[Federal Register: August 19, 2008 (Volume 73, Number 161)]
[Proposed Rules]
[Page 48317-48335]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au08-30]
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FEDERAL TRADE COMMISSION
16 CFR Part 317
[Project No. P082900]
RIN 3084-AB12
Prohibitions On Market Manipulation and False Information in
Subtitle B of Title VIII of The Energy Independence and Security Act of
2007
AGENCY: Federal Trade Commission.
ACTION: Notice of proposed rulemaking; request for public comment.
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SUMMARY: Pursuant to Title VIII, Subtitle B of the Energy Independence
and Security Act of 2007 (``EISA''), the Federal Trade Commission
(``Commission'' or ``FTC'') is proposing a rule to implement Section
811 of Subtitle B prohibiting the use or employment of manipulative or
deceptive devices or contrivances in wholesale petroleum markets.\1\
The Commission invites written comments on issues raised by the
proposed Rule and seeks answers to the specific questions set forth in
Section II.L of this Notice of Proposed Rulemaking (``NPRM'').
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\1\ Section 811 is part of Subtitle B of Title VIII of EISA,
which has been codified at 42 U.S.C. 17301-17305. Hereinafter,
citations to EISA sections shall be made to the United States Code.
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DATES: Written comments must be received by September 18, 2008.
ADDRESSES: Interested parties are invited to submit written comments
electronically or in paper form. Comments should refer to ``Market
Manipulation Rulemaking, P082900'' to facilitate the organization of
comments. Comments containing material for which confidential treatment
is requested must be filed in paper form, must be clearly labeled
``Confidential,'' and must comply with Commission Rule 4.9(c).\2\
Comments should not include any sensitive personal information, such as
an individual's Social Security Number; date of birth; driver's license
number or other state identification number or foreign country
equivalent; passport number; financial account number; or credit or
debit card number. Comments also should not include any sensitive
health information, such as medical records and other individually
identifiable health information.
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\2\ The comment must be accompanied by an explicit request for
confidential treatment, including the factual and legal basis for
the request, and must identify the specific portions of the comment
to be withheld from the public record. The request will be granted
or denied by the Commission's General Counsel, consistent with
applicable law and the public interest. See Commission Rule 4.9(c),
16 CFR 4.9(c).
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Because paper mail in the Washington area, and specifically to the
FTC, is subject to delay due to heightened security screening, please
consider submitting your comments in electronic form. Comments filed in
electronic form should be submitted by using the following weblink:
(http://secure.commentworks.com/ftc-marketmanipulationNPRM/)(and
following the instructions on the web-based form). To ensure that the
Commission considers an electronic comment, you must file it on the
web-based form at the weblink(http://secure.commentworks.com/ftc-
marketmanipulationNPRM/). If this NPRM appears at (http://
www.regulations.gov/search/index.jsp), you may also file an electronic
comment through that website. The Commission will consider all comments
that regulations.gov forwards to it. You may also visit the FTC website
at (http://www.ftc.gov/os/2008/08/P082900nprm.pdf) to read the NPRM and
the news release describing it.
A comment filed in paper form should include the ``Market
Manipulation Rulemaking, P082900'' reference both in the text and on
the envelope, and should be mailed to the following address: Federal
Trade Commission, Market Manipulation Rulemaking, P.O. Box 2846,
Fairfax, VA 22031-0846. This address does not accept courier or
overnight deliveries. Courier or overnight deliveries should be
delivered to: Federal Trade Commission/Office of the Secretary, Room H-
135 (Annex G), 600 Pennsylvania Avenue, NW, Washington, DC 20580.
The Federal Trade Commission Act (``FTC Act'') and other laws the
Commission administers permit the collection of public comments to
consider and use in this proceeding as appropriate. The Commission will
consider all timely and responsive public comments that it receives,
whether filed in paper or electronic form. Comments received will be
available to the public on the FTC website, to the extent practicable,
at (http://www.ftc.gov/os/publiccomments.shtm). As a matter of
discretion, the Commission makes every effort to remove home contact
information for individuals from the public comments it receives before
placing those comments on the FTC website. More information, including
routine uses permitted by the Privacy Act, may be found in the FTC's
privacy policy, at (http://www.ftc.gov/ftc/privacy.shtm).
FOR FURTHER INFORMATION CONTACT: James Mongoven, Deputy Assistant
Director of Policy and Coordination, Bureau of Competition, Federal
Trade Commission, Market Manipulation Rulemaking, P.O. Box 2846,
Fairfax, VA 22031-0846, (202) 326-3772.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Energy Independence and Security Act of 2007
EISA became law on December 19, 2007.\3\ Subtitle B of Title VIII
of the Act prohibits market manipulation in connection with the
purchase or sale of crude oil, gasoline, or petroleum distillates at
wholesale, and reporting false or misleading information related to the
wholesale price of those products. Specifically, Section 811 prohibits
``any person'' from directly or indirectly: (1) using or employing
``any manipulative or deceptive device or contrivance;'' (2) ``in
connection with the purchase or sale of crude oil gasoline or petroleum
distillates at wholesale;'' (3) that violates a rule or regulation that
the FTC ``may prescribe as necessary or appropriate in the public
interest or for the protection of United States citizens.''\4\
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\3\ Pub. L. No. 110-140, codified at 42 U.S.C. 17001-17386.
\4\ 42 U.S.C. 17301.
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Section 812 prohibits ``any person'' from reporting information
that is ``required by law to be reported'' -- and that is ``related to
the wholesale price of crude oil gasoline or petroleum distillates'' --
to a Federal department or agency if the person: (1) ``knew, or
reasonably should have known, [that] the information [was] false or
misleading;'' and (2) intended such false or misleading information
``to affect data compiled by the department or agency for statistical
or analytical purposes with respect to the market for crude oil,
gasoline, or petroleum distillates.''\5\
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\5\ 42 U.S.C. 17302.
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Subtitle B also contains three additional sections, which address,
respectively, enforcement of the Subtitle (Section 813),\6\ penalties
for violations
[[Page 48318]]
of Section 812 or any FTC rule promulgated pursuant to Section 811
(Section 814),\7\ and the interplay between Subtitle B and existing
laws (Section 815).\8\
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\6\ Section 813 provides that Subtitle B ``shall be enforced by
the [FTC] in the same manner, by the same means, and with the same
jurisdiction as though all applicable terms'' of the FTC Act were
incorporated into and made a part of Subtitle B.
42 U.S.C. 17303.
\7\ Section 814(a) of Subtitle B provides that -- ``[i]n
addition to any penalty applicable'' under the FTC Act -- ``any
supplier that violates [S]ection 811 or 812 shall be punishable by a
civil penalty of not more than $1,000,000.'' Further, Section 814(c)
provides that each day of a continuing violation shall be considered
a separate violation.
42 U.S.C. 17304.
\8\ Section 815(a) provides that nothing in Subtitle B ``limits
or affects'' Commission authority ``to bring an enforcement action
or take any other measure'' under the FTC Act or ``any other
provision of law.'' Section 815(b) provides that ``[n]othing in
[Subtitle B] shall be construed to modify, impair, or supersede the
operation'' of: (1) any of the antitrust laws (as defined in Section
1(a) of the Clayton Act, 15 U.S.C. 12(a)), or (2) Section 5 of the
FTC Act ``to the extent that . . . [S]ection 5 applies to unfair
methods of competition.'' Section 815(c) provides that nothing in
Subtitle B ``preempts any State law.'' 42 U.S.C. 17305.
