (“Citigroup Advisers”)2 to 

numerous existing open- and closed-end registered investment companies (the "Funds"). 

You explain in your letter that CGMI and PFS Distributors Inc. (the predecessor to PFSI) 

historically acted as principal underwriters for the Funds. You state that prior to the 

Closing Date, each of CGMI, PFSI, the Affiliated Dealers and certain other affiliates of 

Citigroup (Citigroup and its affiliates, collectively, the “Citigroup Companies”) provided 

distribution services for the Funds. You, therefore, state that each of the Citigroup 

Companies providing such distribution services and each of the employees of CGMI and 

PFSI and of the Affiliated Dealers was an interested person of the Citigroup Advisers 

within the meaning of Section 2(a)(19)(B) of the 1940 Act.3

 Further, you state that Legg 

Mason and Citigroup agreed that Citigroup would continue to distribute shares of the 

 

1

 This letter confirms oral interpretive guidance provided by Elizabeth G. Osterman, Assistant Chief 

Counsel, of this office to Richard Prins of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to 

Citigroup, on November 30, 2005. 

2

 You state that Citigroup controlled the Citigroup Advisers prior to the Closing Date. Consequently, the 

Citigroup Advisers were affiliated persons of Citigroup within the meaning of Section 2(a)(3)(C) of the 

1940 Act until the Closing Date. 

3

 See infra note 11. 
Funds for a period of at least three years after the Closing Date on at least as favorable a 

basis as provided prior to the Closing Date. You state that the framework for these 

continuing distribution agreements is set forth in a Global Distribution Agreement, 

entered into on June 23, 2005, and amended and restated on October 3, 2005 (“Global 

Distribution Agreement”).4 You state that CGMI and PFSI (the “Citigroup Principal 

Underwriters”) entered into new principal underwriting agreements with the Funds as of 

the Closing Date. 

You state that, pursuant to the new principal underwriting agreements with the Funds, the 

Citigroup Principal Underwriters have agreed to act as agents for the Funds to: (1) offer 

shares of the Funds and accept purchases, redemptions and exchanges of such shares; (2) 

review and submit to the NASD any marketing materials they prepare; (3) maintain antimoney laundering programs, and know your customer and privacy policies; (4) maintain 

applicable records of their activities; (5) maintain policies and procedures for share 

transactions with investors and intermediaries; and (6) finance the sale of Class B Shares 

and pay for the printing of certain related marketing materials. You explain that the 

Citigroup Principal Underwriters have provided (and will continue to provide) such 

services for the Funds directly and through their employees. You also explain that 

CGMI, acting in its capacity as a Citigroup Principal Underwriter, has entered into 

selected dealer agreements with the Affiliated Dealers. You state that, pursuant to these 

agreements, the Affiliated Dealers have agreed to provide certain of the above services 

for the Funds on behalf of CGMI. In particular, you state that the Affiliated Dealers are 

responsible for: (1) offering shares of the Funds; (2) forwarding purchase, redemption 

and exchange orders from their customers through CGMI as principal underwriter to the 

Funds; and (3) using marketing materials furnished by the Funds' principal underwriters 

in offering shares of the Funds. You explain that the Affiliated Dealers have provided 

(and will continue to provide) such services for the Funds on behalf of CGMI directly 

and through their employees. (The distribution services described above provided (and to 

be provided) by the Citigroup Principal Underwriters and the Affiliated Dealers, and their 

respective employees, are referred to as the “Distribution Services.”)5

You state that, as payment for providing the Distribution Services for the Funds, the 

Citigroup Principal Underwriters have received (and will continue to receive) front-end 

and deferred sales charges from investors (“Loads”), distribution and shareholder 

servicing payments from the Funds pursuant to the Funds’ plans adopted under Rule 

12b-1 under the 1940 Act (“12b-1 Fees”) and revenue sharing payments from the 

investment advisers to the Funds (“Revenue Sharing Payments”).6 (For purposes of this 

 

4

 You represent that, effective as of December 1, 2005, a Legg Mason subsidiary became a principal 

underwriter to the Funds, in addition to the Citigroup Principal Underwriters. 

5

 You represent that there are no understandings, arrangements or agreements that obligate any of the 

Funds or Legg Mason or any of Legg Mason’s affiliates to execute portfolio transactions for the Funds with 

any person affiliated with the Citigroup Advisers. See Section 2(a)(3) of the 1940 Act (defines affiliated 

person). 

6

 You state that the agreements governing revenue sharing payments by the Funds’ investment advisers to 

the Citigroup Principal Underwriters are in writing and provide in effect that the source of the Revenue 

Sharing Payments is the legitimate profits of the Funds’ investment advisers. See Bearing of Distribution 

Expenses of Mutual Funds, Investment Company Act Release No. 11414 (Oct. 28, 1980). 

