Oil Fund Sponsor Failed to Disclose Limits on Its Ability to Invest in Futures Contracts
The SEC fined a commodity pool operator $2.5 Million for failing to fully disclose limits imposed on its ability to purchase oil futures contracts with newly-created shares.
Due to the pandemic and the resulting volatility in the oil markets, the respondent’s sole futures commission merchant imposed limits that would prevent the firm from investing in oil futures contracts. Consequently, the respondent would be forced to invest new units in cash or other liquid investments that would result in significant tracking error. The SEC faults the firm for failing to specifically disclose these new limits for about a month until it lined up additional FCMs to support its oil futures investing objectives. Instead, the firm’s interim public filings included non-specific disclosure about market restrictions that would limit the firm’s ability to invest in oil futures contracts. The firm did not fix its disclosure until the FCM informed the SEC, which then asked for additional disclosure.
Don’t over-lawyer your disclosure. The SEC will attack ambiguous or legalistic disclosure that hints at an underlying risk without fully disclosing the problem. You can fool yourself into believing that you did enough, but mealy-mouthed legalese won’t fool the SEC or aggrieved investors represented by securities class action lawyers.
Read SEC Order here.