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B. Advance Notice of Proposed Rulemaking
On May 1, 2008, the Commission issued an Advance Notice of Proposed
Rulemaking (``ANPR'') that solicited comments on whether it should
promulgate a rule under Section 811, and, if so, the appropriate scope
and content of such a rule.\9\ In particular, the ANPR requested
comment on the interplay between any proposed FTC rule and other
existing federal rules prohibiting market manipulation; the scope of
certain definitions; the level of scienter necessary to establish a
violation of any proposed rule; the efficacy of the civil penalty
authority provided to the Commission in EISA; the inclusion or
exclusion of certain conduct from the scope of any proposed rule; and
the potential costs and benefits of any proposed rule.\10\ The ANPR set
a deadline of June 6, 2008, by which to submit comments.\11\ In
response to a petition from a major trade association,\12\ the
Commission extended the comment period until June 23, 2008.\13\
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\9\ FTC, Prohibitions On Market Manipulation and False
Information in Subtitle B of the Energy Independence and Security
Act of 2007, 73 FR 25614 (May 7, 2008). The ANPR was announced in a
press release and made available to the public on May 1, 2008,
available at (http://www.ftc.gov/opa/2008/05/anpr.shtm).
\10\ Id. at 25620-25624.
\11\ Id. at 25614.
\12\ Letter from the American Petroleum Institute to FTC
Secretary Donald S. Clark, (May 19, 2008), available at (http://
www.ftc.gov/os/comments/marketmanipulation/index.shtm).
\13\ FTC, Extension of Period to Submit Comments in Response to
the ANPR, 73 FR 32259 (June 6, 2008). The extension was announced in
a press release and made available to the public on May 30, 2008,
available at (http://www.ftc.gov/opa/2008/05/anprfyi.shtm).
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In response to the ANPR, the Commission received 155 comments from
interested parties, including other federal agencies, state government
agencies, industry members, trade and bar associations, academics, and
individual members of the public.\14\ The comments respond to questions
posed in the ANPR and highlight several issues of particular concern to
commenters. An overview of the major themes reflected in the comments
follows.
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\14\ Attachment A contains a list of commenters who responded to
the ANPR, together with the acronyms used to identify each commenter
in this NPRM. The full rulemaking record can be found at (http://
www.ftc.gov/ftc/oilgas/index.html), and electronic versions of the
comments can be accessed at (http://www.ftc.gov/os/comments/
marketmanipulation/index.shtm).
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The overwhelming majority of the comments submitted in response to
the ANPR were from consumers. These consumers voice concern about the
rising cost of gasoline, attributing the increase to many variables,
including: (1) OPEC control over prices;\15\ (2) price manipulation by
oil companies;\16\ (3) speculation by investors;\17\ (4) corporate
greed;\18\ (5) the decreasing value of the U.S. dollar;\19\ and (6)
increased demand from China and India.\20\ Although many of these
consumers urge the United States government, as a whole, to take action
to address gasoline prices,\21\ few expressly support a FTC market
manipulation rule.\22\ Some of the consumer commenters, although not
addressing the need for a specific market manipulation rule,
nonetheless urge the FTC to investigate the petroleum industry for
various types of alleged misconduct or to take other action to control
increasing prices.\23\
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\15\ See, e.g., Bergkamp (``The biggest problem is that the
major OPEC countries are not only determining the price by
controlling out put, they have also figured out that they can inject
millions of dollars into the futures market and manipulate the price
of oil in that capacity.''); Noga (``Since we are an exporter of
food products, the price of our exported food to OPEC members should
be tied to their oil production and prices.''); Pereira (``I feel
that prices are being manipulated by OPEC.''); A. Stark (``Why are
we allowing OPEC to get away with $125.00 per barrel of oil?'').
\16\ See, e.g., Bremer (``The big oil companies need to be
investigated for price gouging and manipulation.''); McGill (``Oil
companies should not be allowed to ship oil overseas, store it until
the price rises, and then return it to the United States. That is
manipulation.''); Phillips (``[S]ince all of the major oil companies
have made, and continue to make record profits (definition: the
monetary surplus left to a producer or employer after deducting
wages, rent, cost of raw materials, etc.) It is highly likely that
they are, together, manipulating the cost of a gallon of
gasoline.''); Love (``BIG OIL controls gasoline prices thru the
refineries which stand BETWEEN primary fuel supplies [including
biofuel] and consumers.''); Reinecke (``Here in Wichita Ks when gas
prices go up over night all stations go up in price over night, and
they say they don't talk to each other,''); Theisen (``I believe the
oil companies should be severely punished for manipulating the sale
and purchase of oil to boost the price of oil.'').
\17\ See, e.g., Barton (``There is no reason gas should be his
high, get rid of the traders and it will drop $ 3.00/ Dth.''); Gould
(``It seems like the real manipulation in fuel cost is happening in
the futures markets and not at the oil companies.''); Nichols
(``[T]he price is now purely speculative and [completely] out of
line with supply and demand. The problem will be if the price does
collapse will the government bail out the speculators and what will
it cost.''); Noga (``This like the tech stocks, housing market
bubble, is a market driven by the greed of speculators and hedge
markets.''); Parker (``OIL/GAS SPECULATION ON WALL STREET IS OUT OF
CONTROL, BECAUSE THE HIGHER THE PRICE THE MORE COMMISSION THEY
GET.''); Patel (``What has change in the last year to make the price
almost double? SPECULATION BY ANALYSTS.''); D. Smith (``As much as
60% of today's crude oil price is pure speculation driven by large
trader banks and hedge funds.''); Van Hecke (``I also feel there
needs to be regulations put in place to have some sort of control on
the way the stock traders are able to continually drive up the costs
through speculation.''). See also Greenberger (arguing that
excessive speculation, fraud, and illegal manipulation are causing
higher gasoline prices).
\18\ See, e.g., Brownstein (``The oil companies have used their
profits to line their pockets instead of putting it back into
increasing refinery & exploration.''); Nenortas (``While I am for
companies making a profit I am NOT for gluttony which the oil
companies seem to be guilty. Their costs do not justify the
outrageous prices they are demanding.'').
\19\ See, e.g., Rubinstein (``Gas/fuel prices are high because
the value of the dollar has fallen. . . .'').
\20\ See, e.g., Tanner (``Oil price rises caused from importing
from China and India. Most oil demand caused by these two countries
having 40 percent of the world's population.'').
\21\ See, e.g., Bergkamp (``[I]f any other business
[construction companies, farmers, etc.] were working in collusion in
a form of bid rigging [and fundamentally that is what is happening
with the price of oil] the Justice Department would have them in a
court so fast it would boggle the mind. But we allow the market to
be exploited with no legal recourse what so ever.''); Berman
(``[President Bush] must call in the executives of the large oil
companies who are making billions and billions in profits in the
current crisis and make them lower their prices.''); Love (``Our
government seems to be able to create a BUBBLE for just about every
economic good . . . except fuel. It can be done for fuel as well and
this will bring BIG OIL back to a levelled playing field.''); Loucks
(``Set some laws and make the oil companies abide by them. This hike
of gasoline costs is outrageous! Someone needs to be held
accountable. Please hurry!''); Noga (``Something needs to be done,
the profits are obscene, the terrorists are the oil companies.'');
A. Stark (``We need regulation and protection from the Oil Industry
. . . .'').
\22\ See, e.g., Bradley (``Put in place a new ban on market
manipulation and giving false information to the FTC or the
Department of Justice. Give the FTC the authority to levy fines up
to $1 million for each violation of market manipulation.'');
Nenortas (``IF making federal regulations that will do this on a
permanent basis and NOT be a band-aid or quick fix to this problem,
then I am all for it.'').
\23\ See, e.g., Bremer (``The big oil companies need to be
investigated for price gouging and manipulation.''); Hudecek
(``[T]he FTC should be able to regulate the price of crude oil
prices to stop all price gauging that is going on in America and in
Europe at this time. The FTC should bring the price of crude oil
back down to a reasonable price per barrel, that is under $60 a
barrel, and set a reasonable gas price for all gas stations in every
State in America . . . .''); Kas (``I want to see real action taken
against those who are stealing from the rest of us.''); Morris-Ramos
(``This is clearly price gouging by private companies and our
government needs to protect us. This is the clear mission of the FTC
and Congress.''); A. Stark (``Why hasn't the FTC investigated this
in earnest?''); Strickland (``I believe the FTC should investigate
market manipulation.''); Warner (``ENOUGH of would of, should of,
could of. Our Government NEEDS to do something NOW about these gas
prices. Don't say it can't be done because it CAN! The government
can do anything it wants to do.'').
