GFY Western Asset Variable Rate Strategic Fund Inc

Proposal No. 1:

LIQUIDATION AND DISSOLUTION OF THE FUND

This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Proxy Statement and the Plan of Liquidation and Dissolution (the “Plan”), a form of which is attached to this Proxy Statement as Exhibit A.

At board meetings held on July 8, 2020 and August 12-13, 2020, the Board unanimously approved a proposal to liquidate and dissolve the Fund pursuant to a Plan, a copy of which is attached as Exhibit A. As permitted under the Maryland General Corporation Law (the “MGCL”) and in accordance with the provisions of the Fund’s charter (the “Charter”), the liquidation and dissolution of the Fund pursuant to the Plan requires the affirmative vote of the holders of a majority of the votes entitled to be cast by the outstanding shares of capital stock of the Fund.

At your upcoming Meeting, you will be asked to approve the liquidation and dissolution of the Fund pursuant to the Plan, which is described in more detail in this Proxy Statement. The Board unanimously recommends that you vote “FOR” this Proposal 1 for the reasons discussed below.

If the Fund’s stockholders approve the liquidation and dissolution of the Fund pursuant to the Plan, the Fund’s management, under the oversight of the Board, will wind up the Fund’s affairs as soon as reasonably practicable thereafter in a timeframe that allows for an orderly liquidation of portfolio holdings under then-current market conditions. The Fund will then set aside, in cash or cash equivalents, the amount of all known or reasonably ascertainable liabilities and obligations of the Fund and make liquidating distributions of the remaining cash to stockholders. The amounts to be distributed to stockholders of the Fund upon liquidation will be reduced by the ordinary expenses and liabilities of the Fund, as described in more detail below under “Distribution Amounts.” If stockholders do not approve the liquidation and dissolution of the Fund pursuant to the Plan, the Fund will continue to exist as a registered investment company in accordance with its stated investment objective and policies while the Board considers what, if any, steps to take in the best interests of the Fund and its stockholders, including the possibility of resubmitting the Plan or another plan of liquidation and dissolution to stockholders for future consideration. Absent relief from the SEC or its staff, the Fund’s investment manager and subadvisers will not be permitted to manage the Fund after December 28, 2020, even if stockholders do not approve the Plan.

Background

The Fund commenced operations on October 25, 2004, and is organized as a Maryland corporation. The Fund’s investment objective is to maintain a high level of current income. The Fund’s shares of common stock are traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “GFY.” As of July 28, 2020, the Fund had net assets of $77,030,178.

Board Considerations in Approving the Proposed Plan of Liquidation and Dissolution

The Board has considered, and discussed with management of the Fund, a variety of measures designed to address the termination of the Fund’s investment advisory agreement as a result of the change of control of Legg Mason, Inc. (“Legg Mason”), and recent stockholder activism. These measures included, in addition to liquidation, merging the Fund with another suitable fund managed by LMPFA, or its affiliates, converting the Fund to an open-end fund and commencing a tender offer or repurchasing Fund shares. However, the Board concluded that it would not be advisable to implement any of these alternative measures for the reasons summarized in this section “Board Considerations in Approving the Proposed Plan of Liquidation and Dissolution.”

The Board believes that the Fund’s historical performance and distribution history have delivered significant value to stockholders since the Fund’s inception. However, having considered: the outcome of the recent meeting of stockholders of the Fund and the change of control of Legg Mason, and termination of the Fund’s management

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agreement and subadvisory agreements without a new management agreement or subadvisory agreement being approved by stockholders, the significant ownership of the Fund by activist stockholders and their recent activity, the pending automatic termination of the Fund’s interim management agreement and subadvisory agreements following December 28, 2020, and the opportunity for stockholders to realize full net asset value (“NAV”) for their shares of common stock through the Liquidation, LMPFA recommended, and the Board determined that, on balance, liquidation and dissolution would be in the best interests of the Fund and its stockholders. In light of this conclusion, and after careful deliberation, the Board approved and recommended that Fund stockholders approve, the Liquidation.

In determining that the Liquidation is in the best interests of the Fund and its stockholders, and in approving, and recommending that stockholders approve, the Liquidation pursuant to the Plan, the Board considered, among other factors:

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Based upon Management’s analyses and discussions at the special meetings, the Board concluded that, depending on market conditions, an orderly liquidation and dissolution of the Fund would be in the interests of stockholders, approved the proposed Plan, and directed the proposed Plan be submitted for consideration by the Fund’s stockholders. A copy of the Plan is attached hereto as Exhibit A.

