UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
ADMINISTRATIVE PROCEEDING
File No. 3-9383
SECURITIES ACT OF 1933
Release No. 7444 / September 2, 1997
SECURITIES EXCHANGE ACT OF 1934
Release No. 39001 / September 2, 1997
INVESTMENT ADVISERS ACT OF 1940
Release No. 1654 / September 2, 1997
INVESTMENT COMPANY ACT OF 1940
Release No. 22805 / September 2, 1997
______________________________
)
)
)
In the Matter of ) ORDER INSTITUTING PUBLIC
) PROCEEDINGS, MAKING FINDINGS,
) IMPOSING REMEDIAL SANCTIONS,
MITCHELL HUTCHINS ASSET ) AND ISSUING CEASE-AND-DESIST
MANAGEMENT INC., ) ORDER
)
)
Respondent. )
)
)
______________________________)
I.
The Securities and Exchange Commission (the "Commission") deems it
appropriate and in the public interest to institute public administrative
proceedings pursuant to Section 8A of the Securities Act of 1933 (the
"Securities Act"), Section 21C of the Securities Exchange Act of 1934 (the
"Exchange Act"), Sections 203(e) and 203(k) of the Investment Advisers Act
of 1940 (the "Advisers Act"), and Sections 9(b) and 9(f) of the Investment
Company Act of 1940 (the "Investment Company Act"), against Respondent
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins").
In anticipation of the institution of these proceedings, Mitchell
Hutchins has submitted an Offer of Settlement to the Commission, which the
Commission has determined to accept. Solely for the purpose of these
proceedings, and any other proceedings brought by or on behalf of the
Commission, or in which the Commission is a party, and prior to a hearing
pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.100, et seq.,
and without admitting or denying the findings set forth herein, except as
to the Commission's jurisdiction over it and the subject matter of this
proceeding, which Mitchell Hutchins admits, Mitchell Hutchins consents to
the entry of this Order Instituting Public Administrative Proceedings,
Making Findings, Imposing Remedial Sanctions and Issuing Cease-and-Desist
Order ("Order").
II.
Accordingly, IT IS ORDERED that an administrative proceeding pursuant
to Section 8A of the Securities Act, Section 21C of the Exchange Act,
Sections 203(e) and 203(k) of the Advisers Act, and Sections 9(b) and 9(f)
of the Investment Company Act be, and hereby is, instituted.
III.
On the basis of this Order and the Offer of Settlement submitted by
Mitchell Hutchins, the Commission finds that:<(1)>
A. Respondent
MITCHELL HUTCHINS is a broker-dealer registered under the Exchange Act
and an investment adviser registered under the Advisers Act. It is wholly
owned by PaineWebber Inc. ("PaineWebber"), a registered broker-dealer.
Mitchell Hutchins serves as the investment adviser and administrator of the
PaineWebber Short-Term U.S. Government Income Fund. Mitchell Hutchins also
acts as the distributor of each class of the Fund's shares.
B. Other Relevant Entity
THE PAINEWEBBER SHORT-TERM U.S. GOVERNMENT INCOME FUND (the "Fund"), a
diversified series of an open-end, management investment company, commenced
operations on May 3, 1993.<(2)> The Fund's assets totalled
approximately $1.7 billion as of November 30, 1993, and approximately $1
billion as of May 31, 1994.
C. Summary
<(1)> The findings made herein and the entry of this Order
are made pursuant to Respondent's Offer of Settlement and shall
not be binding on any other person or entity in this or any other
proceeding.
<(2)> The Fund later was renamed The Paine Webber Low
Duration U.S. Government Income Fund.
======END OF PAGE 2======
This proceeding involves Mitchell Hutchins' management of the
PaineWebber Short-Term U.S. Government Income Fund, which the firm marketed
as a higher-yield and somewhat higher-risk alternative to money market
funds and bank certificates of deposit. The prospectus disclosed that the
Fund's investment objective was to achieve the highest level of income
consistent with preservation of capital and low volatility of net asset
value ("NAV"). The appendix to the prospectus also disclosed that the Fund
had "no present intention" of investing in certain classes of interest only
("IO") and principal only ("PO") stripped mortgage-backed securities
("SMBS").
