USO Being Investigated By SEC For Changes Made During Oil Crash

The fund's rapid fire change in investment strategy may not have been disclosed to shareholders properly.
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The SEC has decided to launch an investigation into the United States Oil Fund (OIL) alleging that the fund's manager may not have properly disclosed the risks involved with the fund.

At the center of the controversy are the rapid fire changes the fund made to its investment exposure during the April crude oil crash. Heading into the May contract expiration, crude oil futures prices plunged to more than -$40 a barrel. Producers were forced to pay people to take crude supplies off their hands with storage facilities maxed out and demand virtually non-existent.

USO quickly changed its investment objective to move away from the nearest-term oil futures contract and allow itself to own contracts with expirations as far as one year out into the future. The closest contract USO owns currently is the July 2020 expiration.

The sudden change to USO's mandate has caught the attention of the folks at the SEC and the CFTC.

credit: Eric Balchunas on Twitter

credit: Eric Balchunas on Twitter

Investors often used USO as a proxy to movements in the price of oil. The changes made to the fund, while helping to reduce the fund's overall risk, also watered down the fund's exposure and correlation to near-term oil price movements.

While not part of the SEC investigation, the changes raised concerns over whether sudden changes in investment objective in reaction to current market conditions are acceptable. USO has always aimed to maintain exposure solely to the nearest-term crude contract, but suddenly became a quasi-actively managed fund when the markets turned volatile.

The same question emerged with dozens of other ETFs who decided to postpone their regular rebalancing schedule in order to help avoid fueling even more volatility during the recent bear market.

The April oil market crash ended up decimating the oil fund industry. Several oil funds were forced to close up shop when plunging prices resulted in losses of 90% or more in several funds. The iPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL), one of the largest products, exercised its call option to close out entirely after it risked getting delisted.

I wrote earlier about how USO was forced to execute a 1:8 reverse split in order to just survive while the ProShares Ultra Bloomberg Crude Oil Fund (UCO) needed to do a 1:25 reverse split to save itself as well.

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