LMP Equity Trust -- LM Investment Counsel Financial Services Fund

N-CSR 1 d336151dncsr.htm LMP EQUITY TRUST -- LM INVESTMENT COUNSEL FINANCIAL SERVICES FUND LMP Equity Trust -- LM Investment Counsel Financial Services Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-06444

Legg Mason Partners Equity Trust

(Exact name of registrant as specified in charter)

55 Water Street, New York, NY 10041

(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

Registrant’s telephone number, including area code: 1-877-721-1926

Date of fiscal year end: March 31

Date of reporting period: March 31, 2012

ITEM 1.

REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

March 31, 2012

LOGO

Annual Repor t

Legg Mason

Investment Counsel

Financial Services

Fund

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE


II		Legg Mason Investment Counsel Financial Services Fund


What’s inside
Letter from the chairman		II
Investment commentary		III
Fund overview		1
Fund at a glance		4
Fund expenses		5
Fund performance		6
Schedule of investments		8
Statement of assets and liabilities		11
Statement of operations		12
Statements of changes in net assets		13
Financial highlights		14
Notes to financial statements		18
Report of independent registered public accounting firm		29
Board approval of management and subadvisory agreements		30
Additional information		35
Important tax information		41

Fund objective

The Fund seeks long-term capital appreciation by investing primarily in common stocks.*

*	Since the Fund focuses its investments primarily on companies involved in financial services, an investment in the Fund may involve a greater degree of risk than an investment with greater diversification.

Letter from the chairman

LOGO

Dear Shareholder,

We are pleased to provide the annual report of Legg Mason Investment Counsel Financial Services Fund for the twelve-month reporting period ended March 31, 2012. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com/individualinvestors. Here you can gain immediate access to market and investment information, including:

Fund prices and performance,

Market insights and commentaries from our portfolio managers, and

A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

LOGO

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

April 27, 2012


Legg Mason Investment Counsel Financial Services Fund			III

Investment commentary

Economic review

The U.S. economy continued to grow over the twelve months ended March 31, 2012, albeit at an uneven pace. U.S. gross domestic product (“GDP”)ⁱ growth, as reported by the U.S. Department of Commerce, was 1.3% and 1.8% in the second and third quarters of 2011, respectively. The economy then gathered further momentum late in 2011, as the Commerce Department reported that fourth quarter GDP growth was 3.0% — the fastest pace since the second quarter of 2010. However, economic growth in the U.S. then moderated somewhat, as the Commerce Department's initial estimate for first quarter 2012 GDP growth was 2.2%.

Two factors constraining economic growth were the weak job market and continued troubles in the housing market. While there was some improvement during the second half of the reporting period, unemployment remained elevated. When the reporting period began, unemployment, as reported by the U.S. Department of Labor, was 8.9%. Unemployment then rose to 9.0% in April and stayed at or above 9.0% over the next five months before declining to 8.9% in October. Unemployment then declined during four out of the next five months and was 8.2% in March 2012, the lowest rate since February 2009. The housing market showed some positive signs, although it still appears to be searching for a bottom. According to the National Association of Realtors (“NAR”), existing-home sales fluctuated throughout the period. However, the inventory of unsold homes moved lower versus the previous month in March 2012 and home prices increased. The NAR reported that the median existing-home price for all housing types was $163,800 in March 2012, up 2.5% from March 2011.

The manufacturing sector overcame a soft patch in the summer of 2011 and expanded at a stronger pace during much of the remainder of the reporting period. Looking back, based on the Institute for Supply Management’s PMI ("PMI")ⁱⁱ, in February 2011, the manufacturing sector expanded at its fastest pace since May 2004, with a reading of 61.4 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). The PMI then generally moderated over the next several months and was 50.6 in August 2011, its lowest reading in two years. The manufacturing sector gathered momentum and ended January 2012 at 54.1, its highest reading since June 2011. After dipping to 52.4 in February, the PMI rose to 53.4 in March. In addition, fifteen of the eighteen industries tracked by the Institute for Supply Management expanded in March. In contrast, only nine and eleven industries expanded in January and February 2012, respectively.

The Federal Reserve Board ("Fed")ⁱⁱⁱtook a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. As has been the case since December 2008, the Fed kept the federal funds rate^iv at a historically low range between zero and 0.25%. In August 2011, the Fed declared its intention to keep the federal funds rate steady until mid-2013. Then, in September 2011, the Fed announced its intention to purchase $400 billion of longer-term Treasury securities and to sell an equal amount of shorter-term Treasury securities by June 2012 (often referred to as "Operation Twist"). In January 2012, the Fed extended the period it expects to keep rates on hold, saying "economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014." The Fed repeated this point at its meeting in April (after the reporting period ended), saying "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its


IV		Legg Mason Investment Counsel Financial Services Fund

dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy."

As always, thank you for your confidence in our stewardship of your assets.

Sincerely,

LOGO

R. Jay Gerken, CFA

Chairman, President and Chief Executive

April 27, 2012

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.

ⁱ	Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time.

ⁱⁱ	The Institute for Supply Management's PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector.

ⁱⁱⁱ	The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.

^iv	The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			1

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund seeks long-term capital appreciation by investing primarily in common stocks. Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of issuers in the financial services industry. We seek out stocks that we believe are undervalued and thus may offer above average potential for capital appreciation. These companies may include, but are not limited to, regional and money center banks, savings banks and thrift institutions, securities brokerage firms, asset management companies, insurance and insurance brokerage firms, government-sponsored agencies, specialty finance companies and financial conglomerates. For purposes of the Fund’s 80% policy, issuers in the financial services industry include companies that derive more than 50% of their revenues from providing products and services to the financial services industry, including software, hardware, publishing, news services, credit research and rating services, Internet services and business services. The Fund may invest its assets in securities of foreign financial services companies (limited to 25% of total assets, not including American Depository Receipts).

Q. What were the overall market conditions during the Fund’s reporting period?

A. Overall market conditions were mixed for the twelve months ended March 31, 2012. The broad market as measured by the S&P 500 Indexⁱ, returned 8.54% but the S&P 500 Financials Indexⁱⁱ was down 1.76% for the same period. At face value these returns seem lackluster but based on the volatility of the year they are very welcome, even the negative return on the Financials index. The first two quarters of the year were very weak and by September 30, 2011, the broad market was down 14% and the Financials sector was down 27%. The year was literally one of two tales. The year began with the concern of an economic slowdown which quickly escalated into a double dip recession fear because of the European sovereign debt crisis. Additionally, there were regulatory fears for the Financials. This very same year has ended on the debt crisis being under control, sure signs of economic growth and with the banks passing the most stringent stress test in history. Financials were particularly strong in the quarter ending March 31, 2012, returning 20%. Global interest rates remained low and inflation remained a non-event.

Q. How did we respond to these changing market conditions?

A. We responded by adding seven new positions in various sub-sectors in anticipation of a stronger economy. We bought three regional banks operating in areas of economic growth. We bought an insurance company that specializes in the trucking, agriculture and oil industries. All of which are flourishing. We added two finance companies, one consumer and one commercial, because with an improving economy the need for credit increases. Rounding out the purchases we added a name to our financial technology holdings. We sold only one full position: an insurance company for valuation reasons.

Performance review

For the twelve months ended March 31, 2012, Class A shares of Legg Mason Investment Counsel Financial Services Fund, excluding sales charges, returned 4.28%. The Fund’s unmanaged benchmarks, the S&P 500 Index and S&P 500 Financials Index, returned 8.54% and -1.76%, respectively, for the same period. The Lipper Financial Services Funds Category Average¹ returned -1.06% over the same time frame.

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended March 31, 2012, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 78 funds in the Fund’s Lipper category, and excluding sales charges.


