United States Diesel-Heating Oil Fund (UHN) Inactive
Filed: 27 Jul 12, 12:00am
July 27, 2012
VIA Electronic Mail
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: | United States Heating Oil Fund, LP Form 10-K Filed March 28, 2012 File No. 001-34016 |
Dear Ms. Borros:
This letter responds to the Securities and Exchange Commission’s (“SEC”) letter of July 17, 2012, with respect to the Form 10-K filed on behalf of the United States Heating Oil Fund, LP (“USHO”), filed with the SEC on March 28, 2012. For convenience, each of your comments is repeated below, with the response immediately following.
Comment 1
Please tell us whether your shareholders receive a Schedule K-1, which reports their allocable portion of tax items. If you provide Schedule K-1s to your shareholders, please include a risk factor in future filings to address the issues investors may face because of the complex tax treatment.
Response
Unitholders (shareholders) of USHO do receive a Schedule K-1, which reports such unitholder’s allocable portion of tax items. The following new risk factor is being included in the quarterly report on Form 10-Q for the period ended June 30, 2012 and will be added to future quarterly reports on Form 10-Q and annual reports on Form 10-K:
USHO is organized and operated as a limited partnership in accordance with the provisions of the LP Agreement and applicable state law, and therefore, USHO has a more complex tax treatment than traditional mutual funds.
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
July 27, 2012
Page 2
USHO is organized and operated as a limited partnership in accordance with the provisions of the LP Agreement and applicable state law. No U.S. federal income tax is paid by USHO on its income. Instead, USHO will furnish unitholders each year with tax information on IRS Schedule K-1 (Form 1065) and each U.S. unitholder is required to report on its U.S. federal income tax return its allocable share of the income, gain, loss and deduction of USHO. This must be reported without regard to the amount (if any) of cash or property the unitholder receives as a distribution from USHO during the taxable year. A unitholder, therefore, may be allocated income or gain by USHO but receive no cash distribution with which to pay the tax liability resulting from the allocation, or may receive a distribution that is insufficient to pay such liability.
In addition to federal income taxes, unitholders may be subject to other taxes, such as state and local income taxes, unincorporated business taxes, business franchise taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which USHO does business or owns property or where the unitholders reside. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on its investment in USHO. It is each unitholder’s responsibility to file the appropriate U.S. federal, state, local, and foreign tax returns.
Comment 2
We note that you have identified Merrill Lynch Professional Clearing Group as your initial authorized purchaser. In future filings, please identify all of your authorized purchasers.
Response
The list of authorized purchasers for USHO as of June 30, 2012 is being added to the quarterly report on Form 10-Q for the period ended June 30, 2012.
Comment 3
We note your disclosure regarding accountability levels. In future filings, please discuss whether the registrant exceeded the accountability levels during the reporting report, and if so, please discuss what actions were taken by the exchanges, if any, and how the registrant responded.
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
July 27, 2012
Page 3
Response
The following information is being added to the quarterly report on Form 10-Q for the period ended June 30, 2012 and will be added to future quarterly reports on Form 10-Q and annual reports on Form 10-K:
Impact of Accountability Levels, Position Limits and Price Fluctuation Limits. Futures contracts include typical and significant characteristics. Most significantly, the CFTC and U.S. designated contract markets such as the NYMEX have established accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment by USHO is not) may hold, own or control. The net position is the difference between an individual or firm’s open long contracts and open short contracts in any one commodity. In addition, most U.S.-based futures exchanges, such as the NYMEX, limit the daily price fluctuation for futures contracts. Currently, the ICE Futures imposes position and accountability limits that are similar to those imposed by U.S.-based futures exchanges but does not limit the maximum daily price fluctuation, while some other non-U.S. futures exchanges have not adopted such limits.
The accountability levels for the Benchmark Futures Contract and other Futures Contracts traded on the NYMEX are not a fixed ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor’s positions. The current accountability level for any one-month in the Benchmark Futures Contract is 5,000 net contracts. In addition, the NYMEX imposes an accountability level for all months of 7,000 net futures contracts for investments in futures contracts for heating oil. If USHO and the Related Public Funds exceed these accountability levels for investments in the futures contract for heating oil, the NYMEX will monitor USHO’s and the Related Public Funds’ exposure and ask for further information on their activities, including the total size of all positions, investment and trading strategy, and the extent of liquidity resources of USHO and the Related Public Funds (as defined below). If deemed necessary by the NYMEX, it could also order USHO and the Related Public Funds to reduce their aggregate net position back to the accountability level. In addition, the ICE Futures maintains the same accountability levels, position limits and monitoring authority for its heating oil contract as the NYMEX. As of June 30, 2012, USHO held a net of 53 Heating Oil Futures HO Contracts traded on the NYMEX. For the six months ended June 30, 2012, USHO did not exceed accountability levels.
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
July 27, 2012
Page 4
Comment 4
In future filings, please discuss in greater detail the position limits applicable to the registrant. Also discuss, if applicable, whether the registrant reached the position limits during the reporting period and the registrant’s investment strategy as a result of reaching those position limits.