2
letter, we refer collectively to Loads, 12b-1 Fees and Revenue Sharing Payments as 

“Distribution Compensation.”) You also state that, since the Closing Date, the Citigroup 

Principal Underwriters have paid (and will continue to pay) their employees for providing 

the Distribution Services for the Funds using the Distribution Compensation received by 

them. In addition, you state that, since the Closing Date, CGMI has paid (and will 

continue to pay) the Affiliated Dealers for providing the Distribution Services for the 

Funds using the Distribution Compensation received by it (“Affiliated Dealer 

Compensation”). Finally, you state that the Affiliated Dealers have paid (and will 

continue to pay) their employees for providing the Distribution Services for the Funds 

using the Affiliated Dealer Compensation received by them from CGMI.7 

You also state that the Citigroup Principal Underwriters and another Citigroup Company, 

CitiStreet LLC, received prior to the Closing Date (and have continued to receive since 

the Closing Date) compensation for providing (and continuing to provide since the 

Closing Date) sub-accounting services for some of the Funds.8

 These services include:

(1) maintaining shareholder records pertaining to beneficial holder identification, 

purchases and sales, dividend payments, dividend reinvestments, aggregate number of 

shares beneficially held, share tax lots, taxable income and the components thereof, 

returns of capital and tax basis; and (2) preparing and forwarding tax form 1099 to 

beneficial holders of Fund shares. You state that one or more of the Citigroup 

Companies, in addition to the Citigroup Principal Underwriters and CitiStreet LLC, also 

may provide in the future, and receive compensation for providing, sub-accounting 

services to Funds other than those for which sub-accounting services are currently 

provided. 

Section 15(f) 

Section 15(f) of the 1940 Act establishes a non-exclusive safe harbor for the receipt of 

any amount or benefit by an investment adviser to a registered investment company 

(“fund”) or an affiliated person of such adviser in connection with the sale of securities 

of, or a sale of any other interest in, the adviser that results in an assignment of the fund’s 

advisory contract, provided that two conditions are satisfied.9

 Under Section 15(f)(1)(A), 

 

7

 You note that for reasons of administrative efficiency: (i) the Citigroup Principal Underwriters with 

respect to their employees may request that the relevant Fund or Legg Mason adviser forward the 

appropriate amount of Distribution Compensation to such employees; (ii) out of CGMI’s share of the 

Distribution Compensation, CGMI may request that the relevant Fund or Legg Mason adviser forward (a) 

the appropriate amount of Affiliated Dealer Compensation to each Affiliated Dealer and (b) the net 

remaining amount to CGMI; and (iii) at the request of the Affiliated Dealers with respect to their 

employees, CGMI may request that the relevant Fund or Legg Mason adviser forward the appropriate 

amount of the Affiliated Dealer Compensation to such employees. You state that in each case, the relevant 

Fund's amount would consist solely of 12b-1 Fees and the relevant Legg Mason adviser's amount would 

consist solely of Revenue Sharing Payments. 

8

 You state that the arrangements applicable to sub-accounting services are not governed by the terms of 

the Global Distribution Agreement. You also state that the sub-accounting services are not paid for, or 

required to be paid for, by the Funds out of their Rule 12b-1 plans. 

9

 Section 15(f) was added in 1975 to clarify industry concerns following the decision in Rosenfeld v. 

Black, 445 F.2d 1337 (2d Cir. 1971). These concerns related to whether an investment adviser to a fund 

could earn any profit upon the sale of its investment advisory business consistent with its fiduciary 

3
at least 75% of the directors of a fund’s board must not be interested persons of either the 

fund’s investment adviser or its predecessor adviser for three years following the sale of 

securities of, or a sale of any other interest in, the adviser that results in an assignment of 

the fund’s advisory contract.10 Under Section 15(f)(1)(B), an unfair burden may not be 

imposed on the fund as a result of the transactions described in Section 15(f), or any 

express or implied terms, conditions or understandings applicable to such transactions. 

Section 15(f)(2)(B) defines “unfair burden” to include: 

any arrangement, during the two-year period after the date on 

which any [transaction described in Section 15(f)] occurs, whereby 

the investment adviser or [, its] predecessor or successor 

investment advisers [...] or any interested person of any such 

adviser [...] receives or is entitled to receive any compensation 

directly or indirectly (i) from any person in connection with the 

purchase or sale of securities or other property to, from, or on 

behalf of such company, other than bona fide ordinary 

compensation as principal underwriter for such company, or (ii) 

from such company or its security holders for other than bona fide

investment advisory or other services (emphasis added). 

You state that each of the Citigroup Companies that provided distribution services for the 

Funds, each of the employees of the Citigroup Principal Underwriters and each of the 

employees of the Affiliated Dealers, before the Closing Date, was an interested person of 

the Citigroup Advisers within the meaning of Section 2(a)(19)(B) at that time.11 

Consequently, each of such persons was an interested person of the Funds’ predecessor 

investment adviser. Accordingly, you are concerned whether the safe harbor set forth in 

Section 15(f), and in particular Section 15(f)(2)(B), applies under the circumstances you 

describe in your letter. You state that you are not aware of any judicial or administrative 

interpretation that would provide guidance as to the application of Section 15(f)(2)(B) 

under those circumstances. You therefore request that we concur with your view that: (1) 

 obligations to the fund. In adopting Section 15(f), Congress sought to balance the interests of fund 

shareholders and the ability of an investment adviser to sell its advisory business at a profit. S. Rep. No. 

94-75, at 71 (1975); H. Rep. 94-123, at 90 (1975). Section 59 of the 1940 Act makes Section 15(f) 

applicable to business development companies to the same extent as if they were registered closed-end 

funds. 