If the Liquidation is approved by stockholders, Management, under the oversight of the Board and the officers of the Fund, will proceed to wind up the Fund’s affairs as soon as reasonably practicable thereafter in a timeframe that allows for an orderly liquidation of portfolio holdings under then-current market conditions. The Fund cannot predict at this time how long it will take to accomplish an orderly liquidation. See “Additional Considerations” below. If the liquidation and dissolution of the Fund pursuant to the Plan is not approved by stockholders, the Directors will consider whether another course of action would benefit the Fund and its stockholders.

Summary of Plan of Liquidation and Dissolution

The following summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Plan which is attached hereto as Exhibit A. Stockholders are urged to read the Plan in its entirety.

Effective Date of the Plan and Cessation of the Fund’s Activities as an Investment Company. The Plan will become effective only upon (a) the adoption and approval of the Plan by the affirmative vote of the holders of a majority of the votes entitled to be cast by the outstanding shares of capital stock of the Fund at a meeting of stockholders called for the purpose of voting upon the Plan and (b) the satisfactory resolution in the sole discretion of the Board of any and all possible claims pending against the Fund and/or its Board (the “Effective Date”). After announcement by the Fund of the stockholder meeting date called for purposes of voting on the Plan, and prior to the Effective Date, the Fund may commence the sale of portfolio securities and the investment of the proceeds of such sale in investment grade short-term debt securities denominated in U.S. dollars, cease to invest its assets in accordance with its investment objectives and will, as soon as reasonable and practicable after the Effective Date, complete the sale of the portfolio securities it holds in order to convert its assets to cash or cash equivalents, provided, however, that after stockholder approval of the Plan, the Fund will not engage in any business activities except for the purpose of paying, satisfying, and discharging any existing debts and obligations, collecting and distributing its assets, and doing all other acts required to liquidate and wind up its business and affairs, and will dissolve in accordance with the Plan and will file Articles of Dissolution with the State of Maryland. The Fund will, nonetheless, continue to meet the source of income, asset diversification and distribution requirements applicable to regulated investment companies under the U.S. Internal Revenue Code of 1986, as amended (the “Code”), through the last day of its final taxable year ending on liquidation.

Closing of Books and Restriction on Transfer of Shares. The proportionate interests of stockholders in the assets of the Fund will be fixed on the basis of their holdings on the Effective Date, or on such later date as may be determined by the Board (the “Determination Date”). On the Determination Date, the books of the Fund will be closed. Thereafter, unless the books of the Fund are reopened because the Plan cannot be carried into effect under the laws of the State of Maryland or otherwise, the stockholders’ respective interests in the Fund’s assets will not be transferable by the negotiation of share certificates and the Fund’s shares will cease to be traded on the NYSE.

Liquidation Distributions. The distribution of the Fund’s assets will be made in one or more cash payments in complete cancellation of all the outstanding shares of common stock of the Fund. The first distribution of the Fund’s assets (the “First Distribution”) is expected to consist of cash representing substantially all the assets of the Fund, less an estimated amount necessary to discharge (a) any unpaid liabilities and obligations of the Fund on the Fund’s books on the First Distribution date, and (b) any liabilities as the Board reasonably deems to exist against the assets of the Fund on the Fund’s books.

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However, there can be no assurance that the Fund will be able to declare and pay the First Distribution. If the First Distribution is declared and paid, the amount of the First Distribution currently is uncertain. Subsequent distributions, if necessary, are anticipated to be made within 90 days after the First Distribution and will consist of cash from any assets remaining after payment of expenses, the proceeds of any sale of assets of the Fund under the Plan not sold prior to the First Distribution and any other miscellaneous income of the Fund.

Each stockholder not holding stock certificates of the Fund will receive liquidating distributions equal to the stockholder’s proportionate interest in the net assets of the Fund as of the Determination Date. Each stockholder holding stock certificates of the Fund will receive a confirmation showing the number of shares represented by such stock certificates and the total number of outstanding shares of the Fund as of the Determination Date. This confirmation will include an advice that each stockholder will be paid such stockholder’s proportionate interest in the net assets of the Fund in cash upon return of the stock certificate. Stockholders holding stock certificates should consider arranging with the Fund’s transfer agent a return of their certificates in advance of any liquidating distributions in order to facilitate payments to them. The transfer agent is Computershare Inc. The transfer agent can be reached by telephone at 1-888-888-0151 or by e-mail at web.queries@computershare.com. All stockholders will receive information concerning the sources of the liquidating distribution.

