Energy Business

Why the USO 'Oil ETF' Received an SEC Wells Notice

If you have ever heard the phrase “You better understand what you are investing in,” this phase was something that investors in United States Oil Fund L.P. (NYSEARCA: USO) found out the hard way over and over. This has been mistakenly called the “Oil Price ETF” by many investors for years. On top of severe tracking error in the past, the roll dates in futures and subsequent instant changes to the investment policy made this nearly impossible to keep track of the price versus the net asset value.

It appears that the regulators have decided to go after the so-called Oil ETF. A fresh filing was made showing that on August 17, 2020, the United States Commodity Fund (USCF), United States Oil Fund (USO) and John Love have received a Wells Notice from the staff of the U.S. Securities & Exchange Commission (SEC).

According to the filing, the Wells Notice relates to USO’s disclosures in late April and early May regarding constraints imposed on its ability to invest in oil futures contracts. The SEC has made a preliminary determination to recommend filing an enforcement action against those named, alleging violations with respect to disclosures and actions during that time. These were the areas noted:

  • Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933
  • Section 10(b) of the Securities Exchange Act of 1934
  • Rule 10b-5.

As the SEC filing noted, a Wells Notice is neither a formal charge of wrongdoing nor a final determination that the Wells Notice recipient has violated any law. The group also has maintained that the USO’s disclosures and its actions were appropriate. The filing noted: “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.”

As of August 18, 2020, the USO net asset value of $30.79 was down one cent, and the last trade price on the day was $30.60, for a −0.55% premium/discount. With 137,323,603 shares outstanding, it still had total assets of nearly $4.23 billion.

24/7 Wall St. had covered the USO’s tracking errors even in rallies and potentiality of this being an issue in which the “tail can wag the dog.” The fund’s website still comes with a bright red warning box on top of the fund details page.

Again, it is imperative that investors understand exactly what they are investing in and how the mechanics work.