10 You represent that the composition of each Fund board has satisfied this condition at all times since the 

Closing Date. 

11 Section 2(a)(19)(B) of the 1940 Act defines “interested person” when used with respect to an investment 

adviser of any investment company to include, among others: 

any person or any affiliated person of a person (other than a registered investment company) that, 

at any time during the 6-month period preceding the date of the determination of whether that 

person or affiliated person is an interested person, has executed any portfolio transactions for, 

engaged in any principal transactions with, or distributed shares for – (I) any investment company 

for which the investment adviser . . . serves as such; . . . . 

4
the Distribution Compensation directly received (and to be received) by the Citigroup 

Principal Underwriters, and indirectly received (and to be received) by the employees of 

the Citigroup Principal Underwriters, the Affiliated Dealers and employees of the 

Affiliated Dealers under the circumstances described in your letter, constitutes “ordinary 

compensation as principal underwriter” for the Funds for purposes of Section 

15(f)(2)(B)(i); and (2) the sub-accounting services constitute “other services” for 

purposes of Section 15(f)(2)(B)(ii). 

Conclusion 

Based on the facts and representations in your letter, and without necessarily agreeing 

with your analysis, it is our view that: 

• the Distribution Compensation received (and to be received) by the 

Citigroup Principal Underwriters, and paid by them to their employees, for 

providing the Distribution Services for the Funds constitutes “ordinary

compensation as principal underwriter” for purposes of Section 

15(f)(2)(B)(i); 

• the payments made (and to be made): (i) by CGMI to the Affiliated 

Dealers using the Distribution Compensation received by it for providing 

the Distribution Services for the Funds, as described above, and (ii) by the 

Affiliated Dealers to their employees using the Affiliated Dealer 

Compensation for providing the Distribution Services for the Funds, as 

described above, constitute “ordinary compensation as principal 

underwriter” for purposes of Section 15(f)(2)(B)(i); and 

• “other services” include the sub-accounting services provided (and to be 

provided) for the Funds by the Citigroup Companies for purposes of 

Section 15(f)(2)(B)(ii), based in particular on your representation that such 

services are not required to be paid for by the Funds out of their 

Rule 12b-1 plans. 

5
We express our views solely for purposes of Section 15(f), and express no view regarding 

what constitutes acting as principal underwriter or other services for any other purpose.12 

Our views are based on the facts and representations set forth in your letter. You should 

note that any different facts or representations may require a different conclusion.13

Very truly yours, 

Douglas Scheidt 

Associate Director and 

Chief Counsel 

 

12 Moreover, our view should not be taken to suggest that the Affiliated Dealers or any employees 

discussed in this letter are principal underwriters, as defined in Section 2(a)(29) of the 1940 Act. 

13 Our interpretation of Section 15(f), moreover, does not address whether the Distribution Compensation, 

or any part of it, is “bona fide” within the meaning of Section 15(f)(2)(B)(i), or whether the sub-accounting 

services are “bona fide” within the meaning of Section 15(f)(2)(B)(ii). A determination as to whether such 

compensation or services are bona fide is primarily factual in nature. We are not in a position to conduct 

the investigation necessary to evaluate the requisite facts and circumstances of such payments or services, 

and therefore, as a matter of policy, we generally do not respond to questions raising issues that are 

primarily factual in nature. See, e.g., Zurich Insurance Company, Scudder Kemper Investments, Inc., 

Division of Investment Management no-action letter (pub. avail. Aug. 31, 1998) (staff declined to take 

position on whether change in control had occurred). 

We recognize that the Citigroup Companies and their employees likely will receive compensation in 

addition to the compensation described in this letter during the two-year period following the Closing Date. 

This letter does not address whether the receipt of such additional compensation would constitute “ordinary 

compensation as principal underwriter” for purposes of Section 15(f). 

6
INCOMING LETTER: 

Section 15(f) of the 

Investment Company Act

 July 26, 2006 

Douglas Scheidt 

Chief Counsel 

Division of Investment Management 

Securities and Exchange Commission 

100 F Street, NE 

Washington, D.C. 20549 

Dear Mr. Scheidt: 

On behalf of our client Citigroup Inc. ("Citigroup") we are writing to seek 

confirmation of the oral interpretive advice we received on November 30, 2005 from the 

staff of the Securities and Exchange Commission (the "Commission") under Section 

15(f) of the Investment Company Act of 1940 (the "1940 Act") in connection with the 

sale (the "Transfer") by Citigroup to Legg Mason, Inc. ("Legg Mason") of substantially 

all of its business of acting as investment adviser through one or more of its affiliated 

investment advisers ("Citigroup Advisers")14 to numerous existing open- and closed-end 

registered investment companies (the "Funds"). The Transfer, which occurred on 

December 1, 2005, (the "Closing Date"), was part of a larger transaction in which 

Citigroup sold substantially all of its investment management business to Legg Mason in 

exchange for Legg Mason securities and Legg Mason's investment banking and retail 

brokerage operations pursuant to a Transaction Agreement entered into on June 23, 2005. 