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[[Page 48319]]
Twenty-nine industry members, associations, and other organizations
responded to the ANPR. Most organizational commenters express concern
about the prospect of a FTC rule.\24\ In support of their position,
these commenters advance a variety of arguments, including: (1) a rule
is unnecessary because there is no empirical evidence that market
manipulation is occurring;\25\ (2) a rule would be duplicative of
existing laws, including the Commodity Exchange Act (``CEA''), existing
antitrust laws, and the FTC Act;\26\ and (3) a rule could harm the
efficient functioning of petroleum markets to the detriment of
consumers.\27\ Many of the organizational commenters who express
concern about FTC rulemaking in this area advance the view that if the
Commission promulgates a rule, it should be narrowly tailored to reach
only fraudulent conduct in the marketplace.\28\ Only a few
organizational commenters affirmatively favor a FTC market manipulation
rule.\29\ A few commenters recommend specific conduct that a FTC rule
should prohibit.\30\
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\24\ Three commenters specifically argue that the FTC should not
promulgate a rule. See API at 12-16 (arguing that the Commission
should refrain from promulgating a rule); Flint Hills at 1-2, 8-11
(asserting that a rule is unnecessary in the absence of any evidence
of inefficiencies or anticompetitive behavior in the U.S. oil
refining industry); IER at 1 (arguing that existing statutes provide
FTC and other agencies ``with adequate powers to deal with
legitimately anti-competitive and/or fraudulent practices in the
petroleum and financial markets''). Many commenters, without
expressly stating whether they support a rule, urge the Commission
to consider a variety of concerns in drafting a Section 811 rule.
See, e.g., ICE at 1-2 (recommending that the Commission draft a rule
with a ``well defined jurisdictional boundary'' to avoid duplicative
enforcement); Plains at 1, 3 (recommending that the Commission craft
a rule that will ``avoid any overlap with other regulatory
regimes''); Sutherland at 8 (urging the Commission to adopt a rule
that avoids any overlap with futures trading which is the exclusive
jurisdiction of the Commodity Futures Trading Commission
(``CFTC'')); AOPL at 1 (seeking clarification from the Commission
that a Section 811 rule will not apply to crude oil and petroleum
products pipelines); CFDR at 2 (encouraging the FTC to draft a rule
that is clear and easily understood, ``advances the development of
one universal definition of price manipulation'' in the markets for
petroleum products, and does not create or alter existing
obligations among market participants); Hess at 12 (urging the
Commission to ``consider the entire spectrum of possible
consequences stemming from the contemplated rulemaking'');
Sutherland at 2, 4 (urging the Commission to avoid adopting
regulations that will have a chilling effect on legitimate market
activities). Cf. Platts at 2 (supporting a FTC rule that encourages
the voluntary reporting of data, such as price, inventory volumes,
and import/export volumes); CAPP at 2-3 (raising a concern about the
FTC's ability to construct a market manipulation rule appropriately
in the face of little empirical evidence of market manipulation).
\25\ See, e.g., API at 12-13 (stating that a Section 811 rule is
unnecessary because there is no evidence that market manipulation is
occurring or has occurred); CAPP at 2-3 (arguing that little
empirical evidence exists of market manipulation or any adverse
effects on crude oil markets); Sutherland at 3 (asserting that the
FTC has found U.S. oil markets to be generally free of manipulation
in its past investigations). See also Flint Hills at 1-2, 8-11.
\26\ See, e.g., Flint Hills at 3-4 (arguing that Section 811
``overlaps and arguably duplicates authority conferred by [Section 5
of the FTC Act]''); AOPL at 1-2 (stating that a FTC rule will
overlap with and be duplicative of other agencies' regulations). See
also ISDA at 2-3; API at 14-16.
\27\ See, e.g., IER at 1-2 (arguing that a rule could interfere
with healthy market operations, leading to higher volatility in oil
and gas prices and less efficiency in distribution); Flint Hills at
2-3 (stating that a rule would likely be harmful to the industry and
consumers); API at 16 (stating that a Section 811 rule could deter
beneficial market activity); Sutherland at 3-4 (stating that the FTC
needs to take great care not to chill legitimate market activities
by adopting rules that substitute governmentally created norms for
the rules of the marketplace); CAPP at 5 (stating that it could be
damaging to the petroleum industry to enact rules to prohibit
conduct described in the ANPR).
\28\ See, e.g., API at 2, 16-17 (recommending that any FTC rule
be drafted narrowly to avoid duplication with other laws and to
avoid deterring pro-competitive conduct); Flint Hills at 5, 8-9, 15
(stating that a rule should cover ``only conduct that contains an
element of fraud or dishonesty''); ISDA at 2-3 (urging the
Commission to adopt a rule under Section 811 that is tailored to
target manipulative schemes involving wholesale, physical petroleum
products); Muris at 13 (advocating that any rule be limited to
fraudulent and deceptive conduct). ContraNPGA at 5 (urging the FTC
to ``view its mandate broadly'' and focus ``on practices that are
not a reaction to market forces'').
\29\ See, e.g., Greenberger at 21-25 (urging the Commission to
move quickly to adopt a rule); Gregoire at 1 (recommending that the
FTC promulgate an interim rule so it can commence an investigation
into the oil and gas markets). See also NPGA at 2 (``[R]apid
increase in price levels and volatility recently . . . raise
concerns regarding potential manipulation and the need for stronger
regulatory oversight.''). See also MFA at 4-5.
\30\ See, e.g., IPMA at 3-4; TOMA at 2-3 (recommending that the
FTC treat an oil company's decision to sell only gasoline blended
with ethanol instead of unblended gasoline at the terminal rack as a
potentially manipulative practice); Navajo Nation at 3-5 (asking the
FTC to treat the denial of access by terminals and common carrier
pipelines to other suppliers as a manipulative practice); ILMA at 1
(requesting that the FTC consider as potentially manipulative a
refiner's decision to increase the price of base oils sold to others
(non-refiner blenders/marketers) at wholesale faster than the
refiner increases the retail price for its own branded finished
oils).
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Organizational commenters express differing views regarding the
appropriate legal basis for, and form of, any such rule. For example,
some commenters argue that the Commission should model its rule after
market manipulation authority under which other federal agencies, such
as the Securities and Exchange Commission (``SEC''), the CFTC, and the
Federal Energy Regulatory Commission (``FERC''), currently police
market manipulation.\31\ Other commenters disagree, questioning whether
it is appropriate to apply approaches designed for regulated industries
to the comparatively unregulated petroleum industry.\32\
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\31\ See, e.g., CFDR (advising that the FTC model its rule after
SEC, FERC, and CFTC market manipulation standards to varying
degrees); Gregoire (recommending that the FTC model a rule after
FERC and SEC market manipulation rules); Greenberger at 23 (urging
the FTC to use FERC's market manipulation rule as a template for
drafting a Section 811 rule); ISDA at 7 (encouraging the FTC to
``propose a rule that draws on the most analogous aspects of those
anti-manipulation standards already applicable to the commodities
markets, in particular those existing under the [CEA]''); MFA at 5-
6, 21-23 (arguing for the adoption of a CFTC-style anti-manipulation
regulation in the wholesale energy market because of its relevance
to the FTC's mission); CAPP at 3-4 (urging the Commission to adopt
CEA's specific intent standard); Sutherland at 7 (urging the
Commission to draw on precedent developed under the CEA). But see
ISDA at 12-14 (urging the FTC not to use FERC and SEC market
manipulation standards as models in determining what constitutes
manipulative behavior); MFA at 5-6, 19-21 (stating that ``the
absence of a securities law disclosure foundation . . . argues
against the adopting of an SEC-style anti-manipulation formulation .
. . .''). See also Flint Hills at 10 n.25, 13-14, 22-23.