Mitchell Hutchins violated the antifraud provisions of the federal
securities laws because it marketed the Fund as a low-volatility
investment, when ultimately it was not. Contrary to the Fund's investment
objective and "no present intention" statement, the Fund began investing in
certain inappropriate IO and PO securities in the fall of 1993. For the
next seven months, Mitchell Hutchins failed to review the securities
purchased by the Fund's portfolio manager or to otherwise ensure that the
Fund's investments were consistent with the prospectus and other public
disclosures. In fact, Mitchell Hutchins recklessly disregarded certain
indications that might have led it to discover the portfolio manager's
improper conduct in pricing and managing the Fund's securities portfolio.
When interest rates increased sharply beginning in February 1994, the Fund
incurred significant losses, performing well below comparable funds.
D. Mitchell Hutchins' Disclosures and Representations
The Fund was offered and sold to the public using a prospectus and
other documents prepared by Mitchell Hutchins. The prospectus stated that
"[t]he Fund's investment objective is to achieve the highest level of
income consistent with the preservation of capital and low volatility of
net asset value" (emphasis added). In addition, the prospectus disclosed
that the Fund would invest in U.S. Government securities, including
mortgage-backed securities. The appendix to the prospectus said that the
Fund had "no present intention" of investing in certain mortgage-backed
securities -- IO and PO strips of collateralized mortgage obligations
("CMOs") that were not planned amortization class bonds ("non-PAC IOs and
POs").<(3)>
<(3)> IOs and POs with prepayment protection, or "PAC bonds,"
are designed to provide relatively predictable payments according
to an established schedule, provided that prepayments on the
underlying mortgage assets fall within a certain range (i.e., as
long as early pay-offs by mortgagors fall within certain
parameters.) Non-PAC IOs and POs, on the other hand, are
significantly more volatile because, among other things, they
lack prepayment protection and absorb the effects of changes in
prepayments for PAC classes. The Fund's prospectus stated that
non-PAC IOs and POs "are extremely sensitive to the rate of
principal payments (including pre-payments) on the underlying
[m]ortgage [a]ssets."
======END OF PAGE 3======
Mitchell Hutchins also prepared and disseminated to PaineWebber's
retail sales force marketing materials containing a number of false and
misleading statements about the Fund and its expected performance. For
example, certain of these materials stated that an investment in the Fund
carried somewhat more risk than an investment in a money market fund or a
certificate of deposit, but investors could expect returns of 1.5% to 2%
more than a money market investment. Based on the performance of a
"hypothetical portfolio" prepared by Mitchell Hutchins for marketing
purposes<(4)>, certain marketing materials also stated that a 100
basis point increase in interest rates would cause the Fund's NAV to
decrease by only $.02 per share, while a 200 basis point increase would
cause the NAV to decrease by only $.04 per share. Finally, certain
marketing materials also stated that the Fund would not invest in IOs, POs,
or derivatives, or engage in option writing or leverage
transactions.<(5)> In selling the Fund's shares to the investing
public, oral representations were made to certain customers based on these
marketing materials.
E. The Fund Invested in Certain IO and PO Securities That
Were Inconsistent With the Fund's Prospectus Disclosures
In September 1993, Mitchell Hutchins hired a person to act as the
Fund's co-portfolio manager, with day-to-day responsibility for managing
the Fund's investments (the "portfolio manager"). At that time, the
portfolio manager's supervisor and another senior co-portfolio manager told
him that IOs and POs without PAC protection were not permitted in the Fund.
Despite these instructions, on September 30, 1993, the portfolio
manager purchased a non-PAC PO for more than $15 million. That security
was inconsistent with both the prospectus' "no present intention" statement
and the Fund's low-volatility investment objective. Thereafter, between
September 30, 1993, and February 14, 1994, he bought a total of six non-PAC
POs and three non-PAC inverse IOs for an aggregate purchase price of more
than $162 million. By February 1994, non-PAC IOs and POs constituted
approximately 6% of the Fund's portfolio. During October 1993 through
January 1994, the portfolio manager purchased five PAC inverse IOs for a
<(4)> Created before any securities were purchased for the
Fund's actual portfolio, the "hypothetical portfolio" showed the
Fund's anticipated volatility in response to interest rate
changes.