Section 15(f) of the 1940 Act permits Citigroup to retain any amount or benefit it realized 

in connection with the Transfer if, among other things, no "unfair burden" is imposed 

upon the Funds as a result of the Transfer or any of the express or implied terms, 

conditions or understandings applicable to the Transfer. The term "unfair burden" is 

 

14 Citigroup controlled each of the Citigroup Advisers prior to the date of the Transfer (the "Closing 

Date"). Consequently, each of the Citigroup Advisers was an affiliated person of Citigroup within the 

meaning of Section 2(a)(3)(C) of the 1940 Act until the Closing Date. 

7
defined in Section 15(f)(2)(B)(i) to include any arrangement during the two-year period 

after the Transfer whereby either Citigroup or any of its affiliates (together with 

Citigroup, the "Citigroup Companies") or Legg Mason or any of its affiliates receive any 

compensation directly or indirectly from any person in connection with the purchase or 

sale of any securities or other property to, from or on behalf of the Funds other than bona 

fide ordinary compensation as principal underwriter for the Funds. Except as otherwise 

noted, for purposes of this letter the word affiliate means any person that at the time of 

determination, directly or indirectly, through one or more intermediaries, controls, is 

controlled by or is under common control with another person and the word control 

means the possession, directly or indirectly, of the power to direct or cause the direction 

of the management or policies of a person. Each of the Citigroup Companies that 

provides distribution services for the Funds and each of the employees of those Citigroup 

Companies is an interested person of the Funds' investment advisers and principal 

underwriters within the meaning of Section 2(a)(19) of the 1940 Act. 

Citigroup is one of the largest diversified financial services companies in 

the world, with consolidated assets, shareholders' equity and assets under management as 

of June 30, 2005 of $1,547 trillion, $113 billion and $436 billion, respectively. It 

currently owns Citibank, N.A. and Citigroup Global Markets Inc. ("CGMI"), which 

together are among the largest underwriters, dealers and/or brokers in the world of 

securities, commodities, foreign exchange, commercial loans, securities loans, derivative 

instruments and other financial instruments. 

Legg Mason is a financial services holding company that, currently 

provides asset management and related financial services, and prior to the Transfer also 

provided securities brokerage and investment banking services, through its subsidiaries. 

As of June 30, 2005, Legg Mason's asset management operations had aggregate assets 

under management of $397 billion, of which approximately $248 billion represented 

fixed income assets and $75 billion represented assets in mutual and closed-end funds 

sponsored by Legg Mason and its affiliates. 

Historically, CGMI and another Citigroup subsidiary, PFS Distributors 

Inc. ("PFSD") acted as principal underwriters for each of the Funds and substantially all 

of the shares of the Funds were sold through these principal underwriters to the customers 

of themselves and their affiliates. Effective December 1, 2005 a Legg Mason subsidiary 

became an additional principal underwriter of the Funds. Legg Mason desired to take on 

this role in order to be able to expand distribution opportunities for the Funds beyond 

Citigroup and to take responsibility for shaping the marketing of the Funds in the future. 

Citigroup wished to continue distributing shares of the Funds (which, as noted above, are 

largely held by Citigroup customers). Legg Mason believed it would be in the best 

interest of the Funds to maintain the Citigroup distribution channel for the Funds. 

Accordingly, Legg Mason and Citigroup agreed, and the boards of the Funds approved, 

that Citigroup would continue for a period of at least three years after the Closing Date to 

continue to distribute shares of the Funds on at least as favorable a basis as prior to the 

8
Closing Date. The Funds' boards took these distribution commitments into account in 

their decisions to approve new advisory agreements to take effect at the Closing Date 

pending shareholder approval. The framework for these continuing distribution 

agreements is set forth in a Global Distribution Agreement, entered into on June 23, 2005 

and amended and restated on October 3, 2005 (the "Global Distribution Agreement"), 

which also contemplates that Citigroup will have the right to be the primary retail 

distribution channel for certain Legg Mason registered mutual funds and related products, 

subject to any applicable approvals by the directors of such funds. 

At the time the Transaction Agreement and the Global Distribution 

Agreement were entered into, CGMI and PFSD were the sole principal underwriters for 

the Funds and other Citigroup Companies performed distribution services for CGMI 

pursuant to selected dealer and similar agreements with it (such Citigroup Companies are 

referred to as the "Affiliated Dealers"). Depending on the class of shares involved, the 

principal underwriters and Affiliated Dealers received distribution-related compensation 

in the form of front-end and deferred sales charges from investors, Rule 12b-1 

distribution and Rule 12b-1 shareholder servicing payments from the Funds and revenue 

sharing payments from the investment advisers of the Funds. Out of these revenues the 

principal underwriters paid their employees and the Affiliated Dealers for their 

distribution services. Due to the provision of these services each of the Citigroup 

Companies providing distribution services and each of the employees of these Citigroup 

Companies was an interested person of the Citigroup Advisers within the meaning of 

Section 2(a) (19)(B) of the 1940 Act. Prior to the Closing Date, three of the Citigroup 

Companies (CGMI, PFS Investments, Inc. ("PFSI," which is also the successor to PFSD) 

and CitiStreet LLC ("CitiStreet")), also received sub-accounting fees from some of the 