2		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Fund overview (cont’d)


Performance Snapshot as of March 31, 2012 (unaudited)
(excluding sales charges)	6 months			12 months
Legg Mason Investment Counsel Financial Services Fund:
Class A		27.84	%		4.28	%
Class B¹		27.46	%		3.58	%
Class C		27.35	%		3.56	%
Class I		28.02	%		4.58	%
S&P 500 Index		25.89	%		8.54	%
S&P 500 Financials Index		35.25	%		-1.76	%
Lipper Financial Services Funds Category Average²		31.74	%		-1.06	%

The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value and investment returns will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/individualinvestors.

All share class returns assume the reinvestment of all distributions at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply or the deduction of taxes that a shareholder would pay on Fund distributions. If sales charges were reflected, the performance quoted would be lower. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

Fund performance figures reflect fee waivers and/or expense reimbursements, without which the performance would have been lower.

Total Annual Operating Expenses (unaudited)

As of the Fund’s current prospectus dated July 31, 2011, the gross total annual operating expense ratios for Class A, Class B, Class C and Class I shares were 1.71%, 2.86%, 2.29% and 1.39%, respectively.

Actual expenses may be higher. For example, expenses may be higher than those shown if average net assets decrease. Net assets are more likely to decrease and Fund expense ratios are more likely to increase when markets are volatile.

As a result of expense limitation arrangements, the ratio of expenses, other than brokerage, interest, extraordinary expenses and acquired fund fees and expenses, to average net assets is not expected to exceed 1.50% for Class A shares, 2.25% for Class B shares, 2.25% for Class C shares and 1.25% for Class I shares. These expense limitation arrangements cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.

The manager is permitted to recapture amounts previously waived or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

Q. What were the leading contributors to performance?

A. On an absolute basis, the Fund’s top five performing stocks for the reporting period were Visa, First California Financial, Verisk Analytics Inc., Discover Financial and Heritage Oaks Bancorp. Visa performed well because the Durbin Amendment did not pose the threat (that was feared) to earnings. In addition to having strong earnings, First California Financial is the target of an activist shareholder. Heritage Oaks is a small regional bank that was hit hard in the financial crisis and is now recovering. Verisk Analytics Inc. benefitted from an improvement in property and casualty insurance pricing, which we believe could lead to stronger organic growth in 2012. Discover Financial, also not hurt by the Durbin amendment, had very strong earnings as consumer spending rose. Also credit quality improved.

In addition to underweighting mega-cap financials, stronger relative performance

Effective July 1, 2011, the Fund no longer offers Class B shares for purchase by new and existing investors. Individual investors who owned Class B shares on June 30, 2011 may continue to hold those shares but may not add to their Class B share positions except through dividend reinvestment. Class B shares are also available for incoming exchanges.

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended March 31, 2012, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 78 funds for the six-month period and among the 78 funds for the twelve-month period in the Fund’s Lipper category, and excluding sales charges.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			3

from some of the smaller regional banks enabled us to handily beat the S&P 500 Financials Index benchmark during the reporting period. Additionally, two takeovers added to performance.

Q. What were the leading detractors from performance?

A. On an absolute basis, our five worst performing stocks for the reporting period were: Online Resources, NetSpend Holdings, Bank of America, First PacTrust Bancorp, and Riverview Savings Bank. Both Online Resources and NetSpend Holding disappointed on earnings which sent the stocks down. Both First PacTrust Bancorp and Riverview Savings Bank located in California continue to struggle with credit issues. Rumors of solvency plagued Bank of America all year as well as being the recipient of all the general resentment directed towards banks.

Thank you for your investment in Legg Mason Investment Counsel Financial Services Fund. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

LOGO

Amy LaGuardia, CFA

Legg Mason Investment Counsel, LLC

April 17, 2012

RISKS: In addition to normal risks associated with equity investing, narrowly focused investments typically exhibit higher volatility. The financial services sector may be subject to greater governmental regulation, competitive pressures and rapid technological change and obsolescence, which may have a materially adverse effect on the sector. Additionally, the Fund’s performance will be influenced by political, social and economic factors affecting investments in companies in foreign countries. The securities of small- and mid-sized companies tend to be more volatile than those of larger companies. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Please see the Fund’s prospectus for a more complete discussion of these and other risks, and the Fund’s investment strategies.

Portfolio holdings and breakdowns are as of March 31, 2012 and are subject to change and may not be representative of the portfolio manager’s current or future investments. The Fund’s top ten holdings (as a percentage of net assets) as of March 31, 2012 were: Fiserv Inc. (3.2%), Territorial Bancorp Inc. (3.1%), Alterra Capital Holdings Ltd. (2.9%), People's United Financial Inc. (2.8%), U.S. Bancorp (2.8%), TD Ameritrade Holding Corp. (2.8%), Heritage Financial Corp. (2.7%), Hanover Insurance Group Inc. (2.7%), Discover Financial Services (2.7%) and HCC Insurance Holdings Inc. (2.7%). Please refer to pages 8 through 10 for a list and percentage breakdown of the Fund’s holdings.

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio manager’s current or future investments. The Fund’s top five sector holdings (as a percentage of net assets) as of March 31, 2012 were: Commercial Banks (31.3%), Insurance (27.0%), Thrifts & Mortgage Finance (13.5%), IT Services (9.5%) and Capital Markets (7.0%). The Fund’s portfolio composition is subject to change at any time.

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

ⁱ	The S&P 500 Index is an unmanaged index of 500 stocks and is generally representative of the performance of larger companies in the U.S.

ⁱⁱ	The S&P 500 Financials Index, a subset of the S&P 500 Index, tracks the companies in the financial sector, one of 10 sectors in the S&P 500 Index. The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.


4		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Fund at a glance^† (unaudited)

Investment breakdown (%) as a percent of total investments

LOGO

†	The bar graph above represents the composition of the Fund’s investments as of March 31, 2012 and March 31, 2011. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			5

Fund expenses (unaudited)

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; service and/or distribution (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on October 1, 2011 and held for the six months ended March 31, 2012.

Actual expenses

The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.

Hypothetical example for comparison purposes

The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.


Based on actual total return¹													Based on hypothetical total return¹
	Actual Total Return Without Sales Charge²			Beginning Account Value		Ending Account Value		Annualized Expense Ratio			Expenses Paid During the Period³			Hypothetical Annualized Total Return			Beginning Account Value		Ending Account Value		Annualized Expense Ratio			Expenses Paid During the Period³
Class A		27.84	%	$	1,000.00	$	1,278.40		1.50	%	$	8.54	Class A		5.00	%	$	1,000.00	$	1,017.50		1.50	%	$	7.57
Class B		27.46			1,000.00		1,274.60		2.25			12.79	Class B		5.00			1,000.00		1,013.75		2.25			11.33
Class C		27.35			1,000.00		1,273.50		2.25			12.79	Class C		5.00			1,000.00		1,013.75		2.25			11.33
Class I		28.02			1,000.00		1,280.20		1.21			6.90	Class I		5.00			1,000.00		1,018.95		1.21			6.11

¹	For the six months ended March 31, 2012.

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B and C shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to each class' respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (183), then divided by 366.


6		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Fund performance (unaudited)


Average annual total returns
Without sales charges¹	Class A			Class B			Class C			Class I
Twelve Months Ended 3/31/12		4.28	%		3.58	%		3.56	%		4.58	%
Five Years Ended 3/31/12		-1.75			-2.35			-2.42			N/A
Ten Years Ended 3/31/12		4.68			4.06			3.94			N/A
Inception* through 3/31/12		5.43			4.96			4.67			2.11

With sales charges²	Class A			Class B			Class C			Class I
Twelve Months Ended 3/31/12		-1.75	%		-1.42	%		2.56	%		4.58	%
Five Years Ended 3/31/12		-2.90			-2.54			-2.42			N/A
Ten Years Ended 3/31/12		4.07			4.06			3.94			N/A
Inception* through 3/31/12		4.96			4.96			4.67			2.11


Cumulative total returns
Without sales charges¹
Class A (3/31/02 through 3/31/12)	58.01	%
Class B (3/31/02 through 3/31/12)	48.93
Class C (3/31/02 through 3/31/12)	47.16
Class I (Inception date of 3/25/08 through 3/31/12)	8.75

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Total returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower.