<(5)> These statements in the marketing materials were
inconsistent with disclosures in the prospectus. For example,
the prospectus provided that the Fund could purchase certain
derivatives (including PAC IOs and POs, which were purchased from
its inception), could write options (which it did starting in
January 1994), and could enter into leverage transactions.
======END OF PAGE 4======
total purchase price of more than $34 million. The PAC inverse IOs also
were inconsistent with the Fund's investment objective.<(6)>
In addition, in March 1994, the portfolio manager purchased two
"structured floater" securities for a total purchase price of approximately
$203 million. These complex, interest-rate sensitive securities were
created by bundling together IO, PO and other components (some lacking PAC
protection) of various mortgage transactions. When the portfolio manager
purchased the two structured floaters, his supervisor was not aware of the
existence of non-PAC IOs and POs and inverse floaters in the portfolio. As
a result, these two structured floaters were purchased without adequate
consideration of how they might impact the Fund's overall portfolio.
For the first three quarters after its inception, the Fund showed a
strong performance. For example, for the period January 1 through March
31, 1994, the A shares, B shares, and D shares ranked 2, 9, and 7,
respectively, out of 103 comparable funds.
When interest rates increased sharply in the first half of 1994,
however, the Fund incurred significant losses. For example, the Fund's NAV
fell $0.21 per share from March 31 to June 30, 1994, placing the Fund's
performance among the bottom four of 105 comparable funds during the second
quarter of 1994.
F. Mitchell Hutchins Failed to Ensure That the
Fund's Investments Were Consistent With Disclosures
in the Prospectus and Certain Marketing Materials
Until late April 1994, Mitchell Hutchins failed adequately to monitor
the Fund's purchases of securities to ensure adherence to the "no present
intention" statement and to have a reasonable basis for continuing to
characterize the Fund as a low-volatility investment. No one in a
supervisory role reviewed the contents of the Fund's securities portfolio
to determine consistency with the "no present intention" statement. Other
than reviewing aggregate duration calculations, Mitchell Hutchins did not
test the Fund's portfolio to determine whether it would perform in the
manner described in the marketing materials. While Mitchell Hutchins
required portfolio managers to complete a monthly checklist indicating
adherence to investment restrictions and limitations, no form was completed
for this Fund during the first eleven months of its operation.
When Mitchell Hutchins prepared an amendment to the Fund's prospectus,
effective as of April 1, 1994, it failed to make reasonable efforts to
determine whether the Fund was adhering to the "no present intention"
statement and the low-volatility investment objective.
<(6)> Inverse IOs generally are more volatile than other IO
securities because of their extreme sensitivity to interest rate
fluctuations. Inverse IOs, which may be either PAC or non-PAC,
vary inversely with the London interbank offered rate ("LIBOR").
======END OF PAGE 5======
G. Certain Fund Securities Frequently Were Mispriced
Furthermore, certain of the Fund's portfolio securities frequently
were mispriced. The Fund's prospectus and statement of additional
information ("SAI") described the method it would use to value portfolio
securities. The Fund's SAI disclosed that it would value its portfolio
securities based on their current market value where market quotations were
readily available. Where market quotations were not readily available, or
did not adequately reflect, in Mitchell Hutchins' judgment, a security's
"fair value," the SAI said that portfolio securities would be valued based
on appraisals received from a pricing service or appraisals based on
information provided by recognized dealers in those or similar securities.
Finally, in the absence of any of the foregoing market indicators, the SAI
stated that portfolio securities would be "valued at fair value as
determined in good faith by or under the direction of the Trust's board of
trustees."
The Fund's portfolio was valued as of the end of each business day.
The Fund received from its custodian bank (the "custodian") a daily report
of prices for each of the portfolio securities where dealer quotations
could be obtained; these prices, in turn, provided the principal basis for
the daily calculation of the Fund's NAV. Pursuant to the Fund's stated
valuation method, the custodian-provided prices, in most instances,
reflected quotations received from a pricing service or from a dealer
(usually the dealer that sold the security to Mitchell Hutchins).
Consistent with the firm's procedures, the Fund's day-to-day portfolio
manager could substitute his own price for a custodian-provided price if he
determined that the latter did not adequately reflect a security's "fair
value." However, Mitchell Hutchins had no written procedures to guide
portfolio managers in making those pricing determinations.
