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======