<PAGE>
CODE OF ETHICS
ARROYO SECO, INC.
PACIFIC AMERICAN INCOME SHARES
WESTERN ASSET MANAGEMENT COMPANY
LM INSTITUTIONAL FUND ADVISORS 1
A. STATEMENT OF GENERAL PRINCIPLES
-------------------------------
1. All Access Persons are fiduciaries to the Accounts and Funds managed by
the Companies. All Access Persons are also fiduciaries to Fund
shareholders. Accordingly, Access Persons shall place the interests of
the Accounts and Funds first.
2. Each Access Person shall handle his or her personal securities
transactions in such a manner as to avoid any actual or potential
conflict of interest or any abuse of his or her position of trust and
responsibility. No Access Person shall take inappropriate advantage of
his or her position.
3. All Access Persons shall act in accordance with both the letter and the
spirit of this Code.
4. It will be considered a violation of this Code to do indirectly that
which is prohibited directly. For example, it will be considered a
violation of this Code to do indirectly through options, futures or other
derivatives that which is prohibited directly through transactions in
securities themselves.
5. This Code is to be interpreted consistent with the Securities and
Exchange Commission's rules governing codes of ethics.
B. PRE-CLEARANCE
-------------
1. Except for the transactions set forth in Section C.1 below, any
Securities Transaction which an Access Person or a member of his or her
Immediate Family has a Beneficial Interest must be pre-cleared with a
Pre-Clearance Officer.
2. PRE-CLEARANCE PROCEDURES: Prior to entering an order for a Securities
Transaction that requires pre-clearance, the Access Person must complete,
in writing, a Trade Authorization Request form and submit the completed
form to a Pre-Clearance Officer. Proposed Securities Transactions of a
Page 1
<PAGE>
Pre-Clearance Officer that require pre-clearance must be submitted to
another Pre-Clearance Officer. In the event an Access Person is unable to
complete a Trade Authorization Request form, the Access Person requesting
Pre-Clearance may designate someone else to complete the Form on his or
her behalf in order to obtain proper authorization.
3. LENGTH OF TRADE AUTHORIZATION APPROVAL: The authorization provided by the
Pre-Clearance Officer is effective until the earlier of (1) its
revocation, (2) the close of business on the trading day after the
authorization is granted, or (3) the Access Person learns that the
information in the Trade Authorization Request Form is not accurate. If
the order for the Securities Transaction is not placed within that
period, a new authorization must be obtained before the Securities
Transaction is placed. If a Securities Transaction is placed but has not
been executed before the authorization expires (e.g. a limit order), no
new authorization is necessary unless the person placing the order amends
it in any way.
C. EXEMPTIONS
----------
1. The following Securities Transactions are exempt from the pre-clearance
requirements of this code as well as the prohibitions outlined in
sections E.3, E.4 and E.5:
a. MUTUAL FUNDS - Securities issued by any registered open-end
investment company;
b. NO KNOWLEDGE - Securities Transactions where neither the Access
Person nor an Immediate Family member knows of the transaction
before it is completed (for example a transaction effected by a
Trustee of a blind trust or discretionary trades involving an
investment partnership or investment club, in connection with
which the Access Person is neither consulted nor advised of the
trade before it is executed);
c. CERTAIN CORPORATE ACTIONS - Any acquisition of Securities, through
stock dividends, dividend reinvestments, stock splits, reverse
stock splits, mergers, consolidations, spin-offs, exercise of
rights or other similar corporate reorganizations or distributions
generally applicable to all holders of the same class of
Securities;
Page 2
<PAGE>
d. MISCELLANEOUS - Any transaction in the following:
1. Bankers Acceptances,
2. Bank Certificates of Deposit,
3. Commercial Paper,
4. Repurchase Agreements,
5. Securities that are direct obligations of the U.S.
Government,
6. Other securities as may from time to time be
designated in writing by the Code of Ethics
Committee on the grounds that the risk of
abuse is minimal or non-existent.
The Securities listed above are not exempt from the reporting
requirements set forth in Section D.
2. Commodities, Futures, Options on Futures and Options on Broad Based
Indices Commodities, Futures (including currency futures and futures on
securities comprising part of a broad-based, publicly traded market based
index of stocks) and options on futures are not subject to preclearance,
nor to the seven-day blackout, 60-day profit disgorgement, and prohibited
transaction provisions of Section E, but are subject to transaction
reporting. Options on broad-based indices are subject to the preclearance
and transaction reporting provisions of the Code, but are not subject to
the provisions regarding seven-day blackout and 60-day profit
disgorgement.
3. Sovereign debt of non-U.S. governments with an issue size greater than $1
billion and issued in either the home currency or U.S. dollars are exempt
from the blackout provisions of the Code as provided for in Section E.
These transactions are still subject to the pre-clearance and reporting
requirements of the Code.
D. REPORTING
---------
1. CONFIRMATIONS AND STATEMENTS: All Access Persons and members of his or
her Immediate Family must arrange for the Compliance Department to
receive directly from any broker, dealer or bank duplicate copies of
confirmations for Personal Securities Transactions and periodic
statements for each brokerage account in which the Access Person has a
Beneficial Interest. The foregoing does not apply to transactions and
holdings in registered open-end investment companies.