Prior to the time the portfolio manager assumed day-to-day
responsibility for managing the Fund, price overrides were relatively
infrequent. By contrast, during his tenure at the Fund from October 1993
through April 1994, the portfolio manager frequently overrode prices
provided by the custodian, altering the prices of approximately 5 to 25
securities on many days. On more than 40 occasions, the portfolio manager
overrode custodian-provided prices for a particular security for more than
a two-week period. Moreover, the portfolio manager overrode custodian-
provided prices for two of the non-PAC securities for almost the entire
time they were held by the Fund.<(7)>
The portfolio manager overrode custodian-provided prices with prices
he derived based on his own method, which did not take into account whether
<(7)> On September 30, 1993, the portfolio manager purchased
the first non-PAC PO; he subsequently overrode custodian-provided
prices for that security from October 18 until January 25, 1994,
when he sold it. He purchased a non-PAC IO on October 20, 1993,
and overrode its custodian-provided prices every day from
November 2, 1993, through February 14, 1994, when he sold it.
======END OF PAGE 6======
the securities currently could be sold at the prices he calculated. The
portfolio manager kept no documentation to support his calculations.
When the portfolio manager overrode custodian-provided prices, in most
cases, he replaced them with higher prices. For example, from November 29,
1993, to April 22, 1994, he overrode at least 17 securities in the Fund's
portfolio, including non-PAC IOs and POs and PAC inverse IOs, by amounts
ranging from approximately 9% to 62% higher than the available dealer
quotations.
Because the Fund's NAV is a function of the value of its securities
portfolio, the portfolio manager's overrides caused the Fund's NAV to be
overstated. For example, following the increase in interest rates during
February through April 1994, the portfolio manager overrode custodian-
provided prices for a substantial number of securities, resulting in
inflation of the Fund's NAV by more than $0.01 per share for a total of 36
days during the period from March 1 to April 25, 1994.
The portfolio manager's overrides had the effect of obscuring the
volatile effect of the non-PAC IOs and POs and inverse IOs on the Fund's
NAV. This, in turn, had the effect of obscuring his purchases of those
securities.
Instead of reviewing the actual securities purchased by the portfolio
manager, the portfolio manager's supervisor relied on his reported
allocation of portfolio securities among various broad classes (e.g., IOs,
POs, pass-throughs, etc.), which did not indicate the presence of non-PAC
IOs and POs. In monitoring the Fund's volatility, the supervisor relied
principally on daily reports of NAV calculated out to five decimal places
(the accuracy of which depended on the portfolio manager's accurate
valuation of portfolio securities) and on his calculation of aggregate
duration, which measures the percentage change in the portfolio's value in
response to specified changes in interest rates. By failing to have in
place a process to review the support for these aggregate indicators,
Mitchell Hutchins failed to detect the portfolio manager's conduct.
H. Mitchell Hutchins Did Not Adequately
Monitor the Portfolio Manager's Conduct
During this period, there was an indication that could have alerted
Mitchell Hutchins to the portfolio manager's conduct in purchasing and
pricing the Fund's portfolio securities. In November 1993, a Mitchell
Hutchins chief investment officer ("CIO"), who reviewed and initialed price
overrides in several funds administered by the firm, reported to the then-
general counsel that the portfolio manager's overrides were "persistent"
and "high" in number. The CIO also reported that the portfolio manager's
override documentation precluded a substantive review of his overrides
because, among other things, it did not precisely identify the securities
at issue. The then-general counsel thereafter brought this matter to the
attention of Mitchell Hutchins' president.
======END OF PAGE 7======
Four months following the CIO's report, in late March 1994, there was
a meeting at Mitchell Hutchins (involving, among others, the CIO, the then-
general counsel and the portfolio manager's supervisor) to discuss price
overrides. Following this meeting, the CIO refused to initial any
additional overrides processed by the Fund's portfolio manager. Mitchell
Hutchins did not investigate the portfolio manager's override practices
until a month later.