Funds for record-keeping services performed by those three companies. These subaccounting services include maintaining shareholder records pertaining to: beneficial 

holder identification; purchases and sales; dividend payments; dividend reinvestments; 

aggregate number of shares beneficially held; share tax lots; taxable income and the 

components thereof, returns of capital, tax basis and similar records and preparing and 

forwarding to such beneficial holders tax form 1099. In the case of CGMI, PFSI and 

CitiStreet, these services were not paid for out of the Funds' Rule 12b-1 plans but rather 

by the Funds as normal operating expenses. Prior to the Transfer, personnel of the 

business unit operating the investment advisers of the Funds, who were also associated 

persons of one of the Citigroup brokers, supervised marketing and advertising for the 

Funds and structured and negotiated arrangements with third party distributors. In 

addition, CGMI and PFSI financed the sale of Class B shares and paid for the printing 

and distribution of prospectuses and sales literature. 

After the Closing Date, CGMI and PFSI (the "Citigroup Principal 

Underwriters") have continued to serve (and will continue to serve) as principal 

underwriters for the Funds and the Affiliated Dealers have continued to perform (and will 

continue to perform) distribution services for CGMI, directly and through their 

employees, pursuant to selected dealer agreements with CGMI. Pursuant to new 

principal underwriting agreements entered into as of the Transfer, CGMI and PFSI have 

9
agreed to act as agents for the Funds to offer shares of the Funds and accept purchases, 

redemptions and exchanges of such shares. Pursuant to these principal underwriting 

agreements, CGMI and PFSI are responsible for reviewing and submitting to the NASD 

any marketing materials they prepare; maintaining anti-money laundering programs, 

know your customer and privacy policies; maintaining applicable records of their 

activities; and maintaining policies and procedures for share transactions with investors 

and intermediaries. The Affiliated Dealers are responsible for offering shares of the 

Funds and forwarding purchase, redemption and exchange orders from their customers 

through CGMI as principal underwriter to the Funds. In offering shares they utilize 

marketing materials furnished by the Funds' principal underwriters. Accordingly, CGMI 

and PFSI have provided (and will continue to provide) the foregoing services for the 

Funds directly and through their employees and the Affiliated Dealers. The Citigroup 

principal underwriters continue to receive front-end and deferred sales charges from 

investors, Rule 12b-1 distribution and Rule 12b-1 shareholder servicing payments from 

the Funds (which may be payable through the Legg Mason principal underwriter as an 

administrative matter) and revenue sharing payments from the investment advisers to 

those Funds pursuant to written revenue sharing agreements providing in effect that the 

source of the revenue sharing payments by the investment advisers of the Funds to CGMI 

and PFSI will be the legitimate profits of those investment advisers. They also continue 

to finance the sale of Class B Shares and pay for the printing of certain marketing 

materials. The Citigroup principal underwriters will not utilize other revenue sources to 

compensate their employees and, in the case of CGMI, the Affiliated Dealers, for such 

distribution services. The revenue sharing payments will be used by CGMI and PFSI to 

support their distribution systems. The foregoing services are hereinafter referred to as 

the "Distribution Services" and the compensation received for such services as described 

above as the "Distribution Compensation." All elements of the Citigroup principal 

underwriters' compensation in connection with Distribution Services for a Fund will be 

disclosed in that Fund's registration statement or in the selling materials or order 

confirmation statements utilized by the Citigroup Companies. 

After the Closing Date, the Citigroup Principal Underwriters have paid 

(and will continue to pay) their employees for providing the Distribution Services for the 

Funds using the Distribution Compensation received by them. In addition, after the 

Closing Date, CGMI has paid (and will continue to pay) the Affiliated Dealers for 

providing the Distribution Services for the Funds using the Distribution Compensation 

received by it ("Affiliated Dealer Compensation"). Finally, the Affiliated Dealers have 

paid (and will continue to pay) their employees for providing the Distribution Services 

for the Funds using the Affiliated Dealer Compensation received by them from CGMI. 

For reasons of administrative efficiency: (i) the Citigroup Principal Underwriters with 

respect to their employees may request that the relevant Fund or Legg Mason adviser 

forward the appropriate amount of Distribution Compensation to such employees, (ii) out 

of CGMI’s share of the Distribution Compensation, CGMI may request that the relevant 

Fund or Legg Mason adviser forward (a) the appropriate amount of Affiliated Dealer 

Compensation to each Affiliated Dealer and (b) the net remaining amount to CGMI, and 

(iii) at the request of the Affiliated Dealers with respect to their employees, CGMI may 

request that the relevant Fund or Legg Mason adviser forward the appropriate amount of 

10
the Affiliated Dealer Compensation to such employees. In each case the Fund's amount 

would consist solely of 12b-1 payments and the Legg Mason adviser's amount would 

consist solely of revenue sharing payments. 

After the Closing Date, the Citigroup Companies that currently perform 

sub-accounting services for some of the Funds have continued to receive (and will 

continue to receive) sub-accounting payments for such services. In addition, it is 

contemplated that one or more of the Citigroup Companies, possibly including Citigroup 

Companies in addition to CGMI, PFSI and CitiStreet, may provide the same or similar 

sub-accounting services in the future to Funds other than those for which sub-accounting 

services are currently provided. Any such appointment would be pursuant to an 

independent process and subject to the Funds' applicable policies under the supervision of 

the Funds' independent directors. These services are hereinafter referred to as the "Other 

Services" and are not governed by the Global Distribution Agreement. 