¹	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable CDSC with respect to Class B and C shares.

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 5.75%; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from purchase payment. This CDSC declines by 1.00% per year until no CDSC charge is incurred. Class C shares reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from the purchase payment.

Inception date for Class A and C shares is November 16, 1998, which is the inception date of Legg Mason Financial Services Fund (the “Predecessor Fund”). The Fund acquired the assets and liabilities of the Predecessor Fund in a reorganization on March 16, 2007. The Predecessor Fund’s performance and financial history have been adopted by the Fund and will be used going forward. As a result, the performance for Class A shares prior to March 16, 2007 is the performance of the Predecessor Fund’s Financial Intermediary Class and the performance for Class C shares prior to March 16, 2007 is the performance of the Predecessor Fund’s Primary Class, both of which have not been restated to reflect any differences in expenses.

Performance for Class B shares prior to March 16, 2007 (inception date) is the performance of Class C shares (formerly the Predecessor Fund’s Primary Class), which has not been restated to reflect any differences in expenses. Inception date for Class I shares is March 25, 2008.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			7

Historical performance

Value of $10,000 invested in

Class A, B and C Shares of Legg Mason Investment Counsel Financial Services Fund vs. S&P 500 Index and S&P 500 Financials Index† — March 2002 - March 2012

LOGO

†

Hypothetical illustration of $10,000 invested in Class A, B and C shares of Legg Mason Investment Counsel Financial Services Fund on March 31, 2002, assuming the deduction of the maximum initial sales charge of 5.75% at the time of investment for Class A shares and the reinvestment of all distributions, including returns of capital, if any, at net asset value through March 31, 2012. The hypothetical illustration also assumes a $10,000 investment in the S&P 500 Index and S&P 500 Financials Index. The S&P 500 Index is an unmanaged index of 500 stocks and is generally representative of the performance of larger companies in the U.S. The S&P 500 Financials Index, a subset of the S&P 500 Index, tracks the companies in the financial sector, one of 10 sectors in the S&P 500 Index. The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Indices are unmanaged and are not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund’s other class may be greater or less than the Class A, B and C shares’ performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in the other class.


8		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Schedule of investments

March 31, 2012

Legg Mason Investment Counsel Financial Services Fund


Security	Shares		Value
Common Stocks — 98.5%
*Capital Markets — 7.0%*
Affiliated Managers Group Inc.		9,392	$	1,050,120	*
Ameriprise Financial Inc.		22,850		1,305,420
TD Ameritrade Holding Corp.		80,000		1,579,200
*Total Capital Markets*				*3,934,740*
*Commercial Banks — 30.0%*
American River Bankshares		100,000		790,000	*
Banner Corp.		52,142		1,148,688
CIT Group Inc.		28,000		1,154,720	*
Farmers & Merchants Bank of Long Beach		200		854,000
First California Financial Group Inc.		200,000		1,166,000	*
First Connecticut Bancorp Inc.		45,000		593,550
First Financial Bancorp		27,000		467,100
Heritage Financial Corp.		113,000		1,536,800
Heritage Oaks Bancorp		200,000		1,018,000	*
MB Financial Inc.		40,000		839,600
Northrim BanCorp Inc.		44,100		949,032
Old National Bancorp		90,000		1,182,600
Pacific Continental Corp.		99,020		932,769
PNC Financial Services Group Inc.		20,580		1,327,204
Royal Bank of Canada		23,000		1,333,029
U.S. Bancorp		50,000		1,584,000
*Total Commercial Banks*				*16,877,092*
*Consumer Finance — 5.4%*
Discover Financial Services		45,000		1,500,300
Green Dot Corp., Class A Shares		25,000		663,000	*
Netspend Holdings Inc.		110,000		853,600	*
*Total Consumer Finance*				*3,016,900*
*Diversified Financial Services — 1.2%*
Bank of America Corp.		70,000		*669,900*
*Insurance — 27.0%*
Alterra Capital Holdings Ltd.		70,000		1,608,600
American Financial Group Inc.		36,650		1,413,957
American Safety Insurance Holdings Ltd.		70,000		1,319,500	*
Amerisafe Inc.		60,000		1,484,400	*
Arch Capital Group Ltd.		35,000		1,303,400	*
Assurant Inc.		35,000		1,417,500
Brown & Brown Inc.		52,000		1,236,560

See Notes to Financial Statements.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			9

Legg Mason Investment Counsel Financial Services Fund


Security					Shares		Value
*Insurance — continued*
Hanover Insurance Group Inc.						37,000	$	1,521,440
HCC Insurance Holdings Inc.						48,000		1,496,160
Hilltop Holdings Inc.						150,000		1,258,500	*
MetLife Inc.						30,000		1,120,500
*Total Insurance*								*15,180,517*
*IT Services — 9.5%*
Fiserv Inc.						26,250		1,821,488	*
Lender Processing Services Inc.						45,000		1,170,000
Online Resources Corp.						340,000		969,000	*
Visa Inc., Class A Shares						11,700		1,380,600
*Total IT Services*								*5,341,088*
*Professional Services — 2.6%*
Verisk Analytics Inc., Class A Shares						30,500		*1,432,585*	*
*Real Estate Investment Trusts (REITs) — 2.3%*
MFA Mortgage Investments Inc.						175,000		*1,307,250*
*Thrifts & Mortgage Finance — 13.5%*
Alliance Bancorp Inc.						50,000		575,000
BCSB Bancorp Inc.						50,000		665,000	*^(a)
First PacTrust Bancorp Inc.						30,000		357,600
Fox Chase Bancorp Inc.						100,000		1,300,000
People's United Financial Inc.						120,000		1,588,800
Riverview Bancorp Inc.						226,340		511,528	*
Territorial Bancorp Inc.						85,000		1,768,850
WSFS Financial Corp.						20,000		820,000
*Total Thrifts & Mortgage Finance*								*7,586,778*
Total Common Stocks (Cost — $48,813,784)								55,346,850

	Rate			Maturity Date	Face Amount
Corporate Bond & Notes — 1.3%
*Commercial Banks — 1.3%*
Regions Financing Trust II (Cost—$675,022)		6.625	%	5/15/47	$	750,000		720,000	^(b)
Total Investments before Short-Term Investments (Cost — $49,488,806)								56,066,850

See Notes to Financial Statements.


10		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Schedule of investments (cont’d)

March 31, 2012

Legg Mason Investment Counsel Financial Services Fund

Security

Rate

Maturity
Date

Face
Amount

Value

Short-Term Investments — 1.6%

Repurchase Agreements — 1.6%

State Street Bank & Trust Co., repurchase agreement dated 3/30/12; Proceeds at maturity—$874,001; (Fully collateralized by U.S. Treasury Notes, 1.500% due 6/30/16; Market value—$892,031) (Cost—$874,000)

0.010

4/2/12

874,000

874,000

Total Investments — 101.4% (Cost — $50,362,806#)

56,940,850

Liabilities in Excess of Other Assets — (1.4)%

(767,845

)

Total Net Assets — 100.0%

56,173,005

*	Non-income producing security.

^(a)	Security is valued in good faith in accordance with procedures approved by the Board of Trustees (See Note 1).

^(b)	Variable rate security. Interest rate disclosed is as of the most recent information available.