I. Mitchell Hutchins' Discovery of the Portfolio
Manager's Improper Conduct and Its Response
In late April 1994, Mitchell Hutchins discovered a clerical pricing
error affecting a security in the portfolio of an offshore fund also
managed by the Fund's portfolio manager under the same supervisor. On the
day it discovered that pricing error, Mitchell Hutchins undertook a review
of the valuation of the Fund's portfolio securities. During that review,
the firm examined the portfolio manager's pattern of overriding custodian-
provided prices and his failure to maintain documentation substantiating
those overrides. The firm also discovered the presence of certain
portfolio securities that were inconsistent with the Fund's "no present
intention" statement and low-volatility investment objective. The firm
then recalculated the Fund's NAV and amended the Fund's prospectus to
disclose that the Fund had "no present intention" of investing more than 3%
of its assets in certain non-PAC IO and PO SMBS classes.
During this period, Mitchell Hutchins contacted Commission staff
concerning the problems with the Fund and the firm's possible purchase of
securities from the Fund.<(8)> Thereafter, Mitchell Hutchins
purchased certain IOs and POs from the Fund and paid Fund investors $33
million, which was the amount estimated by the firm as the losses
associated with those securities, thereby settling two related class action
lawsuits. The firm replaced the firm's president and all persons with
direct involvement for the Fund's management and supervision, including the
portfolio manager and his supervisor, and revised certain of its policies
and procedures. In addition, Mitchell Hutchins paid $145 million to
purchase from the Fund certain IO and PO securities and certain structured
floater securities.
Legal Analysis
Mitchell Hutchins Violated Section 17(a)
of the Securities Act, Section 10(b) of
the Exchange Act and Rule 10b-5 Thereunder,
and Sections 206(1) and (2) of the Advisers Act
<(8)> The staff ultimately issued a no-action letter
indicating that it would not object to the purchase of the
securities from the Fund under Section 17(a) of the Investment
Company Act.
======END OF PAGE 8======
Section 17(a) of the Securities Act makes it unlawful, in the offer or
sale of securities, (1) to employ any device, scheme or artifice to
defraud, or (2) to obtain money or property by means of any untrue
statement of material fact or any omission to state a material fact
necessary to make the statements made, in light of the circumstances in
which they were made, not misleading, or (3) to engage in any transaction,
practice, or course of business that operates as a fraud or deceit upon a
purchaser. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
make it unlawful to employ any device, scheme or artifice to defraud in
connection with the purchase or sale of securities. Section 206(1) of the
Advisers Act makes it unlawful for an investment adviser to employ any
device, scheme or artifice to defraud any client or prospective client.
Section 206(2) makes it unlawful for an investment adviser to engage in any
transaction, practice, or course of business that operates as a fraud or
deceit upon any client.
Mitchell Hutchins willfully violated each of the foregoing antifraud
provisions. The portfolio manager purchased non-PAC IOs and POs that
rendered materially false and misleading the "no present intention"
statement in the Fund's prospectus. These securities together with certain
other securities purchased by the portfolio manager also rendered
materially false and misleading the characterization of the Fund as a low-
volatility investment.
No one in a supervisory capacity reviewed the portfolio manager's
purchases of portfolio securities until late April 1994. Nor did the firm
undertake any other reasonable effort to ensure that the portfolio
manager's investment practices complied with the Fund's prospectus.
Moreover, the purchase of non-PAC IOs and POs and certain other securities
rendered materially false and misleading statements in certain marketing
materials about the anticipated effect on the Fund's NAV of specified
changes in interest rates. As a result, the firm acted recklessly with
respect to its public disclosures concerning the Fund's performance,
investment objective and permissible investments.
Mitchell Hutchins also acted recklessly with respect to its reporting
to the Fund of the value of portfolio securities and NAV. Despite an
indication that might have led the firm to discover the portfolio manager's
improper overriding of custodian-provided prices for portfolio securities,
Mitchell Hutchins did not review his override practices until late April
1994. As a result, Mitchell Hutchins reported overstated prices for
certain of the securities, thereby causing the Fund's NAV to be overstated.
This overstatement, in turn, obscured the volatile effect of the non-PAC
IOs and POs and inverse IOs on the Fund's NAV, thereby obstructing the
Fund's ability to discover the purchase of those securities.