Since the Closing Date, the Legg Mason principal underwriter, rather than 

CGMI and PFSI, has been primarily responsible for the overall direction and supervision 

of underwriting and distribution matters for the Funds, much in the same way as the lead 

or book-running principal underwriter in a public offering of closed-end fund shares 

supervises the distribution process. For example, under the principal underwriter 

agreements, the Legg Mason principal underwriter is responsible for due diligencing the 

Funds' prospectuses and sales materials and CGMI and PFSI are responsible for 

prospectus sections dealing with themselves and their roles as principal underwriters. 

Likewise, the Legg Mason principal underwriter is responsible for preparing marketing 

materials but CGMI and PFSI also conduct their own reviews of such materials to satisfy 

themselves that they comply with applicable regulatory guidelines. The Legg Mason 

principal underwriter retains a portion of the distribution compensation for its additional 

services that are not replicated by CGMI and PFSI. 

The rates of the advisory, administrative, custodial, transfer agency, 

selling and other fees payable by the Funds or their shareholders have not been increased, 

and none of the services provided by the Citigroup Companies have been diminished, as 

a result of the Transfer except that Legg Mason rather than Citigroup is now responsible 

for charting overall marketing strategy and the dealer universe for distributing the Funds, 

due diligencing the Funds' prospectuses and marketing materials, clearing its marketing 

materials with the NASD and paying for the printing of prospectuses and marketing 

materials. There are no understandings, arrangements or agreements obligating Legg 

Mason or any of its affiliates or any of the Funds to execute any portfolio transaction with 

any person affiliated with the Citigroup Advisers. 

Citigroup and Legg Mason have covenanted with each other and Citigroup 

has undertaken to the board of directors of the Funds (as reflected in the Funds' proxy 

statements seeking shareholder approval of new investment advisory agreements in 

connection with the Transfer) to comply with Section 15(f). It is our opinion, for the 

11
reasons discussed in more detail below, that the payments received by the Citigroup 

Companies for the Distribution Services and Other Services after the Closing Date in the 

manner described satisfy the safe harbor conditions of Section 15(f). We are, however, 

unaware of any judicial or administrative interpretation of the application of Section 15(f) 

to these practices, particularly in the context of the separation of investment advisory and 

distribution services that occurred as a result of the Transfer and the Global Distribution 

Agreement. Accordingly, we seek interpretive advice from the staff confirming our 

opinion as to these matters. 

Section 15(f) of the 1940 Act

Section 15(f) of the 1940 Act allows an investment adviser to receive any 

amount or benefit in connection with the sale of an interest in its business if two 

conditions are satisfied. 

The first condition, set forth in Section 15(f)(1)(A), states that for a period 

of three years after an assignment of an advisory contract with a registered investment 

company, at least 75% of the members of the board of directors of the fund must not be 

interested persons of the new or predecessor investment adviser. The composition of the 

board of each of the Funds has satisfied this requirement at all times since the Closing 

Date. The second condition, Section 15(f)(1)(B), states that there must not be an "unfair 

burden" imposed on the company "as a result of" the assignment or any of the express or 

implied terms, conditions or understandings applicable thereto. The term unfair burden is 

defined in Section 15(f)(2)(B) as: 

[A]ny arrangement, during the two-year period after the date on 

which any such transaction occurs, whereby the investment adviser 

or corporate trustee or predecessor or successor investment 

advisers or corporate trustee or any interested person of any such 

adviser or any such corporate trustee receives or is entitled to 

receive any compensation directly or indirectly (i) from any person 

in connection with the purchase or sale of securities or other 

property to, from, or on behalf of such company, other than bona 

fide ordinary compensation as principal underwriter for such 

company, or (ii) from such company or its security holders for 

other than bona fide investment advisory or other services. 

The Transfer is Consistent with the Purpose of Section 15(f)

Section 15(f) was added to the 1940 Act in 1975 to "make it clear that an 

investment adviser to a mutual fund may be sold at a profit under conditions designed to 

protect fund shareholders." S. Rep. No. 94-75, at 140 reprinted in 1975 U.S.S.C.A.N. 

179, 317 (hereinafter "Senate Report 94-75"). In 1971, the Second Circuit had held that 

the "expectation of profits under an investment advisory contract is not an asset which, 

under the Investment Company Act, the adviser can assign outright." Rosenfeld v. Black, 

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445 F.2d 1337, 1344 (2d Cir. 1971). After the Second Circuit's decision in Rosenfeld, it 

was felt that legislation was necessary to clarify the law with respect to sales of interests 

in mutual fund investment advisory businesses in order to avoid potential undue burden 

on the investment company industry. See Thomas L. Hazen, Transfers of Corporate 

Control and Duties of Controlling Shareholders - Common Law, Tender Offers, 

Investment Companies - and a Proposal for Reform, 125 U. Pa. L. Rev. 1023, 1057-1060 

(1977). The Congressional purpose in enacting Section 15(f), therefore, was to permit 

sales of mutual fund investment advisory businesses to the extent that the mutual funds 

being advised were themselves not unfairly burdened as a result of the transaction. 