\32\ See, e.g., Muris at 2 (``[T]he Commission should follow its
own clear precedents regarding when a failure to disclose is
deceptive, and avoid importing broad disclosure requirements from
highly regulated markets that simply have no place in wholesale
petroleum markets.''); PMAA at 3 (``Given the very wide gap between
regulated and unregulated behavior, existing precedents should be
looked to as informational only and not as having any binding effect
upon interpretation of rules promulgated under Section 811.'');
Flint Hills at 10 n.25, 13-14, 22-23 (stating that FERC and SEC
market manipulation statutes were promulgated in a different
regulatory context than EISA). Cf. API at 18-19, 30 (recognizing the
value of FERC and SEC approaches to an extent).
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Organizational commenters also advance several significant
suggestions regarding the elements of a cause of action that they
believe the Commission should employ in enforcing the proposed Rule. In
particular, commenters express strong views about the appropriate level
of scienter\33\ and
[[Page 48320]]
whether a price effect should be a prerequisite to a finding of
liability.\34\
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\33\ Many commenters urge the Commission to require specific
intent as a prerequisite for finding liability under Section 811.
See, e.g., ISDA at 7 (urging the FTC to require a specific intent to
manipulate prices); Muris at 11 (``In any manipulation rule, the
Commission should require specific intent, rather than relying
solely on the knowledge standard in the FTC Act.''); CFDR at 4, 13
(asserting that the FTC should require a specific intent to affect
market prices); MFA at 6, 23-25 (arguing that the Commission should
include a ``specific intent to create an artificial price'' standard
to ensure protection of legitimate commercial conduct); CAPP at 3
(recommending that the FTC adopt the intent standard set out in the
CEA); API at 28-29 (arguing that the legislative history of EISA
supports inclusion of a scienter standard); Sutherland at 7
(encouraging the Commission to follow CEA by requiring proof of
specific intent). Cf. PMAA at 4-5 (```[T]he focus is on practices
that intentionally, willfully or recklessly cause distortion in the
market.'''). But see, e.g., Flint Hills at 16 (asserting that the
Commission should apply the same standard of intent under the FTC's
existing authority to address fraud and deception). One commenter
counsels the Commission against adopting an intent requirement. NPGA
at 5 (arguing that proof of intent creates an ``impossible burden of
proof,'' which will ``ultimately waste the Commission's resources
and contribute little to the efficiency of the markets or the
wellbeing of consumers'').
\34\ Several commenters support, as an element of a Section 811
rule violation, a showing of a price effect. See, e.g., API at 23,
31-32 (stating that, as a prerequisite to finding liability, the FTC
should require a showing that manipulative conduct caused the market
price to deviate materially from the price that would have existed
but for the deception or fraud). See also ISDA at 15; Muris at 9;
CFDR at 4; Sutherland at 7. But see USDOJ (``Certainly, there should
be no requirement that one succeed in moving prices . . . the only
requirement should be an attempt to do so . . . whether successful
or not.''); NPGA at 5 (arguing that the FTC should focus ``on
practices that are not a reaction to market forces'').
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Several commenters also respond to questions and hypotheticals
presented in the ANPR about the types of conduct that might violate
EISA and any proposed market manipulation rule.\35\ Other topics that
the comments address include: possible definitions,\36\ costs and
benefits of a market manipulation rule,\37\ and appropriate penalties
for violations of EISA or any FTC rule.\38\
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\35\ See generally ABA at 6-9 (stating that the antitrust laws
should be the guide for determining when unilateral supply decisions
should be lawful or when firms may be required to provide
competitors with access to facilities); API at 46-47 (arguing that
the Commission should not draft a rule that imposes an affirmative
obligation to release inventory during a price spike); Plains at 2-5
(arguing that the decision to release inventory is complicated, and
the FTC should not substitute its judgment for others); Hess at 8-10
(arguing against imposing an affirmative obligation to release
inventory during price spikes because such an obligation would have
a negative impact on long term supply); PMAA at 6-10 (arguing
against restricting common carrier pipelines' announcements
concerning future capacity constraints); Sutherland at 6 (``To
mandate inventory releases would distort the U.S. oil markets and is
contrary to the healthy structure of the markets.''). See also AOPL
at 20-33; CAPP at 4-6; IER at 4-8; ISDA at 17-18; CFDR at 15-16.
\36\ See generally ISDA at 19 (seeking clarification of the
FTC's proposed definition of wholesale distillates products under
Section 811); CAPP at 3 (stating that the definition of market
manipulation is appropriate because it reflects the language
contained in EISA); Flint Hills at 15 (stating that the FTC's
proposed definition of market manipulation ``makes no sense''); PMAA
at 2; Sutherland at 7.
\37\ See generally API at 16 (``Without evidence of significant
`manipulative' conduct in the petroleum industry, the costs of
additional enforcement and their impact on competitive market
activity outweigh any benefit to be gained from the FTC applying
Section 811 to conduct that is already addressed by other rules.'');
Muris at 7 (``In addressing market manipulation, the potential costs
of mistakenly regulating are likely to be high because these are
well-functioning, highly competitive markets crucial to the
operation of our economy.'').
\38\ See generally API at 38 (urging the FTC to adopt Section
5(m)(1)(C) of the FTC Act as the standard for determining the amount
of civil penalties under Section 811); PMAA at 6 (``The very large
penalty should only be applied, if at all, to the very largest
entities (refiners, trading companies) who participate in the
upstream portion of crude and finished product, manufacture and
sales.'').
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C. Notice of Proposed Rulemaking Pursuant to EISA
Based on the ANPR comments and the Commission's extensive
experience studying, analyzing, and investigating the petroleum
industry, the Commission has determined to propose a rule to prevent
manipulative and deceptive conduct in the petroleum markets.\39\ The
Commission invites written comments on the proposed Rule and answers to
the questions in Section II.L, to assist it in determining whether the
proposed Rule provisions strike an appropriate balance to maximize
protections for consumers from market manipulation while avoiding the
imposition of unnecessary compliance burdens on law-abiding industry
members.
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\39\ In the ANPR, the Commission stated that this rulemaking
proceeding is governed by the Administrative Procedure Act
(``APA''), 5 U.S.C. 553, and Part 1, Subpart C, of the Commission
Rules of Practice concerning the adoption of non-Section 18 rules,
16 CFR 1.21-1.26. 73 FR 25614, 25615 n.4. One commenter, however,
asserts that this proceeding should be commenced as a rulemaking
under Section 18 of the FTC Act, 15 U.S.C. 57a, requiring, among
other things, more lengthy and detailed notice and comment
procedures. See API at 58-59. The Commission disagrees. Nothing in
the plain language of EISA requires Section 18 rulemaking, and the
use of APA rulemaking procedures is consistent with Congressional
expectations that this proceeding be conducted expeditiously.
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II. Discussion of the Proposed Rule
A. Determination to Promulgate a Rule to Proscribe Market Manipulation
In considering whether to exercise its discretionary rulemaking
authority pursuant to Section 811, the Commission relies upon several
sources of information in addition to the statute, including its
extensive background knowledge of the petroleum industry, the ANPR
comments, independent research, and consultation with sister agencies
charged with administering similar market manipulation rules. Based on
its findings, the Commission tentatively concludes that promulgating a
rule to address market manipulation in connection with the wholesale
purchase or sale of crude oil, gasoline, or petroleum distillates is
appropriate and in the public interest.\40\ This Section of the NPRM
sets forth the Commission's reasoning for the proposed Rule. The
Commission invites comment on the issues raised in this Section.
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\40\ As the Commission stated in the ANPR, the phrase ``crude
oil gasoline or petroleum distillates,'' without commas, is used in
Section 811 (as well as in the first clause of Section 812), while
the phrase ``crude oil, gasoline, or petroleum distillates'' (with
commas) is used in Section 812(3). This drafting is presumably a
non-substantive typographical error; therefore, all parts of both
sections should be read to cover all three types of products (that
is, crude oil, gasoline, and petroleum distillates). See 73 FR at
25621 n.59.