#	Aggregate cost for federal income tax purposes is $50,362,819.

See Notes to Financial Statements.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			11

Statement of assets and liabilities

March 31, 2012



Assets:
Investments, at value (Cost — $50,362,806)	$	56,940,850
Foreign currency, at value (Cost — $12,996)		12,998
Cash		371
Receivable for Fund shares sold		56,301
Dividends and interest receivable		48,180
Prepaid expenses		37,454
*Total Assets*		*57,096,154*

Liabilities:
Payable for securities purchased		666,178
Payable for Fund shares repurchased		97,417
Investment management fee payable		34,738
Service and/or distribution fees payable		22,697
Trustees' fees payable		801
Accrued expenses		101,318
*Total Liabilities*		*923,149*
Total Net Assets	$	56,173,005

Net Assets:
Par value (Note 7)	$	46
Paid-in capital in excess of par value		53,728,562
Overdistributed net investment income		(19,099)
Accumulated net realized loss on investments and foreign currency transactions		(4,114,554)
Net unrealized appreciation on investments and foreign currencies		6,578,050
Total Net Assets	$	56,173,005

Shares Outstanding:
Class A		2,332,639
Class B		306,900
Class C		1,358,663
Class I		580,464

Net Asset Value:
Class A (and redemption price)		$12.47
Class B*		$11.87
Class C*		$11.92
Class I (and redemption price)		$12.50
Maximum Public Offering Price Per Share:
Class A (based on maximum initial sales charge of 5.75%)		$13.23

*	Redemption price per share is NAV of Class B and C shares reduced by a 5.00% and 1.00% CDSC, respectively, if shares are redeemed within one year from purchase payment (See Note 2).

See Notes to Financial Statements.


12		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Statement of operations

For the Year Ended March 31, 2012



Investment Income:
Dividends	$	1,188,453
Interest		38,577
Less: Foreign taxes withheld		(8,989)
*Total Investment Income*		*1,218,041*

Expenses:
Investment management fee (Note 2)		439,909
Service and/or distribution fees (Notes 2 and 5)		278,998
Transfer agent fees (Note 5)		186,514
Registration fees		53,834
Legal fees		35,632
Audit and tax		25,500
Shareholder reports		24,460
Fund accounting fees		5,626
Trustees' fees		5,446
Insurance		2,063
Custody fees		594
Miscellaneous expenses		2,798
*Total Expenses*		*1,061,374*
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5)		(96,857)
*Net Expenses*		*964,517*
Net Investment Income		253,524

Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions (Notes 1 and 3):
Net Realized Gain (Loss) From:
Investment transactions		952,307
Foreign currency transactions		(410)
*Net Realized Gain*		*951,897*
Change in Net Unrealized Appreciation (Depreciation) From:
Investments		(53,513)
Foreign currencies		(9)
*Change in Net Unrealized Appreciation (Depreciation)*		*(53,522)*
Net Gain on Investments and Foreign Currency Transactions		898,375
Increase in Net Assets From Operations	$	1,151,899

See Notes to Financial Statements.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			13

Statements of changes in net assets


For the Years Ended March 31,	2012		2011

Operations:
Net investment income (loss)	$	253,524	$	(57,702)
Net realized gain (loss)		951,897		(3,383,412)
Change in net unrealized appreciation (depreciation)		(53,522)		9,061,945
Proceeds from settlement of a regulatory matter		—		123,247	†
*Increase in Net Assets From Operations*		*1,151,899*		*5,744,078*

Distributions to Shareholders From (Notes 1 and 6):
Net investment income		(277,169)		—
*Decrease in Net Assets From Distributions to Shareholders*		*(277,169)*		—

Fund Share Transactions (Note 7):
Net proceeds from sale of shares		9,978,483		14,405,771
Reinvestment of distributions		261,332		—
Cost of shares repurchased		(18,775,239)		(19,331,577)
*Decrease in Net Assets From Fund Share Transactions*		*(8,535,424)*		*(4,925,806)*
*Increase (Decrease) in Net Assets*		*(7,660,694)*		*818,272*

Net Assets:
Beginning of year		63,833,699		63,015,427
End of year*	$	56,173,005	$	63,833,699
* Includes overdistributed and undistributed net investment income, respectively, of:		$(19,099)		$4,956

†	The Fund received $25,582, $53,885, and $43,780 for Class A, B, and C shares, respectively, related to this distribution.

See Notes to Financial Statements.


14		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Financial highlights


For a share of each class of beneficial interest outstanding throughout each year ended March 31:
Class A Shares¹	2012			2011			2010			2009			2008

Net asset value, beginning of year		$12.05			$11.02			$8.16			$11.44			$14.29

Income (loss) from operations:
Net investment income		0.08			0.02			0.06			0.04			0.10
Net realized and unrealized gain (loss)		0.42			1.00			2.84			(3.26)			(2.56)
Proceeds from settlement of a regulatory matter		—			0.01			—			—			—
*Total income (loss) from operations*		*0.50*			*1.03*			*2.90*			*(3.22)*			*(2.46)*

Less distributions from:
Net investment income		(0.08)			—			(0.04)			(0.06)			(0.08)
Net realized gains		—			—			—			—			(0.31)
*Total distributions*		*(0.08)*			—			*(0.04)*			*(0.06)*			*(0.39)*

Net asset value, end of year		$12.47			$12.05			$11.02			$8.16			$11.44
*Total return²*		*4.28*	%		*9.35*	%³		*35.60*	%		*(28.20)*	%		*(17.53)*	%

Net assets, end of year (000s)		$29,082			$33,874			$33,327			$24,387			$26,925

Ratios to average net assets:
Gross expenses		1.70	%		1.71	%		1.67	%		1.69	%		1.78	%
Net expenses^4,5,6		1.50			1.50			1.49			1.50			1.49
Net investment income		0.71			0.21			0.58			0.39			0.72

Portfolio turnover rate		15	%		18	%		24	%		11	%		10	%

¹	Per share amounts have been calculated using the average shares method.

Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

³	The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been 9.26%. Class A received $25,582 related to this distribution.

⁴	The impact of compensating balance arrangements, if any, was less than 0.01%.

⁵	Reflects fee waivers and/or expense reimbursements.

⁶

As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class A shares did not exceed 1.50%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.

See Notes to Financial Statements.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			15


For a share of each class of beneficial interest outstanding throughout each year ended March 31:
Class B Shares¹	2012			2011			2010			2009			2008

Net asset value, beginning of year		$11.53			$10.55			$7.84			$11.01			$13.78

Income (loss) from operations:
Net investment loss		(0.00)	²		(0.06)			(0.02)			(0.03)			(0.01)
Net realized and unrealized gain (loss)		0.40			0.96			2.73			(3.14)			(2.45)
Proceeds from settlement of a regulatory matter		—			0.08			—			—			—
*Total income (loss) from operations*		*0.40*			*0.98*			*2.71*			*(3.17)*			*(2.46)*

Less distributions from:
Net investment income		(0.06)			—			—			—			(0.00)	²
Net realized gains		—			—			—			—			(0.31)
*Total distributions*		*(0.06)*			—			—			—			*(0.31)*

Net asset value, end of year		$11.87			$11.53			$10.55			$7.84			$11.01
*Total return³*		*3.58*	%		*9.29*	%⁴		*34.57*	%		*(28.79)*	%		*(18.13)*	%

Net assets, end of year (000s)		$3,641			$4,831			$7,091			$6,987			$13,033

Ratios to average net assets:
Gross expenses		3.06	%		2.86	%		2.75	%		2.78	%		2.74	%
Net expenses^5,6,7		2.25			2.25			2.24			2.24			2.25
Net investment loss		(0.04)			(0.56)			(0.16)			(0.34)			(0.05)

Portfolio turnover rate		15	%		18	%		24	%		11	%		10	%

¹	Per share amounts have been calculated using the average shares method.

²	Amount represents less than $0.01 per share.

Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

⁴	The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been 8.53%. Class B received $53,885 related to this distribution.

⁵	The impact of compensating balance arrangements, if any, was less than 0.01%.

⁶	Reflects fee waivers and/or expense reimbursements.

⁷

As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class B shares did not exceed 2.25%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.

See Notes to Financial Statements.