Expenses of Liquidation and Dissolution. The Fund will not bear any of the expenses incurred by it in carrying out the Plan, such expenses including, but not limited to, all printing, mailing, legal, accounting, custodian and transfer agency fees, and the expenses of any reports to or meeting of stockholders whether or not the liquidation contemplated by the Plan is affected.

Continued Operation of the Fund. The Plan provides that the Board has the authority to authorize such variations from or amendments of the provisions of the Plan (other than the terms of the liquidating distributions) at any time without stockholder approval, if the Board determines that such action would be advisable and in the best interests of the Fund and its stockholders, as may be necessary or appropriate to effect the marshalling of Fund assets and the dissolution, complete liquidation and termination of existence of the Fund, and the distribution of its net assets to stockholders in accordance with the laws of the State of Maryland, the 1940 Act, the Charter, the Second Amended and Restated Bylaws of the Fund, as amended and supplemented (the “Bylaws”) and the purposes to be accomplished by the Plan. If any variation or amendment appears necessary and, in the judgment of the Board, will materially and adversely affect the interests of the Fund’s stockholders, such variation or amendment will be submitted to the Fund’s stockholders for approval. In addition, the Board may abandon the liquidation and dissolution of the Fund pursuant to the Plan prior to the time Articles of Dissolution are accepted for record by the State Department of Assessments and Taxation of Maryland if the Board determines that such abandonment would be advisable and in the best interests of the Fund and its stockholders. However, it is the Board’s current intention to liquidate and dissolve the Fund as soon as practicable following the settlement of all possible claims pending against the Fund and/or the Board.

Distribution Amounts

The Fund’s net assets on July 28, 2020 were $77,030,178. At such date, the Fund had 4,668,407 shares outstanding. Accordingly, on July 28, 2020, the NAV per share of the Fund was $16.50. The NAV per share of the Fund may change before the Plan becomes effective. The amounts to be distributed to stockholders of the Fund upon liquidation will be reduced by the ordinary expenses and liabilities of the Fund. Any increase in such costs will be funded from the cash assets of the Fund and will reduce the amount available for distribution to stockholders. The Fund will not bear any of the expenses incurred by it in carrying out the Plan whether or not the liquidation contemplated by the Plan is affected. Such expenses shall be borne by LMPFA or its affiliates. The total amount estimated to be spent in connection with the solicitation of stockholders pursuant to this proxy statement, including the costs associated with the preparation, printing and mailing of the Proxy Statement, is approximately $61,196. The total amount estimated to be spent in connection with the liquidation and dissolution of the Fund, excluding such proxy solicitation expenses, is approximately $47,000. Such approximate amount includes estimated costs of any extension of the Directors’ and Officers’ liability insurance policy; any fees charged by state or federal agencies; transfer agent fees; legal fees and other miscellaneous costs. Actual liquidation expenses may vary.

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Material U.S. Federal Income Tax Considerations

The following is a general discussion of the material U.S. federal income tax considerations resulting from the implementation of the Plan for U.S. stockholders who hold their stock as capital assets (generally, property held for investment). This discussion does not purport to be complete or to deal with all aspects of U.S. federal income taxation that may be relevant to stockholders in light of their particular circumstances. You are a U.S. stockholder if you are an individual who is a citizen or resident of the United States, a U.S. domestic corporation, or any other person subject to U.S. federal income tax on a net income basis in respect of your investment in stock in the Fund. This discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), the regulations promulgated thereunder, and judicial and administrative ruling authorities, as of the date hereof, all of which are subject to change or differing interpretations (possibly with retroactive effect). This discussion does not represent a detailed description of the U.S. federal income tax considerations relevant to special classes of taxpayers including, without limitation, financial institutions, insurance companies, investors in pass-through entities, U.S. stockholders whose “functional currency” is not the United States dollar, tax-exempt organizations, dealers in securities or currencies, traders in securities or commodities that elect mark to market treatment, or persons that hold their stock in the Fund as a position in a “straddle,” “hedge” or as part of a “constructive sale” for U.S. federal income tax purposes. In addition, this discussion does not address the application of the U.S. federal alternative minimum tax or the Medicare contribution tax. Stockholders should consult their own tax advisers with regard to the U.S. federal tax consequences of the implementation of the Plan to them, as well as the tax consequences arising under the laws of any state, foreign country, or other taxing jurisdiction.

If its stockholders approve the Plan, the Fund will sell its assets and distribute the proceeds and any income to stockholders. The Fund anticipates that it will retain its qualification for treatment as a regulated investment company under the Code during the liquidation period and that it will make all required distributions so that it will not be taxed on any gain realized from the sale of its assets. The tax consequences to stockholders from any such distributions will be the same as is normally the case. The Fund may, if eligible, treat all or a portion of the amounts required to be distributed as having been paid out as part of the liquidating distributions.