Mitchell Hutchins' Violations
of the Investment Company Act
Section 34(b) of the Investment Company Act makes it unlawful to,
among other things, make any untrue statement of material fact in any
registration statement. Because the Fund's prospectus was incorporated
======END OF PAGE 9======
into its registration statement, Mitchell Hutchins willfully violated that
provision by rendering materially false and misleading certain prospectus
disclosures described above.
Section 13(a)(3) of the Investment Company Act provides that, unless
authorized by the vote of a majority of its outstanding voting securities,
no registered investment company shall deviate from any investment policy
that is changeable only if authorized by shareholder vote, or deviate from
any policy recited in its registration statement pursuant to Section
8(b)(3) of that Act. The Fund's prospectus disclosed that its low-
volatility investment objective was a "fundamental polic[y] that may not be
changed without shareholder approval." Mitchell Hutchins caused the Fund
to deviate from this fundamental policy by purchasing securities that were
inconsistent with this objective. Neither Mitchell Hutchins nor the Fund
ever sought shareholder approval to change the investment objective. As a
result, Mitchell Hutchins willfully aided and abetted and caused a
violation of Section 13(a)(3).
Under Section 31(a) of the Investment Company Act and Rule 31a-1(a)
thereunder, registered investment companies are required to maintain and
keep current such books, accounts and other documents constituting the
basis for financial statements required to be filed with the Commission
under Section 30 of the Investment Company Act, which include balance
sheets showing the aggregate value of securities held and the amounts and
values of securities owned as of the date thereof. For the period from
October 1993 through April 1994, the portfolio manager did not maintain
documentation regarding the basis for overriding the prices of securities
held in the Fund's portfolio or the methodology and calculations he used to
derive override prices. As a result, the Fund did not maintain records
necessary to show the basis for the NAV and securities valuations reported
in its balance sheets. Therefore, Mitchell Hutchins willfully aided and
abetted and caused a violation of the aforementioned recordkeeping
requirements.
Mitchell Hutchins Failed Reasonably to
Supervise the Fund's Portfolio Manager
Pursuant to Section 203(e)(5) of the Advisers Act, the Commission is
authorized to impose sanctions on an investment adviser for failure
reasonably to supervise, with a view toward preventing violations, any
person who violates the federal securities laws, if that person is subject
to the adviser's supervision. Mitchell Hutchins' supervisory practices,
policies and procedures at the time were inadequate reasonably to detect
and prevent the above-described violations of the federal securities laws
by the portfolio manager. Accordingly, Mitchell Hutchins failed reasonably
to supervise him.
Mitchell Hutchins did not establish adequate procedures, or a system
for applying such procedures, which reasonably could have been expected to
prevent or detect the portfolio manager's violations. Specifically,
Mitchell Hutchins did not have adequate procedures to implement or monitor
the Fund's low-volatility investment objective, the "no present intention"
======END OF PAGE 10======
statement in the prospectus, or the Fund's stated valuation method.
Moreover, the firm's supervisory practices concerning these matters were
insufficient in that they, among other things, gave the portfolio manager
too much control over the purchase and valuation of the Fund's portfolio
securities with inadequate oversight.
Mitchell Hutchins' supervisory practices, and its failure to establish
adequate procedures, or a system for applying such procedures, enabled the
portfolio manager to purchase non-PAC IOs and POs and certain other
securities contrary to the Fund's low-volatility investment objective and
"no present intention" statement.
IV.
In determining to accept the Offer of Settlement submitted by Mitchell
Hutchins, the Commission considered remedial measures adopted and
implemented by Mitchell Hutchins.
V.
In view of the foregoing, the Commission deems it appropriate and in
the public interest to impose the sanctions set forth in Mitchell Hutchins'
Offer of Settlement.
Accordingly, IT IS ORDERED THAT:
A. Mitchell Hutchins shall be, and hereby is, censured;
B. Mitchell Hutchins shall cease and desist from committing any
violation and any future violation of Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Sections
206(1) and 206(2) of the Advisers Act, and Section 34(b) of the Investment
Company Act, and shall cease and desist from causing any violation and any
future violation of Sections 13(a)(3) and 31(a) of the Investment Company
Act and Rule 31a-1(a) thereunder;
C. Mitchell Hutchins shall pay a civil money penalty of $500,000 to
the United States Treasury within seven days of the entry of this Order.