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1. The proposed Rule must meet Section 811's ``necessary or
appropriate'' standard
Section 811 states that the Commission ``may prescribe'' a rule
``as necessary or appropriate in the public interest or for the
protection of United States citizens.''\41\ Thus, the Commission may
only promulgate a rule to prohibit manipulation in the petroleum
industry if, in its discretion, it finds that a rule under EISA is
``necessary or appropriate'' and ``in the public interest or for the
protection of United States citizens.'' The Commission has tentatively
determined that promulgating a market manipulation rule narrowly
tailored to address fraudulent practices would be appropriate to ensure
that the objective of EISA is carried out, and therefore would be in
the public interest.
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\41\ 42 U.S.C. 17301.
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The Commission believes that the initial inquiry in determining
whether it should promulgate a rule requires understanding the phrase
``necessary or appropriate in the public interest or for the protection
of United States citizens.''\42\ The use of the disjunctive ``or'' in
the first clause of this phrase indicates that the Commission would be
within its mandate to promulgate a rule
[[Page 48321]]
that is either: (1) ``necessary . . . in the public interest or for the
protection of United States citizens,'' or (2) ``appropriate in the
public interest or for the protection of United States citizens.''\43\
Similarly, the Commission need only show that a rule would be either
``in the public interest'' or ``for the protection of United States
citizens.'' Thus, the Commission could proceed in its rulemaking if, at
a minimum, the endeavor is ``appropriate . . . in the public
interest.'' The Commission has determined that a rule that achieves
EISA's plainly stated purpose -- that is, the prohibition of market
manipulation in the petroleum industry -- would be appropriate.
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\42\ Some commenters address the phrase ``necessary or
appropriate'' in their comments; however, none attempt to define the
phrase. See, e.g., API at 36 (``[T]here are solid grounds to
conclude that adoption of a market manipulation rule for petroleum
wholesale markets is neither necessary nor appropriate.''); CAPP at
4 (``In order to ensure that rules are . . . necessary or
appropriate in the public interest . . . the Commission must set
objective standards as to what these concepts are and how they will
manifest themselves in reality.''). See alsoAOPL at 11-12
(``Regulation of oil [pipelines] . . . would not be `necessary or
appropriate in the public interest or for the protection of the
United States citizens.''').
\43\ 42 U.S.C. 17301 (emphasis added). The use of a disjunctive
indicates alternatives and requires that each be treated separately
unless there is clear legislative intent that indicates otherwise.
Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979) (``Canons of
construction ordinarily suggest that terms connected by a
disjunctive be given separate meanings, unless the context dictates
otherwise . . . .''). See also FCC v. Pacifica Foundation, 438 U.S.
726, 739-740 (1978); Azure v. Morton, 514 F.2d 897, 900 (9th Cir.
1975) (``As a general rule, the use of a disjunctive in a statute
indicates alternatives and requires that they be treated
separately.''); Norman J. Singer, Statutes and Statutory
Construction 21.14, at 180-182 (6th ed. rev. vol. 2002)
(``Generally, courts presume that `or' is used in a statute
disjunctively . . . .'').
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The Commission carefully considered concerns raised by
organizational commenters about the necessity or appropriateness of a
rule in determining whether to move forward in the rulemaking process.
Some of these commenters argue, for example, that petroleum markets are
competitive, and, in the absence of specific evidence of market
manipulation, the Commission should refrain from promulgating a
rule.\44\ Some point to FTC and CFTC authority to argue that any rule
would be duplicative of existing laws and lead to uncertainty and
confusion among market participants about compliance.\45\ Many
commenters also express concerns about the scope and contours of a rule
and whether any rule that the Commission promulgates would be
appropriate for petroleum markets.\46\
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\44\ See, e.g., AOPL at 18 (noting that the Commission has found
little evidence of price manipulation in previous investigations);
API at 12-14, 36; Flint Hills at 10 (``[T]he Commission lacks
evidence of `manipulation' in wholesale petroleum markets that
warrants the kind of extensive regulatory intervention that a
proposed rule could engender.''); Hess at 10-11; Muris at 2
(asserting that the petroleum industry is highly competitive). See
also Sutherland at 3 (stating that the Commission should not ``adopt
rules that substitute governmentally created norms for the rules of
the marketplace.'').
\45\ Commenters express the view that a FTC rule is unnecessary
because it would duplicate existing laws and regulations. See, e.g.,
API at 40-41 (arguing against a FTC rule that would duplicate the
existing CEA enforcement scheme and antitrust laws); Flint Hills at
8-9 (asserting that existing Commission authority under Section 5 of
the FTC Act is sufficient to protect against ``[d]isingenuous
business practices''); MFA at 17 (``FTC Rules that purport to
overlap with CFTC exclusive jurisdiction would not serve the public
interest.''). Although it is true that other agencies have market
manipulation regulations in place already, this fact was well-known
to Congress when it enacted EISA. Therefore, the Commission
disagrees with commenters that argue that a Commission rule is
unnecessary because it may be redundant with other regulatory
authority.
\46\ For a general discussion of organizational commenters'
concerns about a FTC rule, see Section I.B above.
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EISA targets manipulative and deceptive conduct in the petroleum
markets, thereby seeking to eliminate conduct which serves no
legitimate purpose and may in fact harm the market to the detriment of
market participants and consumers.\47\ In the view of the Commission, a
rule that allows the Commission to guard against conduct that
undermines the integrity of the petroleum market would be in the public
interest.\48\ The Commission notes that fraud and deception may occur
in competitive marketplaces. Further, the Commission notes that
Congress specifically authorized it to determine whether a rule would
be appropriate and in the public interest despite the existence of
other laws that potentially cover fraud or deceit.\49\ Therefore, as
the agency charged with protecting consumers and preserving the
competitiveness of markets (such as petroleum markets), the Commission
believes that it would be appropriate for it to propose a rule
targeting fraudulent or deceptive conduct in wholesale petroleum
markets under this new authority.
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\47\ Commenters recognize the negative effects of fraud and
deceit. See, e.g., Greenberger at 1 (arguing that excessive
speculation, fraud, and illegal manipulation are causing higher
gasoline prices); MFA at 1 (``Price manipulation has a corrosive
effect on the proper functioning of any market.''); API at 50 (``We
agree that the provision of false or misleading pricing information
to private reporting entities could be problematic.''); ISDA at 19
(``ISDA . . . both supports and encourages the development of
dynamic markets undistorted by manipulative trading activity.'');
Sutherland at 3 (``[O]il marketers and traders often are the first
victims of unfair business practices. They, therefore, support
efforts by Congress to deter manipulation and the use of deceptive
devices.''); Flint Hills at 18 (``[R]estrictions on disclosures that
`leave customers in the dark' may be inimical to the smooth
operations of the relevant markets. Of course, false or deceptive
reports can also raise familiar [sic] problems.''); CAPP at 1
(``CAPP recognizes that fraud and manipulation pose a potential
threat to the successful and efficient functioning of petroleum
markets in North America.'').
\48\ Some commenters opine on the meaning of the language: ``in
the public interest or for the protection of United States
citizens.'' See, e.g., CFDR at 4-5 (``The public interest and the
protection of U.S. citizens . . . are best served by the adoption of
a clear legal standard for market manipulation.'' CFDR goes on to
say that a clear legal standard ``will allow market participants to
conduct their business with a clear understanding of the relevant
legal boundaries.''); MFA at 17 (``FTC rules that purport to overlap
with CFTC exclusive jurisdiction would not serve the public
interest.''). Noting the absence of the phrase ``public interest''
from other laws the Commission enforces, Flint Hills states that
Congress must have intended that the Commission rely upon its
experience in promoting the public interest through enforcement of
the consumer protection and antitrust principles governed by Section
5 of the FTC Act. See Flint Hills at 17-18.
\49\ 42 U.S.C. 17301.
