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Exchange-Traded Fund and Its CPO Settle SEC and CFTC Charges of Inadequate Disclosure

An exchange-traded commodity pool trading oil futures and its general partner, a CPO, settled parallel SEC and CFTC charges for misleading disclosure statements. The disclosures concerned trading limitations imposed by the sole FCM executing futures transactions for the fund.

As outlined in the SEC Order and related CFTC Order, the agencies found that in 2020 during a period of unusual price movements (including certain oil futures contracts briefly going negative), the fund's FCM did not allow any new futures executions for the fund. This prohibition created the risk that the fund would not be able to meet its stated investment objective. The CPO filed a registration statement for the fund with the SEC for the creation of new shares two days before the new FCM limitations were imposed, but made several pre-effective amendments after the FCM imposed the new limits. The CPO was found to have failed to timely disclose the refusal.

As a result, the agencies found violations of Securities Act Section 17(a)(3) ("Records and reports"), CEA Section 4o(l)(B) ("Fraud and misrepresentation by commodity trading advisors, commodity pool operators, and associated persons"), and CFTC Rule 4.41(a)(2) ("Advertising by commodity pool operators, commodity trading advisors, and the principals thereof").

To settle the parallel SEC and CFTC charges, the entities agreed to (i) $2.5 million in penalties and (ii) cease and desist from future violations.

"Despite the exceptionally unusual market circumstances that set the backdrop for these actions, this was a straightforward case of misleading disclosure. Whether out of haste or a sincere belief that the FCM-imposed limitations would quickly be lifted, the registration statement for the fund, even after several amendments, discussed FCM limitations as a potential issue that “could change” its investment intention if “additional or different risk mitigation measures” were taken. It was not until a direct SEC inquiry, made after the FCM disclosed the limitations to the SEC, that the registration statement was updated to address the specific, real-time impact of the then-existing FCM limitations," said Nick Allen.

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XI, Number 314
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