In the Matter of Mitchell Hutchins Asset Management Inc.
Securities and Exchange Commission
Investment Company Act Release No. 22805 (1997)
Mitchell Hutchins Asset Management Inc. (MHAM) was the investment adviser to the PaineWebber Short-Term U.S. Government Income Fund (the fund). The fund’s prospectus, which was prepared by MHAM, stated that the fund sought low volatility and would invest in U.S. Government securities, including mortgage-backed securities (MBS), but had no intention of investing in MBS that did not protect against the risk of prepayment on the underlying mortgages (nonprotective MBS). Notwithstanding this representation, the fund’s portfolio manager repeatedly purchased nonprotective MBS, as well as other securities that were inconsistent with the fund’s low-volatility strategy, and MHAM did little to prevent this from happening. Although MHAM required its portfolio managers to submit a monthly checklist confirming adherence to investment restrictions, the first checklist was not submitted for the fund until nearly a year after the fund’s inception. The fund’s custodian provided daily pricing information for the securities in the fund’s portfolio. The fund’s procedures permitted the portfolio manager to override a custodian-provided price with the portfolio manager’s own price if the portfolio manager believed the former did not adequately reflect the security’s fair value. The portfolio manager’s price overrides were frequent and, in most cases, resulted in higher prices that did not reflect the prices at which the securities could then be sold. This caused the fund’s net asset value to be overstated and hid the volatile nature of the nonprotective MBS in the fund’s portfolio. The portfolio manager did not keep records supporting the portfolio manager’s price calculations, and MHAM did not adequately review the overrides. The Securities and Exchange Commission (SEC) brought an administrative proceeding against MHAM for violations of § 17(a) of the Securities Act of 1933 (Securities Act), § 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Rule 10b-5 under the Exchange Act, and §§ 206(1) and (2) of the Investment Advisers Act of 1940 (Advisers Act).
Rule of Law
Holding and Reasoning ()
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