16		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Financial highlights (cont’d)


For a share of each class of beneficial interest outstanding throughout each year ended March 31:
Class C Shares¹	2012			2011			2010			2009			2008

Net asset value, beginning of year		$11.51			$10.60			$7.87			$11.04			$13.81

Income (loss) from operations:
Net investment income (loss)		(0.00)	²		(0.06)			(0.01)			(0.03)			0.01
Net realized and unrealized gain (loss)		0.41			0.95			2.74			(3.14)			(2.47)
Proceeds from settlement of a regulatory matter		—			0.02			—			—			—
*Total income (loss) from operations*		*0.41*			*0.91*			*2.73*			*(3.17)*			*(2.46)*

Less distributions from:
Net investment income		—			—			—			(0.00)	²		(0.00)	²
Net realized gains		—			—			—			—			(0.31)
*Total distributions*		—			—			—			*(0.00)*			*(0.31)*

Net asset value, end of year		$11.92			$11.51			$10.60			$7.87			$11.04
*Total return³*		*3.56*	%		*8.58*	%⁴		*34.69*	%		*(28.70)*	%		*(18.08)*	%

Net assets, end of year (000s)		$16,194			$20,252			$22,409			$20,242			$38,094

Ratios to average net assets:
Gross expenses		2.30	%		2.29	%		2.21	%		2.18	%		2.11	%
Net expenses^5,6		2.25	⁷		2.23	⁷		2.18	⁷		2.18			2.11	⁷
Net investment income (loss)		(0.03)			(0.52)			(0.10)			(0.29)			0.07

Portfolio turnover rate		15	%		18	%		24	%		11	%		10	%

¹	Per share amounts have been calculated using the average shares method.

²	Amount represents less than $0.01 per share.

⁴	The total return reflects a payment received due to the settlement of a regulatory matter. Absent this payment, the total return would have been 8.40%. Class C received $43,780 related to this distribution.

⁵	The impact of compensating balance arrangements, if any, was less than 0.01%.

⁶

As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class C shares did not exceed 2.25%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.

⁷	Reflects fee waivers and/or expense reimbursements.

See Notes to Financial Statements.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			17


For a share of each class of beneficial interest outstanding throughout each year ended March 31, unless otherwise noted:
Class I Shares¹	2012			2011			2010			2009			2008²

Net asset value, beginning of year		$12.07			$11.01			$8.14			$11.44			$11.77

Income (loss) from operations:
Net investment income		0.11			0.05			0.03			0.05			0.01
Net realized and unrealized gain (loss)		0.42			1.01			2.89			(3.27)			(0.34)
*Total income (loss) from operations*		*0.53*			*1.06*			*2.92*			*(3.22)*			*(0.33)*

Less distributions from:
Net investment income		(0.10)			—			(0.05)			(0.08)			—
*Total distributions*		*(0.10)*			—			*(0.05)*			*(0.08)*			—

Net asset value, end of year		$12.50			$12.07			$11.01			$8.14			$11.44
*Total return³*		*4.58*	%		*9.63*	%		*35.93*	%		*(28.20)*	%		*(2.80)*	%

Net assets, end of year (000s)		$7,256			$4,877			$188			$16			$18

Ratios to average net assets:
Gross expenses		1.24	%		1.39	%		1.32	%		1.35	%		1.96	%⁴
Net expenses⁵		1.22	^6,7		1.21	^6,7		1.10	^6,7		1.35			1.96	⁴
Net investment income		1.01			0.48			0.33			0.55			3.69	⁴

Portfolio turnover rate		15	%		18	%		24	%		11	%		10	%

¹	Per share amounts have been calculated using the average shares method.

²	For the period March 25, 2008 (inception date) to March 31, 2008.

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁴	Annualized.

⁵	The impact of compensating balance arrangements, if any, was less than 0.01%.

⁶	Reflects fee waivers and/or expense reimbursements.

⁷

As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class I shares did not exceed 1.25%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.

See Notes to Financial Statements.


18		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

Legg Mason Investment Counsel Financial Services Fund (the “Fund”) is a separate non-diversified investment series of Legg Mason Partners Equity Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services’ internal models use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a Fund investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Trustees.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North American Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			19

pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Trustees quarterly.

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

Level 1 — quoted prices in active markets for identical investments

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.


20		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Notes to financial statements (cont’d)

The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:


ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Long-term investments†:
Common stocks	$	54,681,850	$	665,000		—	$	55,346,850
Corporate bonds & notes		—		720,000		—		720,000
Short-term investments†		—		874,000		—		874,000
Total investments	$	54,681,850	$	2,259,000		—	$	56,940,850

†	See Schedule of Investments for additional detailed categorizations.

The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:


Investments in Securities	Common Stocks
Balance as of March 31, 2011	$	43,750
Accrued premium/discounts		—
Realized gain (loss)¹		(1,006,163)
Change in unrealized appreciation (depreciation)²		962,500
Purchases		—
Sales		(87)
Transfers into Level 3		—
Transfers out of Level 3		—
Balance as of March 31, 2012		—
Net change in unrealized appreciation (depreciation) for investments in securities still held at March 31, 2012		—

¹	This amount is included in net realized gain (loss) from investment transactions in the accompanying Statement of Operations.

This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized.

(b) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			21

an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

(c) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.

The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

(d) REIT distributions. The character of distributions received from Real Estate Investment Trusts (“REITs”) held by the Fund is generally comprised of net investment income, capital gains, and return of capital. It is the policy of the Fund to estimate the character of distributions received from underlying REITs based on historical data provided by the REITs. After each calendar year end, REITs report the actual tax character of these distributions. Differences between the estimated and actual amounts reported by the REITs are reflected in the Fund’s records in the year in which they are reported by the REITs by adjusting related investment cost basis, capital gains and income, as necessary.

(e) Concentration risk. The Fund normally invests at least 80% of its assets in financial services related investments. As a result of this investment policy, an investment in the Fund may be subject to greater risk and market fluctuation than an investment in a fund that invests in securities representing a broader range of investment alternatives.


22		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Notes to financial statements (cont’d)

(f) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.

(g) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.

(h) Distributions to shareholders. Distributions from net investment income and distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(i) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

(j) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.

(k) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of March 31, 2012 no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			23

Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.

(l) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:


	Overdistributed Net Investment Income		Accumulated Net Realized Loss
(a)	$	(410)	$	410

^(a)	Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Legg Mason Investment Counsel, LLC (“LMIC”) is the Fund’s subadviser. LMPFA and LMIC are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of the Fund’s average daily net assets.

LMPFA provides administrative and certain oversight services to the Fund. Prior to May 6, 2011, LMPFA delegated to the subadviser the day-to-day portfolio management of the Fund, except for management of cash and short-term instruments. Effective May 6, 2011, LMIC provides the management of cash and short-term instruments. For its services, LMPFA pays LMIC 70% of the net management fee it receives from the Fund.

As a result of expense limitation arrangements between the Fund and LMPFA, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class A, B, C and I shares did not exceed 1.50%, 2.25%, 2.25% and 1.25%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.

During the year ended March 31, 2012, fees waived and/or expenses reimbursed amounted to $96,857.

The investment manager is permitted to recapture amounts previously waived or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expense incurred. In no case will the investment manager recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.

There is a maximum initial sales charge of 5.75% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if


24		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Notes to financial statements (cont’d)

redemption occurs within one year from purchase payment. This CDSC declines by 1.00% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of other shares of funds sold by LMIS, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.

For the year ended March 31, 2012, LMIS and its affiliates received sales charges of approximately $12,000 on sales of the Fund’s Class A shares. In addition, for the year ended March 31, 2012, CDSCs paid to LMIS and its affiliates were approximately:


	Class A			Class B		Class C
CDSCs	$	0	*	$	7,000	$	1,000

*	Amount represents less than $1,000.

All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

3. Investments

During the year ended March 31, 2012, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:


Purchases	$	8,387,361
Sales		16,385,382

At March 31, 2012, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


Gross unrealized appreciation	$	10,532,364
Gross unrealized depreciation		(3,954,333)
Net unrealized appreciation	$	6,578,031

4. Derivative instruments and hedging activities

Financial Accounting Standards Board Codification Topic 815 requires enhanced disclosure about an entity’s derivative and hedging activities.

During the year ended March 31, 2012, the Fund did not invest in any derivative instruments.