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2. SEC Rule 10b-5 provides an appropriate regulatory model on which to
base the FTC's proposed Rule
By its plain language, Section 811 declares unlawful the use of
manipulative or deceptive devices or contrivances -- in connection with
the purchase or sale of crude oil, gasoline, or petroleum distillates
at wholesale -- that violates any FTC rule prohibiting their use.\50\
As one commenter observes, ``Section 811 is not discussed in any
Senate, House, or Conference Report, nor is there any reported
Congressional debate on this provision.''\51\ Nevertheless, the
statutory language -- especially the use of the phrase ``manipulative
or deceptive device or contrivance'' -- reveals its legislative
antecedents.\52\
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\50\ 42 U.S.C. 17301. The statute itself does not describe the
manipulative or deceptive devices or contrivances that are illegal.
Rather, it vests in the FTC discretionary rulemaking authority to
identify such conduct.
\51\ ABA at 3.
\52\ As the ANPR discusses in detail, the Commission studied
SEC, FERC, and CFTC enabling statutes, and their respective
implementing regulations, and asked questions in the ANPR about
whether these existing regulatory schemes should serve as a model
for a FTC Rule. 73 FR at 25616-25618.
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In particular, it is instructive that the language that Congress
chose to frame the conduct prohibition in Section 811 is identical to
language found in Section 10(b) of the Securities Exchange Act of 1934
(``SEA''),\53\ which prohibits the use of any ``manipulative or
deceptive device or contrivance'' in contravention of such rules as the
SEC may prescribe.\54\ Congress used identical
[[Page 48322]]
language -- ``manipulative or deceptive device or contrivance'' -- when
it gave FERC anti-manipulation authority over electricity and natural
gas under the Energy Policy Act of 2005 (``EPAct 2005''). In doing so,
Congress specifically instructed FERC to define the terms ``any
manipulative or deceptive device or contrivance'' ``as those terms are
used in [SEA Section 10(b)].''\55\ The use of this language suggests
that any proposed FTC Rule should follow the contours of SEC Rule 10b-
5, promulgated by the SEC pursuant to that agency's market manipulation
authority.\56\
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\53\ 15 U.S.C. 78j(b).
\54\ See, e.g., ABA at 2 (asserting that ``Section 811 is
modeled on FERC and SEC authority to challenge deceptive conduct'');
Greenberger at 27 (``Congress modeled the FTC's new 2007 anti-
manipulation provision on 10(b) of the [SEA] and Rule 10b-5 to once
again make it clear . . . that the FTC must use the extensive
securities precedent to guide its manipulation investigations in the
petroleum markets.''); CFDR at 3 (recognizing that the language of
Section 811 is ``effectively identical to the anti-manipulation
proscriptions found in Section 10(b) . . . of the [SEA], as
amended''); Sutherland at 4 (``Congress, in fashioning Section 811,
used language similar to that used in the Energy Policy Act of 2005
. . . which in turn drew upon the securities laws . . . .'');
Gregoire at 1 (arguing that the Commission's ``authority is very
similar to the authority Congress previously gave the [FERC] . . .
which in turn was based on the statutory authority of the [SEC]'').
See also Muris at 2 (arguing that ``the statutory language and the
legislative history point to the SEC, FERC, and CFTC as relevant
regulatory models''); MFA at 19-20 (acknowledging that the
provisions of Section 811 were modeled after Section 10(b) of the
SEA, but also taking the position that the Commission should not
follow its statutory precedent). Cf. API at 18 (arguing that EISA
does not require the Commission to follow the SEC model in every
respect, despite an acknowledgment that Section 811 was modeled
after the SEA).
\55\ See 15 U.S.C. 717c-1; 16 U.S.C. 824v; FERC, Prohibition of
Energy Market Manipulation, 71 FR 4244, 4246 (Jan. 19, 2006).
\56\ 17 CFR 240.10b-5.
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Floor statements made in connection with a predecessor bill to
Subtitle B of EISA\57\ and correspondence from Congress regarding
EISA\58\ support the Commission's decision to model its proposed Rule
on SEC Rule 10b-5. Thus, the language of the statute, taken together
with other indicators of Congressional expectations, suggests that any
proposed FTC market manipulation rule should be modeled on SEC Rule
10b-5.
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\57\ Energy Emergency Consumer Protection Act of 2005, S.1735,
109th Cong. (2005). In these remarks, Senator Maria Cantwell stated
that the market manipulation provisions in that bill would ensure
``the same kind of anti-manipulation and transparency rules as those
with which electricity and natural gas industries must comply [under
the EPAct 2005].'' The FERC rules, to which the Senator refers,
similarly derive from the SEA, and target fraudulent marketplace
conduct. 151 Cong. Rec. S10238 (daily ed. Sept. 20, 2005).
\58\ An April 2008 letter to the Commission from Senators Maria
Cantwell, Olympia Snowe, Byron Dorgan, Daniel Inouye, and Gordon
Smith also supports the interpretation that EISA is designed to
provide the FTC with anti-fraud market manipulation authority
similar to that already vested in the SEC and recently given to FERC
in the EPAct 2005. Letter from Senators Cantwell, Snowe, Dorgan,
Inouye, and Smith to FTC Chairman Kovacic and Commissioners Harbour,
Leibowitz, and Rosch (Apr. 8, 2008), available at (http://
www.ftc.gov/os/comments/marketmanipulation/congress/
080414cantwell.pdf).
See EPAct 2005, 42 U.S.C. 15801-16503.
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The Commission believes that, in addition to adhering to the
mandate implied by the statutory language, there are several advantages
to modeling its proposed Rule on SEC Rule 10b-5. The Commission
believes that using an existing anti-fraud market manipulation
regulatory scheme as a model for the proposed Rule is beneficial for
market participants because it leverages the significant body of legal
precedent interpreting that scheme.\59\ This determination is
consistent with the views of some commenters who assert that SEC Rule
10b-5 provides a well-developed framework for the FTC to follow.\60\
Moreover, using an established regulatory scheme as the basis for the
proposed Rule should reduce regulatory uncertainty and thereby assure
greater compliance.
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\59\ See, e.g., Greenberger at 23, 25, 27; Gregoire at 1; CFDR
at 11, 13; SIGMA at 6.
\60\ See, e.g., Gregoire at 1; Greenberger at 23-25, 27; CFDR at
11, 13. But see CAPP at 2 (arguing that EISA was enacted in
anticipation of market abuses, not in response to them, and thus is
not analogous to SEC rules); Sutherland at 4 (arguing that SEC rules
operate in a highly regulated environment and that modeling a rule
that is aimed at the comparatively unregulated petroleum industry
after SEC rules would be inappropriate).
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The structure and scope of SEC Rule 10b-5 also provide a useful
model for the substantive prohibitions of the proposed Rule. EISA
contemplates the FTC using a new authority -- separate and apart from
antitrust law and FTC Act Section 5 authority -- to target manipulation
and deception based on the SEC anti-fraud model.\61\ By mirroring the
established SEC Rule 10b-5, the Commission believes it strikes at the
core of what EISA explicitly proscribes -- market manipulation.\62\
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\61\ As the Commission noted in the ANPR, ``nothing in
connection with this Section 811 Rulemaking, any subsequently
enacted rules, or related efforts should be construed to alter the
standards associated with establishing a deceptive practice or an
unfair practice in a case brought by the Commission.'' 73 FR at
25619 n.55.
\62\ The Commission believes this careful tailoring addresses
concerns that a new rule prohibiting market manipulation in the
petroleum industry might interfere with legitimate, pro-consumer
business behavior. See generally API at 16 (``New rules have the
potential to over-deter, discouraging beneficial market
activity.''); Sutherland at 2 (stating that the FTC must not ``deter
important and economically efficient business activities that are
fundamental to the energy markets'').
