The $4.6bn United States Oil Fund (USO), the world’s largest ETP to offer investors exposure to movements in oil prices, is facing possible regulatory action from the Securities and Exchange Commission (SEC) due to actions taken during the collapse in oil prices earlier this year.

According to a filing with the SEC last week, USO, United States Commodity Funds (USCF) and CEO John Love were issued with a Wells notice from the US regulator informing them of impending charges.

SEC staff have made a preliminary recommendation that the SEC files an enforcement action against USO for violations made during the extreme volatility in April and May.

“The Wells notice relates to USO’s disclosures in late April and early May regarding constraints imposed on USO’s ability to invest in oil futures contracts,” the filing said.

A Wells notice is a letter stating the SEC plans to bring an enforcement action against a company or individual and gives the recipients an opportunity to say why action should not be taken. It is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law.

According to the filing, USO and USCF’s management intend to “vigorously” contest the allegations made by SEC staff maintaining that “their actions were appropriate”.

How historic market volatility changed oil ETPs forever

Like many oil ETPs, USO made a number of changes to its investment strategy after oil prices plummeted to as low as $-37 a barrel on 20 April.

Prior to the fall in prices, USO was entirely exposed to front-month WTI contracts but with USCF concerned another fall into negative territory would lead to investor returns being entirely wiped out, the issuer rolled away from the June futures contracts into later months.

USO ended up making six different changes to its investment strategy within the space of six weeks resulting in investors being exposed to oil futures contracts as far out as June 2021.

To add to the world's largest oil ETPs woes, its broker, RBC Capital Markets, refused to facilitate futures contracts purchases in May.

This also happened with the Samsung S&P GSCI Crude Oil ER Futures ETP (3175) which was forced to halt creations as a result in early May.

Regulators on notice as ETPs exacerbate volatility in oil markets

Critics of USO’s actions will argue the move to later oil futures contracts meant investors did not capture the recovery in spot prices in late April while proponents will claim their actions protected investors from being wiped out.

The SEC probe has done little to impact demand for USO, however, with investors piling $414m into USO in a single day earlier this week, according to Bloomberg, the largest one-day inflow since April.

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