5. Class specific expenses, waivers and/or expense reimbursements

The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.75% of the average daily net assets of each respective class. Service and distribution fees are accrued daily and paid monthly.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			25

For the year ended March 31, 2012, class specific expenses were as follows:


	Service and/or Distribution Fees		Transfer Agent Fees
Class A	$	71,238	$	103,226
Class B		39,227		38,160
Class C		168,533		36,510
Class I		—		8,618
Total	$	278,998	$	186,514

For the year ended March 31, 2012, waivers and/or expense reimbursements by class were as follows:


	Waivers/Expense Reimbursements
Class A	$	55,870
Class B		31,628
Class C		8,334
Class I		1,025
Total	$	96,857

6. Distributions to shareholders by class


	Year Ended March 31, 2012		Year Ended March 31, 2011
Net Investment Income:
Class A	$	198,999		—
Class B		21,589		—
Class C		—		—
Class I		56,581		—
Total	$	277,169		—

7. Shares of beneficial interest

At March 31, 2012, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.


26		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Notes to financial statements (cont’d)

Transactions in shares of each class were as follows:


	Year Ended March 31, 2012				Year Ended March 31, 2011
	Shares		Amount		Shares		Amount
Class A
Shares sold		448,901	$	5,127,494		704,659	$	7,896,497
Shares issued on reinvestment		18,045		192,360		—		—
Shares repurchased		(946,401)		(10,554,020)		(916,932)		(10,458,379)
Net decrease		(479,455)	$	(5,234,166)		(212,273)	$	(2,561,882)

Class B
Shares sold		9,855	$	110,291		54,748	$	600,236
Shares issued on reinvestment		2,104		21,397		—		—
Shares repurchased		(123,966)		(1,324,709)		(307,688)		(3,305,881)
Net decrease		(112,007)	$	(1,193,021)		(252,940)	$	(2,705,645)

Class C
Shares sold		62,722	$	690,720		123,860	$	1,315,945
Shares repurchased		(463,026)		(4,922,169)		(479,481)		(5,098,362)
Net decrease		(400,304)	$	(4,231,449)		(355,621)	$	(3,782,417)

Class I
Shares sold		341,892	$	4,049,978		428,120	$	4,593,093
Shares issued on reinvestment		4,455		47,575		—		—
Shares repurchased		(170,085)		(1,974,341)		(40,958)		(468,955)
Net increase		176,262	$	2,123,212		387,162	$	4,124,138

8. Income tax information and distributions to shareholders

The tax character of distributions paid during the fiscal years ended March 31 was as follows:


	2012		2011
Distributions Paid From:
Ordinary income	$	277,169		—

As of March 31, 2012, the components of accumulated earnings on a tax basis were as follows:


Undistributed ordinary income — net	$	16,157
Capital loss carryforward *		(4,114,541)
Other book/tax temporary differences^(a)		(35,256)
Unrealized appreciation (depreciation)^(b)		6,578,037
Total accumulated earnings (losses) — net	$	2,444,397


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			27

*	As of March 31, 2012, the Fund had the following net capital loss carryforward remaining:


Year of Expiration	Amount
No Expiration	$	(1,833,039	)**
3/31/2017		(492,518	)
3/31/2018		(1,010,603	)
3/31/2019		(778,381	)
	$	(4,114,541	)

These amounts will be available to offset future taxable capital gains.

Under the Regulated Investment Company Modernization Act of 2010, the Fund is permitted to carry forward these capital losses for an unlimited period. However, these losses will be required to be utilized prior to the fund’s other capital losses with the expiration dates listed above. Additionally, these capital losses retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.

^(a)	Other book/tax temporary differences are attributable primarily to book/tax differences in the timing of the deductibility of various expenses.

^(b)	The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the tax deferral of losses on wash sales.

9. Legal matters

Beginning in May 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (“CGM”), a former distributor of the Fund, and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including Smith Barney Fund Management LLC (“SBFM”) and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining


28		Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report

Notes to financial statements (cont’d)

Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to replead as a derivative claim.

On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against Citigroup Asset Management, SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.

On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals. The appeal was fully briefed and oral argument before the U.S. Court of Appeals for the Second Circuit took place on March 5, 2009. On June 9, 2011, the Court of Appeals issued a Summary Order affirming the District Court’s dismissal of all claims with the exception of Plaintiffs’ Section 36(b) claim as it relates to Transfer Agent fees paid to an affiliate of the Managers. The case has been remanded to the District Court for further proceedings in accordance with the Summary Order.

Plaintiffs agreed to dismiss the case, and a Stipulation of Dismissal with Prejudice was filed with the court on October 20, 2011, terminating the litigation.

10. Recent accounting pronouncement

In May 2011, the Financial Accounting Standards Board issued Accounting Standard Update No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No. 2011-04”). ASU No. 2011-04 establishes common requirements for measuring fair value and for disclosing information about fair value measurements. ASU No. 2011-04 is effective during interim and annual periods beginning after December 15, 2011. Management has evaluated ASU No. 2011-04 and concluded that it does not materially impact the financial statement amounts; however, as required, additional disclosure has been included about fair value measurement.


Legg Mason Investment Counsel Financial Services Fund 2012 Annual Report			29

Report of independent registered public accounting firm

The Board of Trustees and Shareholders

Legg Mason Partners Equity Trust:

We have audited the accompanying statement of assets and liabilities of Legg Mason Investment Counsel Financial Services Fund (formerly Legg Mason Barrett Financial Services Fund), a series of Legg Mason Partners Equity Trust, including the schedule of investments, as of March 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of March 31, 2012, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Investment Counsel Financial Services Fund as of March 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

LOGO

New York, New York

May 17, 2012


30		Legg Mason Investment Counsel Financial Services Fund

Board approval of management and subadvisory agreements (unaudited)

At a meeting of the Trust’s Board of Trustees, the Board considered the re-approval for an annual period of the management agreement pursuant to which Legg Mason Partners Fund Advisor, LLC (the “Manager”) provides the Fund with investment advisory and administrative services, and the sub-advisory agreement pursuant to which Legg Mason Investment Counsel, LLC (the “Sub-Adviser”) provides day-to-day management of the Fund’s portfolio. (The management agreement and sub-advisory agreement are collectively referred to as the “Agreements.”) The Manager and the Sub-Adviser are wholly-owned subsidiaries of Legg Mason, Inc. The Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Independent Trustees”)) of the Fund were assisted in their review by Fund counsel and independent legal counsel and met with independent legal counsel in executive sessions separate from representatives of the Manager and the Sub-Adviser. The Independent Trustees requested and received information from the Manager and the Sub-Adviser they deemed reasonably necessary for their review of the Agreements and the performance of the Manager and the Sub-Adviser. Included was information about the Manager, the Sub-Adviser and the Fund’s distributor, as well as the management, sub-advisory and distribution arrangements for the Fund and other funds overseen by the Board. This information was initially reviewed by a special committee of the Independent Trustees and then by the full Board.

In voting to approve the Agreements, the Independent Trustees considered whether the approval of the Agreements would be in the best interests of the Fund and its shareholders, an evaluation based on several factors including those discussed below.

Nature, extent and quality of the services provided to the fund under the management agreement and sub-advisory agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Sub-Adviser under the Management Agreement and Sub-Advisory Agreement, respectively, during the past year. The Trustees also considered the Manager’s supervisory activities over the Sub-Adviser. In addition, the Independent Trustees received and considered other information regarding the administrative and other services rendered to the Fund and its shareholders by the Manager. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Sub-Adviser and the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager and the Sub-Adviser took into account the Board’s knowledge and familiarity gained as Trustees of funds in the Legg Mason fund complex, including the scope and quality of the investment management and other capabilities of the Manager and the Sub-Adviser and the quality of the Manager’s administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s compliance programs. The Board reviewed information


Legg Mason Investment Counsel Financial Services Fund			31

received from the Manager and the Fund’s Chief Compliance Officer regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.

The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board considered the degree to which the Manager implemented organizational changes to improve investment results and the services provided to the Legg Mason fund complex. The Board also considered, based on its knowledge of the Manager and the Manager’s affiliates, the financial resources available to the Manager’s parent organization, Legg Mason, Inc.