Page 3
<PAGE>
2. INITIAL REPORTS: Within 10 days from the start of employment with the
Companies, all Access Persons must disclose all Covered Securities in
which they or members of their Immediate Family have a Beneficial
Interest. Such report must include the title, number of shares and
principal amount of each Covered Security. Access Persons must also
report all brokerage accounts in which they or members of their Immediate
Family have a Beneficial Interest. Initial reports must be signed and
dated by the Access Person.
3. MONTHLY REPORTS: All employees of the companies shall submit to the
Compliance Department, within 10 days after month end, a report of all
personal securities transactions during the previous month. The report
shall state the title and number of shares, the principal amount of the
security involved, the date and nature of the transaction, the price at
which the transaction was effected and the name of the broker, dealer or
bank with or through whom the transaction was effected. Access Persons
who have reported their Personal Securities Transactions through
duplicate copies of broker confirmations and statements are not required
to file a monthly report. In addition, all employees of the companies
shall submit a report of any securities account established during the
month for the direct or indirect benefit of the employee. The report
shall include the name of the broker, dealer or bank with whom the
employee established the account, the date the account was established
and the date the report was submitted to the Compliance Department.
4. ANNUAL REPORTS: All Access Person shall provide annually a list of all
Covered Securities in which they or members of their Immediate Family
have a Beneficial Interest. In addition, each Access Person must report
to the Compliance Department the account number, account name and
brokerage firm of each Securities account in which the Access Person, or
a member of his or her Immediate Family, has a Beneficial Interest. The
information in the annual report must be current as of a date no more
than 30 days before the report is submitted.
5. DIRECTORS REPORTS (for Directors of Pacific American Income Shares and LM
Institutional Fund Advisors 1):
a. A DISINTERESTED DIRECTOR is not required to make a report
regarding Personal Securities Transactions except where such
director knew or, in the ordinary course of fulfilling his or her
official duties as a director of Pacific American Income Shares
or LM Institutional Fund Advisors 1, should have known that
during the 15-day period immediately preceding or after the date
of the transaction in a
Page 4
<PAGE>
security by the director, such security is or was purchased or
sold by a Fund or such purchase or sale is or was considered by a
Fund or its Advisers.
b. AN INTERESTED DIRECTOR is required to make the following reports:
i. Initial Holdings Report (See Paragraph D.2.)
ii. Quarterly Transaction Report: No later than 10 days after the
end of each calendar quarter the folllowing information must
be reported:
- TRANSACTION REPORT for Covered Securities including: Date
of each transaction, full security description, number of
shares and principal amount, nature of transaction, price
at which transaction effected, broker, dealer or bank
through which transaction affected, date report is
submitted.
- ACCOUNT REPORT including: Any new account established by
the Director in which any securities were held during
the quarter for the direct or indirect benefit of the
access Person. Such report to also include the name of
the broker, dealer or bank with whom the Director
established the account, the date the account was
established and the date the report is submitted.
iii. Annual Reports (See Paragraph D.4.)
E. PROHIBITED TRANSACTIONS - The following Securities Transactions are
prohibited and will not be authorized by the Pre-Clearance Officer absent
exceptional circumstances. The prohibitions apply only to the categories
of Access Persons specified.
1. INITIAL PUBLIC OFFERINGS (INVESTMENT PERSONNEL ONLY)
Investment Persons shall not acquire any securities in an
initial public offering.
2. PRIVATE PLACEMENTS (INVESTMENT PERSONNEL ONLY) Investment
Persons shall not acquire any securities in a private
placement without written prior approval from the Code of
Ethics Committee. This prior approval shall take into
account among other factors, whether the investment
opportunity should be reserved for the Funds or Accounts, and
whether the opportunity is being offered to the Investment
Person by virtue of his or relationship with the Companies.
An Investment Person who has been authorized to acquire
securities in a private placement shall disclose that
investment when he or she plays a part in any subsequent
consideration by the Fund, Accounts or the Adviser of an
Page 5
<PAGE>
investment in the issuer. In such circumstances, the
decision to purchase securities of the issuer shall be
subject to an independent review by persons with no personal
interest in the issuer.
3. ONE-DAY BLACKOUT PERIOD No Access Person shall execute a
personal securities transaction in a security on any day
during which an Account or Fund has placed or executed a
purchase or sell order on the same security.
4. SEVEN-DAY BLACKOUT PERIOD (PORTFOLIO MANAGERS ONLY) Portfolio
Managers may not purchase or sell securities for their own
account within seven calendar days of a purchase or sale of
the same Securities (or Equivalent Securities) by an Account
or Fund managed by that Portfolio Manager.
5. 60-DAY BLACKOUT PERIOD (INVESTMENT PERSONNEL ONLY) Investment
Personnel may not (for their own beneficial interest) purchase
a Security within 60 days of the sale of the same Security;
nor may an Investment Person sell a Security within 60 days of
a purchase of the same Security if at any time during the 60
days the security was held by an Account or Fund managed by
the Companies.
