On March 4, BlackRock, the sponsor of the gold ETF iShares Gold Trust (IAU), announced it had temporarily suspended issuance of new shares in the fund. The sponsor admitted it had failed to register the new shares with the SEC as exchange traded commodity funds are required to do. The snafu was due to an “administrative oversight,” it was later explained.
BlackRock was quick to add that IAU shares continued to trade without interruption in spite of the suspension. Nevertheless, the reality is that management lost administrative control over the fund and violated SEC regulations. As a consequence, BlackRock faces fines and penalties from both the SEC and state securities agencies, plus the possibility of lawsuits from shareholders for damages and interest.
Perhaps most alarming, the situation only came to light because the fund alerted the SEC—in other words, government regulators were unaware of the violation.
With watchdog agencies asleep at the wheel, the fund issued and sold $296 million of unregistered shares. This uber-blunder at IAU lays bare the fundamental hazard of using gold exchange traded funds: counterparty risks.