Such payment shall be: (1) made by United States postal money order,
certified check, bank cashier's check or bank money order; (2) made payable
to the Securities and Exchange Commission; (3) hand-delivered to the Office
of the Comptroller, Securities and Exchange Commission, Operations Center,
6432 General Green Way, Stop 0-3, Alexandria, VA. 22312; and (4) submitted
under cover of a letter identifying Mitchell Hutchins as the Respondent in
these proceedings, the name and file number of these proceedings, and the
Commission's case number (HO-2955), a copy of which shall simultaneously be
sent to Richard Sauer, Assistant Director, Division of Enforcement,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 8-3,
Washington, D.C. 20549; and
D. Mitchell Hutchins shall comply with its undertakings to:
======END OF PAGE 11======
1. retain within 60 days of the entry of this Order, at
Mitchell Hutchins' expense, an Independent Consultant
("Consultant") not unacceptable to the Commission's staff
to, among other things, review and make any appropriate
recommendations concerning the policies and procedures
adopted by Mitchell Hutchins prior to the date of this Order
and continuing in effect in the following areas:
a. Mitchell Hutchins' preparation, review and approval of
publicly-disseminated sales materials and broker-only
sales and marketing materials concerning registered
investment company shares;
b. compliance with the terms of registered investment
company prospectuses and SAIs relating to fundamental
investment policies and investment restrictions and
limitations;
c. the valuation of securities held by registered
investment companies managed by Mitchell Hutchins and
the records maintained to support such valuation;
d. the calculation of NAV for registered investment
companies managed by Mitchell Hutchins; and
e. any policies and procedures designed reasonably to
prevent and detect, insofar as practicable, violations
of the federal securities laws in connection with the
matters described in paragraphs D.1. a - d above;
2. require the Consultant, at Mitchell Hutchins' expense, to
prepare a report to Mitchell Hutchins' Board of Directors
within six months of the issuance of this Order setting
forth the review and recommendations as to the matters
described in paragraph D.1 above;
3. authorize the Consultant to provide copies of the report to
the Commission's staff, which may make such further use
thereof as it may, in its discretion, deem appropriate;
4. adopt and implement, no later than six months after receipt
of the report, or such other time as the Consultant believes
is necessary, such policies and procedures as recommended by
the Consultant; provided, however, that as to any of the
Consultant's recommendations that Mitchell Hutchins
determines is unduly burdensome or impractical, Mitchell
Hutchins may propose an alternative procedure reasonably
designed to accomplish the same objectives. The Consultant
shall reasonably evaluate any such alternative procedure
and, if appropriate, either approve the alternative
procedures or amend the recommendation. Mitchell Hutchins
======END OF PAGE 12======
shall abide by the decision of the Consultant and adopt and
implement the alternative procedures or amended
recommendation within the time period set by the Consultant
in light of the nature of the procedure;
5. provide to the Commission staff, within six months after the
issuance of the report a letter attesting to, and setting
forth the details of, its implementation of the
recommendations contained in the report;
6. cooperate fully with the consultant, including obtaining the
cooperation of Mitchell Hutchins employees or other persons
under its control;
7. require the Consultant to enter into an agreement providing
that: (a) for the period of the engagement and for a period
of two years from the completion of the engagement, the
Consultant shall not enter into any employment, consulting
or attorney-client relationship with Mitchell Hutchins, or
any of its present or former affiliates, directors,
officers, employees, or agents acting in their capacity as
such; and (b) any firm with which the consultant is
affiliated or of which the Consultant is a member, and any
person engaged to assist the Consultant in performance of
his duties under this Order shall not, without prior written
consent of the Commission, enter into any employment,
consulting or other professional relationship with Mitchell
Hutchins or any of its present or former directors,
officers, employees, or agents in their capacity as such for
the period of the engagement and for two years thereafter;
and
8. reasonably cooperate, and use all reasonable efforts to
cause its present or former officers, directors, agents,
servants, employees, attorneys-in-fact, assigns and all
persons in active concert and participation with them to
reasonably cooperate with investigations, administrative
proceedings and litigation conducted by the Commission
arising from or relating to the matters described in this
Order.
By the Commission.
Jonathan G. Katz
Secretary
======END OF PAGE 13======