Response
The following information is being added to the quarterly report on Form 10-Q for the period ended June 30, 2012 and will be added to future quarterly reports on Form 10-Q and annual reports on Form 10-K:
Position limits differ from accountability levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that may apply at any time, the NYMEX and the ICE Futures impose position limits on contracts held in the last few days of trading in the near month contract to expire. It is unlikely that USHO will run up against such position limits because USHO’s investment strategy is to close out its positions and “roll” from the near month contract to expire to the next month contract beginning two weeks from expiration of the contract. For the six months ended June 30, 2012, USHO did not exceed any position limits imposed by the NYMEX and ICE Futures.
On October 18, 2011, the CFTC adopted new rules, which establish position limits and limit formulas for certain physical commodity futures including Futures Contracts and options on Futures Contracts, executed pursuant to the rules of designated contract markets (i.e., certain regulated exchanges) and commodity swaps that are economically equivalent to such futures and options contracts. See “Introduction – Futures Contract and Position Limits” in this quarterly report on Form 10-Q for information regarding the Dodd-Frank Act.
Comment 5
We note your disclosure that USCF is responsible for paying the custodian fee. However, in the Custodian Agreement, it appears that USHO is responsible for this fee. Please advise. We may have further comments.
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
July 27, 2012
Page 5
Response
The Custodian Agreement has been amended as of July 20, 2012 making it clear that USCF is responsible for paying the custodian fee. The amendment will be filed as an exhibit to the quarterly report on Form 10-Q for the period ended June 30, 2012.
Comment 6
We note your disclosure on page 12 that USCF paid 1.61% of expenses through December 31, 2011. In future filings, please clarify if these expenses are the same as those USCF pays as described in the table on top of page 11. If not, in future filings, please also clarify whether USCF is contractually obligated to pay the expenses described in the table on the top of page 11.
Response
The expenses of 1.61% paid by USCF through December 31, 2011 are in addition to those expenses described in the table on page 11. Future filings, including the quarterly report on Form 10-Q for the period ended June 30, 2012, will clearly state which fees USCF is contractually obligated to pay.
Comment 7
Please tell us whether you ever need to incur costs to rebalance your portfolio to track your benchmark. If so, please include such expenses in your fee disclosure in future filings.
Response
The following information is being added to the quarterly report on Form 10-Q for the period ended June 30, 2012 and will be added to future quarterly reports on Form 10-Q and annual reports on Form 10-K:
Such fees include those incurred when purchasing Futures Contracts and options on Futures Contracts when USHO issues units as a result of a Creation Basket, as well as fees incurred when selling Futures Contracts and options on Futures Contracts when USHO redeems units as a result of a Redemption Basket. Such fees are also incurred when Futures Contracts and options on Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio.
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
July 27, 2012
Page 6
The expenses incurred will be included in the fee disclosure in the quarterly report on Form 10-Q for the period ended June 30, 2012 and will be added to future quarterly reports on Form 10-Q and annual reports on Form 10-K.
Comment 8
In future filings, please separately disclose amounts paid and amounts accrued.
Response
USHO respectfully notes that it included the referenced expense information to provide context for the general discussion of USHO’s “Business” (Item 1 of Form 10-K, which refers to the requirements of Rule 101 of Regulation S-K). USCF believes that aggregating expenses paid or incurred during a particular period provides investors with useful information about the overall fee ratio of the fund. USCF does not believe it is necessary to separate expenses actually paid during the period as opposed to being accrued; in either case, they were part of the expense ratio of the fund and provide valuable information to investors. USCF does acknowledge that a reasonable investor may want to get a sense of the fund’s future obligations resulting from accrued fees, but we note that USHO’s Statement of Financial Information in the audited financial statements includes a specific section on “Liabilities and Partner’s Capital”, where all fees for which USHO is responsible and which are payable as of the date of the particular Statement of Financial Condition are set forth. In short, we believe the current method of presentation does not violate any SEC rules, and that in its current format provides investor-friendly information.
Comment 9
We note your disclosure on pages 50 and 51 regarding factors that have impacted or are most likely to impact USHO’s ability to track its Benchmark Futures Contract. We also note your disclosure on pages 49 and 50 that highlights how USHO has underperformed the benchmark in each of the last three fiscal years. In future filings, please revise your MD&A to discuss known material trends, if any, that will continue to impact USHO’s ability to track the benchmark.
Response
The following information is being added to the quarterly report on Form 10-Q for the period ended June 30, 2012 and will be added to future quarterly reports on Form 10-Q and annual reports on Form 10-K:
Ms. Sonia G. Barros
Special Counsel
United States Securities and Exchange Commission
July 27, 2012
Page 7
USCF anticipates that interest rates will continue to remain at historical lows and therefore, it is anticipated that fees and expenses paid by USHO will continue to be higher than interest earned by USHO. As such, USCF anticipates that USHO will continue to underperform its benchmark until such a time when interest earned at least equals or exceeds the fees and expenses paid by USHO.
United States Commodity Funds LLC (the “Company”), as general partner of United States Oil Fund, LP, acknowledges that:
| • | The Company is responsible for the adequacy and accuracy of the disclosure in the filing |
| • | Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
| • | The Company may not assert staff comments as a defense to any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
If you should have any questions on the foregoing please do not hesitate to contact Heather Harker, General Counsel – United States Commodity Funds LLC at 804-894-8075 or via email at hharker@unitedstatesoilfund.
| Sincerely, |
| /s/Howard Mah |
| Howard Mah |
| Chief Financial Officer |
| United States Commodity Funds LLC |
| Cc: | Nicholas D. Gerber | |
| Heather Harker, Esq. | ||
| W. Thomas Conner, Esq. |