SEC Puts Us Oil Fund on Notice Over Investor Disclosures
Reprinted from the FT – 20/08/2020
Regulator’s staff likely to recommend action over fund’s maneuvers as crude prices crashed in spring Oil markets were thrown into turmoil earlier this year as the pandemic wiped out demand.
The world’s largest fund investing in oil futures is in the crosshairs of the US securities regulator, over disclosures it made to investors during a period of mayhem in crude markets this spring.
The manager of the $4bn United States Oil Fund (USO) disclosed on Wednesday that it had received a Wells Notice from the US Securities and Exchange Commission related to constraints on its ability to hold certain futures contracts in late April and May. Such notices warn recipients that regulatory staff intends to recommend commissioners authorise a civil action, though charges do not necessarily follow.
As the coronavirus crisis wiped out demand, oil markets were thrown into turmoil. At Cushing, Oklahoma, the delivery point for US West Texas Intermediate crude oil futures, speculation mounted that storage tanks would fill to the brim. The price of WTI for May delivery fell below zero on April 20 as traders struggled to exit purchases of oil that they could not store.
Exchange operator CME Group ordered the US Oil Fund to shuffle its portfolio of WTI futures, abandoning its aim of tracking short-term oil futures prices. On April 21 it sold out of 91m barrels’ equivalent of WTI for June delivery, helping push down the price of that contract by 43 per cent on the day. The fund said in a filing that SEC staff intend to recommend that the commission file an enforcement action against the fund, its manager United States Commodity Funds and fund chief executive John Love, alleging violations of securities laws “with respect to its disclosures and USO’s actions during that period.” Reached for comment, the fund company said: “USCF, USO, and Mr. Love maintain that USO’s disclosures and their actions were appropriate. They intend to vigorously contest the allegations made by the SEC staff in the Wells Notice and expect to engage in a dialogue with the SEC staff regarding this matter.” The SEC declined to comment.
USO has been a long-term money-loser, with ample production swamping crude prices and the cost of storage eating up returns.
However, it has experienced moments of popularity during oil price crashes since it allows investors to bet on a speedy rebound through a retail brokerage account. The fund manager’s website is now streaked with a bright red banner warning that oil market disruptions and regulatory limits on its futures positions “have substantially impacted the ability of USO to make investments to best meet its investment objective”.
Nevertheless, since mid-April, the fund has absorbed $1.3bn in cash from investors, according to ETF.com.
The US Commodity Futures Trading Commission, which regulates futures markets, is also examining disclosures by managers of commodity funds that are popular with retail investors, its chairman Heath Tarbert has said. “We have seen certain instances out there where strategies have changed but the disclosure documents have not, [and] that is something we are going to be focused on,” Mr. Tarbert told the Financial Times last month. He declined to comment on USO specifically.