F. MISCELLANEOUS
1. GIFTS: An Investment Person shall not receive any gift or other thing of
more than de minimis value from any person or entity that does business
with or on behalf of an Account or Fund advised by Western Asset
Management Company. Gifts of a nominal value (i.e. gifts whose reasonable
value is no more than $100 a year), and customary business meals,
entertainment (e.g. sporting events), and promotional items (e.g. pens,
mugs, T-shirts) may be accepted. An Investment Person may not personally
give any gift with a value in excess of $100 per year to persons
associated with securities or financial organizations, including clients
of the firm.
2. SERVICE AS A DIRECTOR: No Investment Person may serve on the board of
directors of any publicly traded company without prior written
authorization from the Code of Ethics Committee. If the Committee
authorizes board service, it shall do so subject to appropriate
safeguards, including in most cases "Chinese Walls" or other procedures
to isolate the Investment Person from the making of investment decisions
related to the company on whose board the Investment Person serves.
Page 6
<PAGE>
3. REMEDIES AND SANCTIONS: If the Code of Ethics Committee determines that
an employee of the Companies has committed a violation of the Code, the
Committee may impose sanctions and take other actions as it deems
appropriate.
4. CERTIFICATION OF COMPLIANCE: At least annually, all Access Persons shall
certify that they have complied with the requirements of this Code and
that they have disclosed or reported all personal securities transactions
required to be disclosed or reported pursuant to the requirements of this
Code.
G. DEFINITIONS
-----------
1. "ACCESS PERSONS" means (a) all interested directors and officers of
Arroyo Seco, Inc., Pacific American Income Shares, Western Asset
Management Company and LM Institutional Fund Advisors 1 (the Companies);
(b) all employees of the Companies who, in connection with their regular
functions or duties, make, participate in, or obtain information,
regarding the purchase or sale of a security by an Account or Fund; (c)
any natural person in a control relationship to the Companies who obtains
information concerning recommendations made to an Account or Fund with
regard to the purchase or sale of a security and such other persons as
the Compliance Department shall designate.
2. "ACCOUNT" means any portfolio managed by Western Asset Management Company.
3. "BENEFICIAL INTEREST" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship or
otherwise, to profit, or share in any profit derived from, a transaction
in the subject Securities. An Access Person is deemed to have a
Beneficial Interest in the following:
a. any Security owned individually by the Access Person;
b. any Security owned jointly by the Access Person with others (for
example, joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts and controlling interests in corporations); and
c. any Security in which a member of the Access Person's Immediate
Family has a Beneficial Interest if the Security is held in an
account over which the Access Person has decision making authority
(for example, the Access Person acts as trustee, executor, or
guardian). In addition, an Access Person is presumed to have a
Beneficial Interest in any Security in which a member of the Access
Person's Immediate Family has a Beneficial Interest if the Immediate
Family member resides in the
Page 7
<PAGE>
same household as the Access Person. This presumption may be
rebutted if the Access Person is able to provide the Compliance
Department with satisfactory assurances that the Access Person has
no material Beneficial Interest in the Security and exercises no
control over investment decisions made regarding the Security.
Access Persons may use the form attached (Certification of No
Beneficial Interest) in connection with such requests
4. "COMPANIES" means Arroyo Seco Inc., Pacific American Income Shares,
Western Asset Management Company and LM Institutional Fund Advisors 1.
5. "COVERED SECURITY" means any security defined below except covered
security does not include direct obligations of the U.S. Government,
bankers acceptances, bank certificates of deposit, commercial paper and
high quality short-term debt instruments including repurchase agreements
and shares issued by open-end Funds.
6. "FUND" means any investment company registered under the Investment
Company Act of 1940 managed by Western Asset Management Company.
7. "IMMEDIATE FAMILY" of an Access Person means any of the following persons
who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
8. "DIRECTOR" means a director of Pacific American Income Shares or LM
Institutional Fund Advisors 1.
9. "INVESTMENT PERSON" means each Portfolio Manager (as defined below) and
any Access Person who, in connection with his or her regular functions or
duties provides information and advice to a Portfolio Manager or who
helps execute a Portfolio Manager's decisions.
10. "PORTFOLIO MANAGER" means a person who has or shares principal day-to-day
responsibility for managing an Account or Fund.
Page 8
<PAGE>
11. "PRE-CLEARANCE OFFICER" means the persons designated as Pre-Clearance
Officers by the Code of Ethics Committee.
12. "SECURITY" means any security (as that term is defined under the
Investment Company Act of 1940) and any financial instrument related to a
security, including options on securities, futures contracts, options on
futures contracts and any other derivative.
13. "SECURITIES TRANSACTION" means a purchase or sale of Securities in which
an Access Person or a member of his or her Immediate Family has or
acquires a Beneficial Interest.
14. "WESTERN ASSET CODE OF ETHICS COMMITTEE" ("CODE OF ETHICS COMMITTEE")
Members of the Western Asset Code of Ethics Committee shall be designated
by the Western Asset Board of Directors.
Page 9
