May 27 (Bloomberg) -- UBS AG changed procedures to avoid penalties from Luxembourg’s financial regulator after being criticized for its role as custodian bank for funds that invested with Bernard Madoff, the agency said.

UBS “provided proof and guarantees” that its infrastructure and internal policies “are in line with professional standards in Luxembourg,” the Commission de Surveillance du Secteur Financier said in a statement today. The Luxembourg regulator in February faulted the Zurich-based bank for failing to fulfill its duties as custodian and ordered changes be made within three months.

“It’s extremely frustrating for investors to see that the bank was faulted for a grave breach and now, three months later, everything seems to be in order,” said Pierre Reuter, whose team at Luxembourg law firm Thewes & Reuter is handling about 70 claims against Madoff-related funds, banks and auditors.

UBS, Switzerland’s largest bank by assets, has been the target of lawsuits over its units’ alleged liability for investors’ losses in funds linked to Madoff. Since Madoff’s arrest in December, investors have sued the bank for access to documents and repayments from as many as four affected funds for which UBS was custodian bank.

“We are pleased that CSSF has acknowledged that our processes are appropriate,” Tatiana Togni, a spokeswoman for UBS, said in an e-mailed statement. “They further acknowledge that the responsibilities for the Madoff affair should be determined by the courts under the circumstances of the particular contracts.”

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UBS’s Luxembourg unit should make good investors’ losses “in line with the obligations of a Luxembourg custodian bank,” except where there are contrary contractual clauses or a contrary court ruling, the agency said.

UBS Luxembourg was custodian for Access International Advisors LLC’s LuxAlpha Sicav-American Selection fund, which once had assets of $1.4 billion, and for Luxembourg Investment Fund, with once $419 million in assets. The funds were dissolved earlier this year.

“It’s frustrating for investors because all the decisions made between UBS and the CSSF lacked complete transparency,” said Reuter by telephone. “We will have to fight even more vigorously for compensation in the courts now.”

Madoff, 71, is in prison after pleading guilty March 12 to running the biggest Ponzi scheme in U.S. history and faces as much as 150 years in prison. His sentencing is scheduled for June 29.

The CSSF next month will release a report on HSBC Holdings Plc’s local unit and how it handled its role as custodian bank for Herald (Lux) US Absolute Return Fund, the third fund dissolved by the Luxembourg agency earlier this year, Jean Guill, the regulator’s director general said.

To contact the reporter on this story: Stephanie Bodoni in London via sbodoni@bloomberg.net

Last Updated: May 27, 2009 13:07 EDT