Senate Report 94-75 at p. 7. 

The legislative history of Section 15(f) and the prior studies of the 

Commission on which it was in large part modeled are replete with references to the goal 

of permitting sales of advisory businesses while avoiding harm to the mutual funds 

involved. See Senate Report 94-75 at 71. See also Letter from William J. Casey, 

Chairman of the Commission, to the Honorable Harrison A. Williams, Jr., Chairman of 

the S. Comm. on Banking, Housing, and Urban Affairs, Fed. Sec. L. Rep. P 78,671 (Mar. 

10, 1972); Hearings on the Investment Company Act Amendments of 1967 before the 

Subcomm. on Commerce and Finance of the H. Comm. on Interstate and Foreign 

Commerce, 90th Cong., 1st Sess. (1967); Report of the Commission on the Public Policy 

Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d 

Session (1966) at 152. The principal potential harms suggested were that the successor 

adviser might want to ensure somehow the permanency of its position in order to earn 

back the purchase price (see, e.g., Hearings on S.470 (Feb. 1973), Technical Statements 

of the Commission at 246 ("1973 Hearings"); and Hearings on H.R.10570 (1975), 

Statements of Philip A. Loomis, Jr., Commissioner, at 36-38), or that the successor 

adviser might want the right to execute portfolio transactions on behalf of the mutual 

funds on terms unfavorable to the funds or the selling advisor might want to retain such 

rights (see, e.g., Id.; and Senate Report 94-75, at 141). Based on our review of these 

materials, we have found no suggestion that any particular function or status, such as 

selected dealer, underwriter, custodian, transfer agent, administrator, or other service 

agent was viewed as inherently harmful and should be prohibited. 

The Transfer has been carefully structured so as to protect the interests of 

the Funds and their shareholders. Steps were taken prior to the Closing Date to ensure 

that the Funds would continue to have full access to their current distribution networks 

and the Funds' directors approved new investment advisory agreements in connection 

with the Transfer after having been fully apprised of these distribution arrangements. 

a. The Payments for Distribution Services 

 Qualify for the Section 15(f)(2)(B)(i) Exception

Each of the elements of distribution compensation received by the 

Citigroup principal underwriters since the Closing Date is bona fide ordinary 

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compensation as principal underwriter. Front-end and deferred sales charges and Rule 

12b-1 plan distribution and shareholder servicing payments are all elements of mutual 

fund distribution in common usage in the industry for many years. Front-end sales 

charges are specifically treated as underwriting compensation in the registration forms. 

See Instruction 2 to Item 1 of Form N-2 (closed-end funds) and Items 20(b) and 7 of 

Form N-1A (open-end funds). For level load and deferred load classes of mutual fund 

shares, the sales load is in effect paid by the fund to the principal underwriter over time in 

the form of Rule 12b-1 fees, which are consequently also ordinary principal underwriter 

compensation, or is charged against redemption proceeds if the investor redeems before 

the full amount of the sales load has been paid by the fund. In either case, the amounts 

received by each affiliated principal underwriter must be disclosed. See Item 20(b), 

columns (3) and (5), of Form N-1A. See also NASD Conduct Rule 2830(d)(2), which 

characterizes Rule 12b-1 plan payments as "asset-based sales charges." Financing sales 

of Class B Shares is also commonly done by the principal underwriter, who pays out of 

its retained earnings or financings at the time of sale a fixed amount to the selected dealer 

or employee making the sale and then recoups this payment plus interest (which NASD 

Conduct Rule 2830(d)(2) authorizes) through Rule 12b-1 payments over time. Other 

Rule 12b-1 payments are typically paid to the principal underwriter pursuant to 

"compensation" plans that compensate the principal underwriter for the full range of 

distribution services provided by the principal underwriter in the ordinary course, which 

may include advertising, marketing, prospectus printing and payments to selling dealers 

and sales personnel. Further, Rule 12b-1 requires that payments be for distribution 

purposes, and the NASD Conduct Rules 2710 and 2830 treat such payments as ordinary 

distribution compensation that a principal underwriter must include as underwriting 

compensation. Consequently, we believe these long standing elements of distribution 

compensation are ordinary principal underwriting compensation for purposes of Section 

15(f). 

Revenue sharing payments by fund advisers are also common and longstanding features of mutual fund distribution programs and represent payments in 

recognition of the costs of supporting a large sales force to sell a fund or family of funds 

and maintaining the presence of that fund or those funds in its sales system. Indeed, for 

many years prior to the enactment of Section 15(f), it was common practice for the 

investment adviser of a mutual fund to subsidize the operations of the distributor 

inasmuch as mutual fund distribution was not generally a profitable activity and, in the 

case of no-load funds, was by definition unprofitable. In the adopting release regarding 

Rule 12b-1 (SEC Rel. No. IC-11414 (1980)) the Commission noted that many investment 

advisers had historically utilized a portion of their assets or profits to promote distribution 

of the funds they managed and explained its position that the use by an investment 

adviser of its legitimate profits to support distribution was a permissible activity. The 

question the Commission was considering was not whether advisers paid for distribution 

services but whether such payments were indirect uses of fund assets to pay for 

distribution. From the principal underwriters' point of view, however, receipt of these 

payments is normal underwriting compensation no matter what the source. For example, 

since the standard sales load in the initial public offerings of closed-end funds declined 

from 6.0% to 4.5% several years ago, it has been common practice for the principal 

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underwriters in such offerings to receive trail payments from the investment advisers. 