The Board also considered the division of responsibilities between the Manager and the Sub-Adviser and the oversight provided by the Manager. The Board also considered the Manager’s and the Sub-Adviser’s brokerage policies and practices, the standards applied in seeking best execution, their policies and practices regarding soft dollars, and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes, portfolio manager compensation plan and policy regarding portfolio managers’ ownership of fund shares.

The Board concluded that, overall, it was satisfied with the nature, extent and quality of services provided (and expected to be provided) under the respective Agreement by the Manager and the Sub-Adviser.

Fund performance

The Board received and reviewed performance information for the Fund and for all retail and institutional financial services funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Trustees noted that they also had received and discussed with management information at periodic intervals comparing the Fund’s performance to that of its benchmark index. The information comparing the Fund’s performance to that of the Performance Universe was for the one-, three-, five- and ten-year periods ended June 30, 2011. The Fund performed slightly below the median for the one-year period, but performed better than the median for the three-, five- and ten-year periods. The Board also reviewed performance information provided by the Manager for periods ended September 30, 2011, which showed that the Fund’s performance was better than the Lipper category average during the third quarter. The Trustees then discussed with representatives of management the portfolio management strategy of the Fund’s portfolio managers. The Trustees noted that the Manager and the Sub-Adviser were committed to providing the resources necessary to assist the Fund’s portfolio managers and continue to improve Fund performance. Based on its review, the Board generally was satisfied with the Fund’s performance


32		Legg Mason Investment Counsel Financial Services Fund

Board approval of management and subadvisory agreements (unaudited) (cont’d)

and management’s efforts to continue to improve performance going forward. The Board determined to continue to evaluate the Fund’s performance and directed the Independent Trustees’ performance committee to continue to periodically review Fund performance with the Manager and report to the full Board during periods between Board meetings.

Management fees and expense ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management and sub-advisory services provided by the Manager and the Sub-Adviser, respectively. The Board noted that the Manager, and not the Fund, pays the sub-advisory fee to the Sub-Adviser and, accordingly, that the retention of the Sub-Adviser does not increase the fees and expenses incurred by the Fund. In addition, because of the Manager’s contractual fee waiver and/or expense reimbursement arrangement in effect for the Fund, which partially reduced the management fee paid to the Manager, the Board also reviewed and considered the actual management fee rate (after taking into account waivers and reimbursements) (“Actual Management Fee”).

The Board also reviewed information regarding the fees the Manager and the Sub-Adviser charged any of their U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, institutional separate and commingled accounts and retail managed accounts. The Manager reviewed with the Board the significant differences in the scope of services provided to the Fund and to such other clients, noting that the Fund is provided with regulatory compliance and administrative services, office facilities and Fund officers (including the Fund’s chief financial, chief legal and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers, including the Sub-Adviser. The Board considered the fee comparisons in light of the scope of services required to manage these different types of accounts.

The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes. Management also discussed with the Board the Fund’s distribution arrangements, including how amounts received by the Fund’s distributor are expended, and the fees received and expenses incurred in connection with such arrangements by affiliates of the Manager.

Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fee and Actual Management Fee and the Fund’s overall expense ratio with those of a group of seven retail front-end load financial services funds selected by Lipper as comparable to the Fund (the “Expense Group”), and a broader group of funds selected by Lipper consisting of all retail front-end load financial services funds (the “Expense Universe”). This information showed that the Fund’s Contractual Management Fee and Actual Management Fee were lower than the median of management fees paid by the funds in the Expense Group and that


Legg Mason Investment Counsel Financial Services Fund			33

the Fund’s Actual Management Fee was lower than the average management fee paid by the funds in the Expense Universe. This information also showed that the Fund’s total expense ratio was lower than the median of the total expense ratios of the funds in the Expense Group and lower than the average total expense ratio of the funds in the Expense Universe. The Trustees noted that the Manager’s fee waiver and/or expense reimbursement arrangement would continue until December 31, 2013.

Manager profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Board also noted the profitability percentage ranges determined by appropriate court cases to be reasonable given the services rendered to investment companies. The Board determined that the Manager’s profitability was not excessive in light of the nature, extent and quality of the services provided to the Fund.

Economies of scale

The Board received and considered information regarding whether there have been economies of scale with respect to the management of the Fund as the Fund’s assets grow, whether the Fund has appropriately benefited from any economies of scale, and whether there is potential for realization of any further economies of scale. The Board considered whether economies of scale in the provision of services to the Fund were being passed along to the shareholders.

The Board noted that to the extent the Fund’s assets increase over time, the Fund and its shareholders should realize economies of scale as certain expenses, such as fixed fund fees, become a smaller percentage of overall assets. The Board noted that it appeared that the benefits of any economies of scale also would be appropriately shared with shareholders through increased investment in fund management and administration resources.

Taking all of the above into consideration, the Board determined that the management fee was reasonable in light of the comparative performance and expense information and the nature, extent and quality of the services provided to the Fund under the Agreements.

Other benefits to the manager

The Board considered other benefits received by the Manager and its affiliates, including the Sub-Adviser, as a result of the Manager’s relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.


34		Legg Mason Investment Counsel Financial Services Fund

Board approval of management and subadvisory agreements (unaudited) (cont’d)

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

Based on their discussions and considerations, including those described above, the Trustees approved the Management Agreement and the Sub-Advisory Agreement to continue for another year.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and the Sub-Advisory Agreement.


Legg Mason Investment Counsel Financial Services Fund			35

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of Legg Mason Investment Counsel Financial Services Fund (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Trustees. The business address of each Trustee is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018. Information pertaining to the Trustees and officers of the Fund is set forth below.

The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling the Fund at 1-877-721-1926.


Independent Trustees†:
Paul R. Ades
Year of birth		1940
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		Paul R. Ades, PLLC (law firm) (since 2000)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None
Andrew L. Breech
Year of birth		1952
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1991
Principal occupation(s) during past five years		President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None
Dwight B. Crane
Year of birth		1937
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1981
Principal occupation(s) during past five years		Professor Emeritus, Harvard Business School (since 2007); formerly, Professor, Harvard Business School (1969 to 2007); Independent Consultant (since 1969)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None


36		Legg Mason Investment Counsel Financial Services Fund

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Independent Trustees cont’d
Frank G. Hubbard
Year of birth		1937
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1993
Principal occupation(s) during past five years		President, Avatar International Inc. (business development) (since 1998)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None
Howard J. Johnson
Year of birth		1938
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		From 1981 to 1998 and since 2000
Principal occupation(s) during past five years		Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None
Jerome H. Miller
Year of birth		1938
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1995
Principal occupation(s) during past five years		Retired
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None
Ken Miller
Year of birth		1942
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		President, Young Stuff Apparel Group, Inc. (apparel manufacturer), division of Li & Fung (since 1963)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None


Legg Mason Investment Counsel Financial Services Fund			37


Independent Trustees cont’d
John J. Murphy
Year of birth		1944
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 2002
Principal occupation(s) during past five years		Founder and Senior Principal, Murphy Capital Management (investment management) (since 1983)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		Trustee, UBS Funds (52 funds) (since 2008); Trustee, Consulting Group Capital Markets Funds (11 funds) (since 2002); formerly, Director, Nicholas Applegate Institutional Funds (12 funds) (2005 to 2010); formerly, Director, Atlantic Stewardship Bank (2004 to 2005); formerly, Director, Barclays International Funds Group Ltd. and affiliated companies (1983 to 2003)
Thomas F. Schlafly
Year of birth		1948
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1983
Principal occupation(s) during past five years		President, The Saint Louis Brewery, Inc. (brewery) (since 1989); Partner, Thompson Coburn LLP (law firm) (since 2009); formerly, Of Counsel, Husch Blackwell Sanders LLP (law firm) and its predecessor firms (1984 to 2009)
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		Director, Citizens National Bank of Greater St. Louis (since 2006)
Jerry A. Viscione
Year of birth		1944
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 1993
Principal occupation(s) during past five years		Retired
Number of funds in fund complex overseen by Trustee		49
Other board memberships held by Trustee during past five years		None