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3. The provisions of the proposed Rule appropriately prohibit
fraudulent conduct in wholesale petroleum markets
The Commission believes that an appropriate means to achieve this
objective would be to adopt largely the language and structure of SEC
Rule 10b-5 in promulgating the proposed Rule.\63\ Accordingly, the
proposed Rule contains the following conduct prohibitions. First,
Section 317.3(a) prohibits the use or employment of any ``device,
scheme, or artifice to defraud.'' Second, proposed Rule Section
317.3(b) states that it is a violation of the rule for any person to:
``make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading.'' Finally, proposed Rule Section 317.3(c) makes it illegal
for any person ``[t]o engage in any act, practice, or course of
business that operates or would operate as a fraud or deceit upon any
person.''\64\ The Commission believes that adopting the general conduct
prohibitions embodied in SEC Rule 10b-5 provides the necessary
flexibility for the Commission to adapt to changing market conditions
in enforcing its proposed Rule.\65\
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\63\ Several commenters, while not necessarily advocating a FTC
rule, appear to support a rule based on SEC Rule 10b-5. See, e.g.,
Gregoire at 1 (``The FTC should be similarly informed by the FERC
and SEC rules and model its rules on theirs.''); Greenberger at 22
(urging the FTC to model its rule after FERC's rule because FERC
resolved its ``major interpretative issues'' by ``adopting the anti-
manipulation definitions within Section 10(b) of the [SEA]''); API
at 17 (recognizing the value of FERC and SEC approaches to an
extent). See also CFDR at 3. The determination to prohibit
manipulative and deceptive conduct under the proposed Rule does not
preclude the Commission from finding that other conduct violates
EISA and any other applicable laws or rules that the Commission
enforces.
\64\ Proposed Rule 317.3(a)-(c).
\65\ Any ``laundry list'' of specifically proscribed conduct
could quickly become out of date, requiring that the Commission
frequently revisit the rulemaking process. See also Muris at 11
(``Because defining the specific deceptions that might manipulate
wholesale markets is virtually impossible, any manipulation rule
will of necessity be more general.'').
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Moreover, the Commission is not invoking the entire body of SEC law
in this rulemaking, but rather the anti-fraud provisions of SEC Rule
10b-5. Thus, the proposed Rule does not impose affirmative disclosure
or record-keeping obligations, and does not regulate supply decisions
or require that market participants provide access to terminals or
pipelines.\66\ In making this determination, the Commission considered
arguments raised by commenters who oppose the promulgation of an SEC-
style rule on the grounds that securities markets are qualitatively
different from petroleum product markets because securities markets are
subject to a significant degree of regulation.\67\ The Commission
[[Page 48323]]
believes that excluding these affirmative duties should alleviate
commenter concerns and make clear that the Commission is using only the
relevant portions of the SEC regulatory model in crafting the proposed
Rule.\68\
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\66\ See Chiarella v. United States, 445 U.S. 222, 235 (1980)
(stating that SEC Rule 10b-5 did not create a duty of disclosure;
rather, the duty to disclose was created by a fiduciary relationship
between traders).
\67\ See, e.g., PMAA at 3 (arguing that given the differences
between regulated and unregulated markets, ``existing precedents
should be looked to as informational only''); Sutherland at 4
(stating that ``as a rule'' SEC market manipulation standards are
not useful precedents for a Section 811 rule); ISDA at 12
(``Securities precedent is not illuminating with respect to how to
develop a rule to prosecute manipulation in wholesale, physical
Petroleum Products markets because there are substantial differences
between the market frameworks.''). See also API at 19-20, 30; CAPP
at 2-3.
\68\ Many commenters raise concerns about a FTC rule that would
impose affirmative duties or obligations on persons covered by the
rule. For a discussion of any potential duties or obligations
imposed by the proposed Rule, see Section II.B.4 below.
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In crafting the proposed Rule, the Commission intends to prohibit
manipulative and deceptive conduct without discouraging pro-competitive
or otherwise desirable market practices. Following the example of SEC
Rule 10b-5, the Commission believes that its proposed Rule would
contribute to well-functioning marketplaces. Markets function best when
market participants can presume that the best available information
relevant to their decision-making is not distorted.\69\ Manipulative or
deceptive conduct distorts the marketplace signals that guide resource
allocation.\70\ When market participants react to distorted market
price signals, short-term purchase and sale decisions may be altered
and long-term capital investments may be adversely influenced. Finally,
if manipulative or deceptive conduct recurs, it may increase the cost
of doing business if market participants are required to invest in
defensive measures.\71\ The Commission believes eliminating or reducing
these effects is in the public interest.
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\69\ Several commenters discuss the consequences of manipulative
or deceptive conduct on the overall health of the marketplace and
note the importance of ensuring a legitimate price discovery
process. See, e.g., Muris at 6 (``Fraudulent and deceptive conduct
undermine the market's competitive process because they impair
efficient price discovery, which is the process of incorporating
information in the market price.''); Platts at 2 (``Confidence in
price discovery processes is vital for market participants,
regulators and the public alike . . . .''); MFA at 1 (``Price
manipulation has a corrosive effect on the proper functioning of any
market.'').
\70\ In a market economy, resources are allocated to productive
activities on the basis of impersonal price signals that reflect
both consumer preferences and profit opportunities. When resources
flow to their highest valued use, social wealth is maximized.
Intentional manipulative or deceptive conduct impedes this process.
See also Milton Friedman & Rose Friedman, Free to Choose, 14-18
(Harcourt 1980); Friedrich Hayek, The Use of Knowledge in Society,
35(4) Am. Econ. Rev. 519 (1945). For example, disseminating
misinformation that is relied on by market participants may prevent
wealth-generating exchanges from taking place. If so, an opportunity
cost is imposed on society at large.
\71\ Such investments, although perceived as necessary by the
investor, are socially wasteful because they utilize resources that
otherwise might have been allocated to wealth-generating activities.
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The Commission addresses the elements of a cause of action under
the proposed Rule in Section II.E. This discussion should provide
guidance to the industry on how the Commission would enforce the
proposed Rule. The Commission would not likely act except in cases
where an entity: (1) uses a fraudulent device, scheme or artifice, or
makes a material misrepresentation or a material omission, or engages
in any act, practice, or course of business that operates or would
operate as a fraud or deceit upon any entity; (2) with scienter; (3) in
connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale.\72\ For example, false reporting to
private data reporting services or misleading announcements by
refineries, pipelines, or investment banks done with the requisite
scienter, in connection with the purchase or sale of a covered product
at wholesale, would be covered by the proposed Rule. Similarly, trading
practices in physical or futures markets would also be covered if the
conduct met all the elements of a cause of action.
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\72\ Section II.E of this NPRM also addresses whether actual
price effects should be a required element of proof.
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In sum, the Commission has paid careful attention to maximizing the
proposed Rule's benefits while minimizing its costs from both a legal
and an economic perspective. The Commission believes that the proposed
Rule, by specifically targeting manipulative or deceptive conduct, not
only achieves the goals of Section 811, but also complements the
Commission's antitrust and consumer protection missions. The Commission
seeks comments on the specific formulation of the proposed Rule, and in
particular on whether using SEC Rule 10b-5 as a model is appropriate.
B. Section 317.1 - Scope
Section 813 makes clear that the Commission possesses the same
jurisdiction and power under Subtitle B as it possesses under the FTC
Act.\73\ Because EISA does not expand or contract Commission
jurisdiction or the scope of any rule's coverage, any person to which
Commission jurisdiction under the FTC Act does not extend would also
lie outside Commission jurisdiction under the proposed Rule.
Conversely, any person currently subject to Commission jurisdiction
under the FTC Act would be covered by the proposed Rule.\74\
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\73\ ``This subtitle shall be enforced by the Federal Trade
Commission in the same manner, by the same means, and with the same
jurisdiction as though all applicable terms of the [FTC] Act (15
U.S.C. 41 et seq.) were incorporated into and made a part of this
subtitle.'' 42 U.S.C. 17303 (emphasis added).
\74\ Moreover, any person subject to Commission jurisdiction
must comply with Section 812 and with any rule promulgated under
Section 811. Several commenters asked the FTC to clarify its
proposed definition of ``person.'' See e.g., ISDA at 4 n.5; AOPL at
1.