A stockholder who receives liquidating distributions will generally be treated as having received the distributions in exchange for the stockholder’s stock in the Fund. As such, a stockholder will generally realize capital gain or loss in an amount equal to the difference between the total amount of liquidating distributions received and the stockholder’s adjusted tax basis in the stock sold. Such gain or loss will be long-term or short-term, depending upon the stockholder’s holding period for the stock. Generally, a stockholder’s gain or loss will be a long-term gain or loss if the stock has been held for more than one year and a short-term gain or loss if the stock has been held for one year or less, except that any loss realized with respect to stock held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends that were received on the stock. For non-corporate taxpayers, long-term capital gains are currently eligible for reduced rates of taxation.

The Fund may be required to withhold from liquidating distributions payable to U.S. stockholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Certain stockholders specified in the Code generally are exempt from such backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the stockholder’s U.S. federal income tax liability, provided that the stockholder timely furnishes the Internal Revenue Service with the required information.

Impact of the Plan on the Fund’s Status Under the 1940 Act

On the Effective Date, the Fund will cease doing business as an investment company (including ceasing to invest assets in accordance with the Fund’s investment objectives) and, as soon as practicable, will apply for deregistration under the 1940 Act. It is expected that the SEC will issue an order approving the deregistration of the Fund if the Fund is no longer doing business as an investment company. Accordingly, the Plan provides for the eventual cessation of the Fund’s activities as an investment company and its deregistration under the 1940 Act, and a vote in favor of the Plan will constitute a vote in favor of such a course of action.

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Until the Fund’s deregistration as an investment company becomes effective, the Fund, as a registered investment company, will continue to be subject to and will comply with the 1940 Act.

Procedure For Dissolution Under Maryland Law

After the Effective Date, pursuant to the MGCL, Articles of Dissolution stating that the dissolution has been authorized will in due course be executed, acknowledged and filed with the State Department of Assessments and Taxation of Maryland, and will become effective in accordance with such law. Upon the effective date of such Articles of Dissolution, the Fund will be legally dissolved, but thereafter the Fund will continue to exist for the purpose of paying, satisfying, and discharging any existing debts or obligations, collecting and distributing its assets, and doing all other acts required to liquidate and wind up its business and affairs, but not for the purpose of continuing the business for which the Fund was organized.

Appraisal Rights

Stockholders will not be entitled to appraisal rights under Maryland law in connection with the Plan.

Quorum and Required Vote

Under the MGCL and pursuant to the Charter and Bylaws, the affirmative vote of a majority of the votes entitled to be cast by stockholders of the Fund is required to approve the liquidation and dissolution of the Fund pursuant to the Plan. For purposes of the vote on Proposal 1, abstentions and broker non-votes will have the same effect as a vote “AGAINST” the liquidation and dissolution of the Fund pursuant to the Plan. The presence in person or by proxy of stockholders of the Fund as of the record date entitled to cast at least a majority of the votes entitled to be cast will constitute a quorum for the transaction of business at the Meeting. If the necessary quorum to transact business or the vote required to approve the Liquidation is not obtained at the Meeting, or, if in the discretion of the chairman of the Meeting, it is advisable to defer action on the Liquidation proposal, the chairman of the Meeting may adjourn the meeting with respect to the proposal, or the persons named as proxies may propose one or more adjournments of the Meeting, or the Fund may postpone the Meeting, to permit further solicitation of proxies. The Meeting may be adjourned from time to time without further notice other than announcement at the Meeting at which the adjournment is taken. If the Meeting is postponed or adjourned for more than 120 days after the original record date for the Meeting, the Board will fix a new record date for such Meeting. Any proxy received by the Fund from a stockholder who was a stockholder of record on both the record date originally set for the Meeting and the new record date for such Meeting will remain in full force and effect unless explicitly revoked by the applicable stockholder. Any proposal submitted to a vote at the Meeting may be voted on either in person or by authorized proxy.

Votes cast by proxy or in person at the Meeting will be tabulated by the inspectors of election appointed for the Meeting. The inspectors of election, on behalf of the Fund, will determine whether or not a quorum is present at the Meeting. The inspectors of election will treat abstentions and “broker non-votes” (i.e., shares held by brokers or nominees, typically in “street name,” as to which proxies have been returned but (a) instructions have not been received from the beneficial owners or persons entitled to vote and (b) the broker or nominee does not have discretionary voting power on a particular matter) as present for purposes of determining a quorum.