For purposes of its rules on sales compensation, the NASD has uniformly treated these 

payments as underwriting compensation for purposes of its corporate financing 

compensation limitations under Rule 2710 of its Conduct Rules. See NASD Conduct 

Rule 2710(c)(2). Further, all elements of principal underwriter compensation in closedend fund offerings must be noted on the prospectus cover and/or in the body of the 

prospectus. See Instruction 2 to Item 1 of Form N-2. The staff of the SEC has 

determined that revenue sharing payments are subject to disclosure under this item, 

which underscores our conclusion that revenue sharing payments are ordinary principal 

underwriters compensation. 

As noted earlier, to accommodate the Affiliated Dealers, which have been 

performing distribution services relating to the Funds for years, CGMI and PFSI each 

intends to conduct its principal underwriter functions both directly and indirectly through 

its employees and, in the case of CGMI, the Affiliated Dealers. CGMI and PFSI will 

each be the recipient of "bona fide ordinary compensation as principal underwriter." 

Each will then pass appropriate compensation to its employees and, in the case of CGMI, 

the Affiliated Dealers for the continuance of long-standing distribution activities that 

enable the principal underwriter to perform its function. This is the normal mutual fund 

distribution paradigm envisioned by the 1940 Act and was as prevalent at the time 

Section 15(f) was enacted in 1975 as it is today. In our view, the compensation received 

by employees of CGMI and PFSI from CGMI and PFSI, by Affiliated Dealers of CGMI 

through CGMI, and by the employees of these Affiliated Dealers from their employer 

solely out of the ordinary principal underwriter compensation initially received by CGMI 

or PFSI satisfies the requirements of Section 15(f)(2)(B)(i) because these employees and 

Affiliated Dealers, even though these persons are not themselves principal underwriters 

but are interested persons of the Funds' predecessor and successor investment advisers 

and principal underwriters, are receiving compensation for their distribution activities 

directly or indirectly from a person (CGMI or PFSI) that is receiving bona fide ordinary 

principal underwriter compensation. That is, Section 15(f)(2)(B)(i) requires that the 

compensation be directly or indirectly out of principal underwriter compensation, not that 

each person in the distribution chain be a principal underwriter. The requirement that a 

principal underwriter be the direct recipient of compensation is understandable given the 

purposes of Section 15(f) inasmuch as it is only the principal underwriter function that 

the independent directors (which under Section 15(f) must constitute at least 75% of the 

board for at least three years) control through the statutory requirement that principal 

underwriters be in privity of contract with the Funds and the requirement in Section 15(b) 

that the boards of funds be able to terminate the principal underwriting arrangement at 

any time without penalty. Section 15(f)(2)(B)(i) then treats other sources of 

compensation for distribution as unfair burdens, thereby providing the directors with a 

means of assuring that the distribution function is not used as a means of conveying 

inappropriate types of compensation in connection with a sale of an investment adviser. 

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b. Payments for the Other Services Qualify 

 for the Section 15(f)(2)(B)(ii) Exception

Another element of compensation that will be received by at least three of 

the Citigroup Companies in relation to the Funds is sub-accounting fees. This type of 

service is often provided by a principal underwriter or dealer (and is provided by the 

Citigroup Companies to several other unaffiliated mutual fund complexes) as part of the 

operating environment of the dealer and accordingly, as it is often received in connection 

with distribution, may be characterized either as ordinary distribution compensation or as 

compensation for bona fide "other services." See, e.g., Investment Company Institute, 

SEC No-Action Letter (Oct. 30, 1998). Inasmuch as the particular sub-accounting 

services provided by the Citigroup Companies are shareholder administrative services 

that the Funds themselves otherwise need to provide and are not paid for or required to be 

paid for by the Funds out of Rule 12b-1 plans, we believe that these services would 

qualify as bona fide "other services" under the Section 15(f)(2)(B)(ii) exception if 

appropriately approved by the directors of the Funds. Any decision by the boards of 

directors (including the independent directors) of the Funds to utilize these services going 

forward would be based on cost and service assessments at the time, would be a matter 

entirely left to the discretion of the independent directors, is not required by any of the 

transaction documents and would be viewed by Citigroup both as not being in any sense 

"a result of" the Transfer and as being bona fide other services. 

Conclusion

For the reasons stated above, it is our opinion that the Distribution 

Compensation received (and to be received) directly by CGMI and PFSI and indirectly 

by the Affiliated Dealers and employees through CGMI and PFSI for the Distribution 

Services since the Closing Date as described herein constitute directly or indirectly 

"ordinary compensation as principal underwriter" for purposes of Section 15(f)(2)(B)(i) 

and that the Other Services constitute "other services" for purposes of Section 15(f) 

(2)(B)(ii). We request that the staff confirm that it interprets Section 15(f) in the same 

manner. 

Sincerely, 

 /s/ Richard T. Prins

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