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Two UBS Advisory Firms Settle Charges Arising From Failure to Disclose Change in Investment Strategy

Settlement Will Return More Than $13 Million to Harmed Investors

Washington D.C., Oct. 19, 2015

The Securities and Exchange Commission today announced that two UBS advisory firms have agreed to settle charges arising from their roles in failing to disclose a change in investment strategy by UBS Willow Fund LLC, a closed-end fund they advised.

UBS Willow Management LLC and UBS Fund Advisor LLC agreed to pay a total of approximately $17.5 million, more than $13 million of which will be returned to harmed investors. 

According to an SEC order instituting a settled administrative proceeding:

  • UBS Willow Management, a joint venture between UBS Fund Advisor and an external portfolio manager, marketed the UBS Willow Fund as one that primarily invested in distressed debt, a strategy predicated on the debt increasing in value.  From 2000 through 2008, UBS Willow Management invested the fund’s assets consistent with the strategy described in the offering and marketing materials. 

  • UBS Willow Management changed course in 2008 and instead of focusing on investments in debt issued by troubled companies, it had the fund purchase large quantities of credit default swaps, a strategy predicated on the debt decreasing in value.  The fund started incurring big losses due to its holdings of credit default swaps, which rose from less than 2.6% of the fund’s market value in 2008 to more than 25% by March 2009.  The fund continued to perform poorly due to the change in strategy and was liquidated in 2012.

  • UBS Willow Management did not provide adequate disclosure of the change in investment strategy to the fund’s investors or board of directors.  A marketing brochure it provided to potential investors from fall 2008 to May 2009 misstated the fund’s strategy and investor letters it sent from fall 2008 to August 2011 contained false or misleading information about the fund’s exposure to credit default swaps.  UBS Willow Management also caused the fund to misrepresent its investment strategy in shareholder reports filed with the SEC from fall 2008 until the fund’s liquidation in 2012.

  • UBS Fund Advisor, which retained ultimate control over the fund, was aware of the change in investment strategy and failed to supervise UBS Willow Management by allowing the change to occur without adequate disclosure to the fund’s investors or board.

“Advisers must provide investors and fund boards with accurate information about a fund’s investment strategy,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Here UBS Willow Management completely reversed the fund’s strategy – from investing in distressed debt to betting against it – without adequately disclosing the change.”

The SEC’s order finds that UBS Willow Management negligently violated the antifraud provisions of the federal securities laws and that UBS Fund Advisor failed to supervise UBS Willow Management.  Without admitting or denying the charges, UBS Willow Management and UBS Fund Advisor agreed to be censured and to jointly and severally pay $17.5 million, consisting of $8.2 million in disgorgement of advisory fees, $1.4 million in pre-judgment interest, a $3 million penalty, and $4.9 million to compensate investors for losses.  The disgorgement and investor compensation amounts totaling approximately $13 million will be distributed to affected investors.

The SEC’s investigation was conducted by Jeremiah L. Williams and supervised by Adam S. Aderton of the Asset Management Unit.


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