38		Legg Mason Investment Counsel Financial Services Fund

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Interested Trustee and Officer:
R. Jay Gerken³
Year of birth		1951
Position(s) with Trust		Trustee, President, Chairman and Chief Executive Officer
Term of office¹ and length of time served²		Since 2002
Principal occupation(s) during past five years		Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2005); Officer and Trustee/Director of 161 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (“CEO”) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management LLC (“SBFM”) (formerly a registered investment adviser) (since 2002)
Number of funds in fund complex overseen by Trustee		161
Other board memberships held by Trustee during past five years		None
Additional Officers
Ted P. Becker Legg Mason 620 Eighth Avenue, New York, NY 10018
Year of birth		1951
Position(s) with Trust		Chief Compliance Officer
Term of office¹ and length of time served²		Since 2007
Principal occupation(s) during past five years		Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)
Vanessa A. Williams Legg Mason 100 First Stamford Place, Stamford, CT 06902
Year of birth		1979
Position(s) with Trust		Chief Anti-Money Laundering Compliance Officer and Identity Theft Prevention Officer
Term of office¹and length of time served²		Since 2011
Principal occupation(s) during past five years		Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Assistant Vice President and Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006)


Legg Mason Investment Counsel Financial Services Fund			39


Additional Officers cont’d
Robert I. Frenkel Legg Mason 100 First Stamford Place, Stamford, CT 06902
Year of birth		1954
Position(s) with Trust		Secretary and Chief Legal Officer
Term of office¹ and length of time served²		Since 2007
Principal occupation(s) during past five years		Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)
Thomas C. Mandia Legg Mason 100 First Stamford Place, Stamford, CT 06902
Year of birth		1962
Position(s) with Trust		Assistant Secretary
Term of office¹ and length of time served²		Since 2007
Principal occupation(s) during past five years		Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary to SBFM (since 2002)
Richard F. Sennett Legg Mason 100 International Drive, Baltimore, MD 21202
Year of birth		1970
Position(s) with Trust		Principal Financial Officer
Term of office¹ and length of time served²		Since 2011
Principal occupation(s) during past five years		Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007)


40		Legg Mason Investment Counsel Financial Services Fund

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Additional Officers cont’d
Albert Laskaj Legg Mason 55 Water Street, New York, NY 10041
Year of birth		1977
Position(s) with Trust		Treasurer
Term of office¹ and length of time served²		Since 2010
Principal occupation(s) during past five years		Vice President of Legg Mason & Co. (since 2008); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010); formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2007); formerly, Accounting Manager of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2005)
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, New York, NY 10018
Year of birth		1951
Position(s) with Trust		Senior Vice President
Term of office¹ and length of time served²		Since 2007
Principal occupation(s) during past five years		Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005)

†	Trustees who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the 1940 Act.

¹	Each Trustee and officer serves until his or her respective successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal.

²	Indicates the earliest year in which the Trustee became a board member for a fund in the Legg Mason fund complex or the officer took such office.

³	Mr. Gerken is an “interested person” of the Fund, as defined in the 1940 Act, because of his position with LMPFA and/or certain of its affiliates.


Legg Mason Investment Counsel Financial Services Fund			41

Important tax information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended March 31, 2012:


Record date:	12/7/2011
Payable date:	12/8/2011
Ordinary income:
Qualified dividend income for individuals	100.00	%
Dividends qualifying for the dividends
received deduction for corporations	100.00	%

Please retain this information for your records.

Legg Mason Investment Counsel

Financial Services Fund

Trustees

Paul R. Ades

Andrew L. Breech

Dwight B. Crane

R. Jay Gerken Chairman

Frank G. Hubbard

Howard J. Johnson

Jerome H. Miller

Ken Miller

John J. Murphy

Thomas F. Schlafly

Jerry A. Viscione

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadviser

Legg Mason Investment Counsel, LLC

Distributor

Legg Mason Investor Services, LLC

Custodian

State Street Bank and Trust Company

Co-transfer agents

Boston Financial Data Services, Inc.

2000 Crown Colony Drive

Quincy, MA 02169

BNY Mellon Asset Servicing

4400 Computer Drive

Westborough, MA 01581

Independent registered public accounting firm

KPMG LLP

345 Park Avenue

New York, NY 10154

Legg Mason Investment Counsel Financial Services Fund

The Fund is a separate investment series of Legg Mason Partners Equity Trust, a Maryland statutory trust.

Legg Mason Investment Counsel Financial Services Fund

Legg Mason Funds

55 Water Street

New York, NY 10041

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q, shareholders can call the Fund at 1-877-721-1926.

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling the Fund at 1-877-721-1926, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of Legg Mason Investment Counsel Financial Services Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.

Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.

www.leggmason.com/individualinvestors

Member FINRA, SIPC

Legg Mason Funds Privacy and Security Notice

Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds

This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain other closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.

The Type of Nonpublic Personal Information the Funds Collect About You

The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:

Personal information included on applications or other forms;

Account balances, transactions, and mutual fund holdings and positions;

Online account access user IDs, passwords, security challenge question responses; and

Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.).

How the Funds Use Nonpublic Personal Information About You

The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:

Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators;

Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds;

The Funds’ representatives such as legal counsel, accountants and auditors; and

Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

NOT PART OF THE ANNUAL REPORT

Legg Mason Funds Privacy and Security Notice (cont’d)

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.

The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.

Keeping You Informed of the Funds’ Privacy and Security Practices

The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.

The Funds’ Security Practices

The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.

Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.

In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-877-721-1926.

Revised April 2011

NOT PART OF THE ANNUAL REPORT

www.leggmason.com/individualinvestors

FD02127 5/12 SR12-1651

ITEM 2.

CODE OF ETHICS.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Trustees of the registrant has determined that Jerry A. Viscione possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Viscione as the Audit Committee’s financial expert. Mr. Viscione is an “independent” Trustees pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending March 31, 2011 and March 31, 2012 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $24,300 in 2011 and $23,000 in 2012.

b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in 2011 and $0 in 2012.

In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason Partners Equity Trust (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Period.

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $3,300 in 2011 and $3,400 in 2012. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) for the Item 4 for the Legg Mason Partners Equity Trust.

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Legg Mason Partners Equity Trust requiring pre-approval by the Audit Committee in the Reporting Period.

(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

(2) For the Legg Mason Partners Equity Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for March 31, 2011 and March 31, 2012; Tax Fees were 100% and 100% for March 31, 2011 and March 31, 2012; and Other Fees were 100% and 100% for March 31, 2011 and March 31, 2012.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Equity Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason Partners Equity Trust during the reporting period were $0 in 2012.

(h) Yes. Legg Mason Partners Equity Trust’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Legg Mason Partners Equity Trust or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS.

The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act. The Audit Committee consists of the following Board members:

Paul R. Ades

Andrew L. Breech

Dwight B. Crane

Frank G. Hubbard

Howard J. Johnson

Jerome H. Miller

Ken Miller

John J. Murphy

Thomas F. Schlafly

Jerry A. Viscione

Not applicable.

ITEM 6.

SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

ITEM 7.

DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 8.

PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 11.

CONTROLS AND PROCEDURES.

(a)

The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

ITEM 12.

EXHIBITS.

(a) (1) Code of Ethics attached hereto.

Exhibit 99.CODE ETH

(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.CERT

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.906CERT

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.

Legg Mason Partners Equity Trust


By:		/S/ R. JAY GERKEN
		(R. Jay Gerken)
		Chief Executive Officer of
		Legg Mason Partners Equity Trust

Date: May 23, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By:		/S/ R. JAY GERKEN
		(R. Jay Gerken)
		Chief Executive Officer of
		Legg Mason Partners Equity Trust

Date: May 23, 2012


By:		/S/ RICHARD F. SENNETT
		(Richard F. Sennett)
		Principal Financial Officer of
		Legg Mason Partners Equity Trust

Date: May 23, 2012