Votes cast by proxy or in person at the Meeting will be tabulated by the inspectors of election appointed for the Meeting. The Fund expects that broker-dealer firms holding shares of the Fund in “street name” for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares on Proposal 1. The Fund understands that, under the rules of the NYSE, such broker-dealers may not, without instructions from such customers and clients, grant authority to the proxies designated by the Fund to vote on the proposal to liquidate the Fund if no instructions have been received prior to the date specified in the broker-dealer firm’s request for voting instructions. Therefore, if beneficial owners do not provide proxy instructions or do not return a proxy card that specifies how they wish to vote on Proposal 1, such action will have the same effect as a vote “AGAINST” Proposal 1.

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In the event that a majority of the outstanding shares of common stock of the Fund are not voted in favor of the liquidation and dissolution of the Fund pursuant to the Plan, with the result that the liquidation and dissolution of the Fund as set forth in the Plan is not approved, the Fund will continue to exist as a registered investment company in accordance with its stated investment objective and policies. In the event the liquidation and dissolution of the Fund pursuant to the Plan is not approved, the Board presently intends to meet to consider what, if any, steps to take in the best interests of the Fund and its stockholders, including the possibility of resubmitting the liquidation and dissolution of the Fund pursuant to the Plan or another plan of liquidation and dissolution to stockholders for future consideration. Absent relief from the SEC or its staff, the Fund’s investment manager and subadvisers will not be permitted to manage the Fund after December 28, 2020, even if stockholders do not approve the Plan.

Additional Considerations

In addition to the other information contained in this Proxy Statement, you should consider the following factors in determining whether or not to vote in favor of the liquidation and dissolution of the Fund pursuant to the Plan.

The Fund is not Able to Estimate Net Proceeds to be Received by Stockholders. The actual amounts to be distributed to stockholders of the Fund upon liquidation is subject to significant uncertainties and not possible to predict at this time. The amount available for distribution to stockholders will be based, in part, on the value of the Fund’s assets at the time of liquidation and then-current market conditions; the amount of the Fund’s actual costs, expenses and liabilities to be paid in the future; the potential market impact of liquidation of portfolio securities (including the liquidation of potentially large blocks of portfolio securities) under current and developing market conditions; general business and economic conditions; and the time required to liquidate the Fund’s assets, all of which cannot be predicted with any certainty at this time.

The Fund is Not Able to Predict at this Time the Length of Time it Would Take to Complete the Liquidation and Dissolution of the Fund. Notwithstanding the approval of a majority of the outstanding shares of common stock of the Fund, any claims pending against the Fund and/or the Board must be satisfactorily resolved prior to the liquidation of the Fund’s assets. While the Board is not currently aware of any such claim, it is possible that such a claim could arise and that costs would be incurred to resolve it. If any such claim should arise, the Fund will not liquidate until such claim is satisfactorily resolved in the sole discretion of the Board. The Fund is unable to predict when it will complete the sale of its assets or when it will distribute the liquidation proceeds to stockholders. In effecting the liquidation and dissolution of the Fund, Western Asset expects to invest the cash proceeds from the sale of portfolio securities in short-term taxable instruments. However, the Fund will not be managed during the liquidation period in a manner designed to produce investment returns analogous to that which it attempted to achieve during its investment operations. Further, the market value of the Fund’s portfolio securities may decline during the liquidation period resulting in a reduction in the amounts available for ultimate liquidation distribution, and the length of the liquidation period cannot be predicted at this time as described above.

The Liquidity and Market Price of Fund Common Shares Could Decrease. As the Fund sells its assets and distributes proceeds of the liquidation to stockholders, the Fund’s market capitalization and “float” may diminish. Market interest in the Fund’s shares may also diminish. This could reduce the market demand for and liquidity of shares of the Fund’s common stock, which may adversely affect the market price of the Fund’s shares. The Fund currently intends to maintain its listing on the NYSE until such time as the Common Shares are no longer eligible for listing and trading. This would further decrease the market demand for, liquidity and price of the Fund’s shares.

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5% Beneficial Ownership

At September 18, 2020, to the knowledge of management, the registered stockholders who owned of record or owned beneficially more than 5% of the Fund’s capital stock outstanding is noted in the table below. As of the close of business on September 18, 2020, Cede & Co., a nominee for participants in the Depository Trust Company, held of record [4,668,404] shares, equal to approximately [100]% of the Fund’s outstanding shares.

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