SEC Sanctions Advisers For Not Disclosing Shift In Investment Strategy
The SEC brought another enforcement action predicated on the failure of the firm to comply with its operating documents. In this instance the advisers to a fund failed to inform investors that it effectively changed the investment strategy by altering the composition and risk of its portfolio. In the Matter of UBS Willow Management L.L.C., Adm. Proc. File No. 3-16909 (October 16, 2015).
UBS Willow Management, which ceased operations in 2014, was a registered investment adviser. The firm was a joint venture between registered investment adviser UBS Fund Advisor, L.L.C., and Bond Street Capital L.L.C., a third part portfolio manager. Fund Adviser, a subsidiary of UBS AG, is also a Respondent. Willow Management advised UBS Willow Fund L.L.C., a closed-end Fund. UBS Fund Adviser was the controlling member of Willow Management.
Willow Management began offering the Fund in May 2000 and continued through mid-2012. The Offering Memorandum stated that the Fund primarily invested in distressed debt. The document also specified that the Fund invested in other types of securities, including derivatives for hedging and speculation.
Through 2008 the Fund invested primarily in distressed debt – long credit investments which drove the fund’s performance. In some instances it purchased and sold derivatives, including credit default swaps in modest amounts. Bond Street however believed that in 2008 the credit markets would deteriorate. It changed the composition of the investment portfolio by significantly increasing the short exposure through the purchase of CDS. Indeed, by the end first quarter of 2009 25% of the portfolio was composed of those instruments compared to one year earlier when it held about 2.6%. That switch changed the risk profile of the Fund. It also contributed to significant losses starting in early 2009 and eventually led to the liquidation of the Fund in 2012.
The OM did not reflect the change in portfolio composition. Likewise, investor letters disseminated by Willow Management did not record the change. Nor did the filings made with the Commission.
Fund Advisor was aware of the change. Nevertheless, it never directed Willow Management to reduce the Fund’s CDS exposure. Fund Advisor thus failed to reasonably supervise Willow Management. The Order alleges violations of Securities Act Sections 17(a)(2), 17(a)(3), Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 34(b).
To resolve the proceedings Respondents will compensate Fund investors. In addition, Willow Management consented to the entry of a cease and desist order based on the Sections cited in the Order. Both Respondents were censured. Respondents, jointly and severally, will pay disgorgement of $8,223,110 and pay prejudgment interest.