On October 19, 2015, the SEC announced settled administrative proceedings against UBS Willow Management L.L.C. (“UBS Willow”) and its former controlling member, UBS Fund Advisor L.L.C. (“UBS Advisor” and together with UBS Willow, “UBS”) for misrepresentations and omissions concerning a material change in the investment strategy of UBS Willow Fund L.L.C., a continuously offered, closedend registered investment company and UBS Willow’s sole client.

According to the order, from the Fund’s inception in May 2000, UBS marketed the Fund as a product that primarily invested in distressed debt which, the order states, is “a thesis that debt would increase in value” (emphasis in original). The SEC found that UBS adhered to this investment strategy until 2008, when it “changed course and shorted credit (i.e., a thesis that debt would decrease in value)” (emphasis in original) by purchasing large amounts of credit default swaps (“CDS”) for the Fund. The order states that the CDS exposure, which, in market value terms, increased from 2.6% of net assets at the beginning of 2008 to 25% by the end of the first quarter of 2009, was the “primary driver of the Fund’s performance,” made the Fund more volatile and resulted in significant losses. The SEC noted that the Fund’s board of directors determined to liquidate the Fund in 2012 due, at least in part, to the losses incurred by the Fund from CDS exposure.

The SEC found that UBS did not adequately disclose to the board or investors the Fund’s change in investment strategy, including the “significant, known risks posed by the Fund’s large CDS exposure.” As an example, the order states that on the morning of a May 2009 board meeting, UBS received the results of a stress test showing large potential CDS losses. The SEC found that UBS neither informed the board of the stress test results nor reported to the board on the substantial cost of maintaining the CDS positions, which, by 2010, annually exceeded 25% of the Fund’s net assets. In addition, according to the SEC, UBS provided prospective investors with an offering memorandum that described the Fund’s original longcredit principal investment strategy of investing in distressed debt, a description that was materially false beginning in fall 2008. Similarly, the SEC found that the Fund’s registration statement and the semi-annual and annual shareholder reports were never updated to reflect the change in investment strategy.

As a result of the foregoing conduct, the SEC found that, among other things, UBS Willow violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, which prohibit making untrue statements of material fact and engaging in any fraud or deceit in the offer or sale of securities, and Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any fraud or deceit upon any client or prospective client. The SEC also found that UBS Willow violated the Advisers Act and the 1940 Act as a result of the alleged misrepresentations to investors in the Fund’s offering memorandum, marketing brochure, investor letters, shareholder reports and registration statement. UBS Advisor, as the controlling member of UBS Willow, also was found by the SEC to have violated Section 203(e)(6) of the Advisers Act for failing to reasonably supervise UBS Willow.

Pursuant to the terms of the order, UBS Advisor and UBS Willow agreed to compensate investors in the Fund for losses in the amount of $4,903,620 attributable to the change in the Fund’s investment strategy, pay a civil money penalty of $4,373,436.74, disgorge $8,223,110 in revenues and cease and desist from any violations and future violations of the laws violated by the foregoing conduct. UBS Advisor and UBS Willow were also censured.

The SEC order in the matter of UBS Advisor and UBS Willow is available at: http://www.sec.gov/litigation/ admin/2015/33-9964.pdf