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In response to the ANPR, the Commission received some comments
requesting that the Commission clarify the scope of the application of
any proposed rule. One commenter, AOPL, expresses the belief that
Commission jurisdiction does not extend to pipelines.\75\ Another
opines that any rule could not and should not reach any non-profits or
banks.\76\ Several suggest that any proposed rule should not, by its
terms or construction, reach futures trading activities regulated by
the CFTC, including any futures market manipulation.\77\
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\75\ AOPL at 1 (``Common carrier oil pipelines subject to the
Interstate Commerce Act (``ICA'') are exempt from the Commission's
jurisdiction under the [FTC Act] and thus are also exempt from the
Commission's jurisdiction under the EISA.''). Conversely, Navajo
Nation asserts that FERC's regulations are not directly applicable
to the crude oil market. Therefore the Commission should tailor a
rule to ``eliminate anticompetitive practices that [FERC] may have
determined are beyond its jurisdiction . . . .'' Navajo Nation at 4.
\76\ DRG at 3-4. Cf. Greenberger at 28-29 (arguing that the
Commission has authority to investigate banks for manipulation in
the crude oil markets).
\77\ See, e.g., CFTC at 2 (``[W]e urge the FTC to avoid
proposing regulatory measures that could lead to futures-market
manipulation charges based solely on the downstream effects of
futures exchange prices on off-exchange prices in physical or cash-
market transactions, and that may be inconsistent or duplicative of
CEA provisions.''); MFA at 13-14 (``But futures market manipulation
claims do involve both actual futures transactions and the core
price discovery operations of the futures markets and should be
outside the limits of Section 811 due to the CEA's exclusive
jurisdiction provision.''). See also Flint Hills at 12; Sutherland
at 8; Hess at 12 n.10; CFDR at 6 n.4.
---------------------------------------------------------------------------
As to pipelines in particular, Commission jurisdiction under
Section 5 of the FTC Act does not extend to common carriers that are
subject to the ICA and its amendments,\78\ including the ICC
Termination Act of 1994. Those acts apply to interstate rail, trucking
and busing; domestic offshore water carriage; and pipelines carrying
commodities other than water, gas, or oil.\79\ Accordingly, oil and gas
pipelines enjoy no exemption from the FTC Act and would be subject to
the proposed Rule.\80\
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\78\ 49 U.S.C. 10101-16106. Section 4 of the FTC Act defines the
```Acts to regulate commerce''' to mean, inter alia, ``subtitle IV
of title 49 . . . and all Acts amendatory thereof and supplementary
thereto.'' 15 U.S.C. 44.
\79\ 49 U.S.C. 4(c) (emphasis added).
\80\ 15 U.S.C. 45(a)(2).
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[[Page 48324]]
With respect to banks, Commission jurisdiction under Section 5 of
the FTC Act does not extend to ``banks, savings and loan institutions
described in section 57a(f)(3) of this title, [and] Federal credit
unions described in section 57a(f)(4) of this title.''\81\
Nevertheless, the Commission does have jurisdiction over entities
affiliated with or contracting with banks that are not themselves
banks.\82\ Whether any particular person would be exempt from the FTC
Act or the proposed Rule as a ``bank'' must be assessed on a case-by-
case basis.\83\
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\81\ Id.
\82\ See Minnesota v. Fleet Mortg. Corp., 181 F. Supp. 2d 995,
1000 (D. Minn. 2001).
\83\ Investment banks (e.g., Goldman Sachs and Morgan Stanley),
many of which are voluntarily regulated by the SEC, are not
necessarily ``banks'' as that term is typically defined under
traditional banking law. See 12 U.S.C. 1813(a)(1). Therefore,
whether an investment bank would be covered by the proposed FTC Rule
must be determined on a case-by-case basis.
---------------------------------------------------------------------------
As to non-profit organizations, although Commission jurisdiction
under Section 5 of the FTC Act extends to ``corporations,'' that term
does not cover any organization that does not carry on business for its
own profit or that of its members.\84\ The form of a corporation as a
``non-profit'' is not necessarily determinative, however. Organizations
with both non-profit and for-profit activities may be subject to the
FTC Act. For example, in California Dental Ass'n v. FTC,\85\ the
Supreme Court held that the FTC Act applies to anti-competitive
practices used by non-profit associations whose activities provide
substantial economic benefits to the businesses of their for-profit
members. Moreover, the Commission has asserted that its jurisdiction
over ``persons'' under Section 5 of the FTC Act extends to nonprofit
municipal corporations such as the City of New Orleans and the City of
Minneapolis.\86\ Whether any particular person would be exempt from the
FTC Act or the proposed Rule as a non-profit must be assessed on a
case-by-case basis.
---------------------------------------------------------------------------
\84\ 15 U.S.C. 44 (defining ``corporation'').
\85\ 526 U.S. 756 (1999).
\86\ See In the Matter of The City of New Orleans, 105 F.T.C. 1,
1-2 (1985); In the Matter of The City of Minneapolis, 105 F.T.C 304,
305 (1985). In each complaint, the Commission alleged that the
respondent was a ``municipal corporation'' and ``a person or
corporation within the meaning of the [FTC Act], as amended (15
U.S.C. 45).'' (emphasis added). See 105 F.T.C. at 5-6; 105 F.T.C. at
308-309. The Commission subsequently issued orders dismissing the
complaints on other grounds.
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Commenters argue that a safe harbor provision or other explicit
exemption for the futures markets is necessary to avoid an overlap with
the CFTC's exclusive jurisdiction under Section 2 of the CEA.\87\
According to commenters, including the CFTC, such an overlap
potentially would create duplicative or inconsistent regulatory
requirements and thus undermine a uniform regulatory scheme that
Congress sought to establish for the futures markets under the CEA.\88\
Several other commenters express concern that even if the Commission
could avoid inconsistent regulatory requirements, market participants
would still be unfairly burdened by duplicative enforcement.\89\
---------------------------------------------------------------------------
\87\ Section 2 of the CEA states that ``[t]he Commission shall
have exclusive jurisdiction . . . with respect to accounts,
agreements . . . and transactions involving contracts of sale of a
commodity for future delivery, traded or executed on a contract
market designated . . . pursuant to section 7 or 7a of this title''
of the CEA. See CEA 2(a)(1)(A); 7 U.S.C. 2(a)(1)(A). See e.g., MFA
at 5 (``[Requesting] that the Commission propose and adopt a safe
harbor provision or other appropriate exception from its rules
confirming that nothing in its Section 811 rules would govern or
apply . . . `with respect to accounts, agreements . . . and
transactions involving' futures and options markets and other
trading instruments which are subject to CFTC exclusive
jurisdiction.''); CFTC at 2 (``[T]he FTC might also consider
specifically excluding from a new rule the trading of futures on
registered entities under the CEA, which are within the CFTC's
exclusive purview under that statute.'').
\88\ See, e.g., MFA at 3-4 (arguing that Congress enacted the
CEA's ``exclusive jurisdiction'' provision to ensure that CFTC
regulations and the CEA would be the sole legal standards applied to
U.S. futures trading); CFTC at 1 (``The CFTC's exclusive
jurisdiction over trading in futures is based upon the concern that
futures markets remain subject to a single, federal regulatory
standard.''). See also Flint Hills at 12 (arguing that a rule
overlapping with the CFTC's broad oversight over futures trading
markets could subject market participants to ``differing standards
of conduct and multiple levels of liability''); API at 14 (``It is
unnecessary and undesirable to overlay a parallel system of FTC
regulation to address the same conduct and markets already subject
to oversight by the CFTC.'').
\89\ See, e.g., Sutherland at 8 (arguing that private parties
would be unfairly burdened by ``multiple enforcement actions by
federal agencies examining identical facts or suffer double jeopardy
in terms of fines and disgorgement orders''); ICE at 2
(``Duplicative enforcement and regulation is unduly burdensome and
could possibly deprive market participants of due process.''); NPGA
at 2 (``A flawed regulatory scheme may result in . . . penalties
being cumulative and ultimately excessive.'').
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The Commission does not believe a safe harbor provision or
exemption from the proposed Rule is warranted. CFTC authority over
manipulation relating to commodities futures markets is not exclusive
and, moreover, is separate from CFTC's exclusive authority under CEA
Section 2(a)(1)(A).\90\ The Commission believes the proper approach,
and the one courts favor, is to give full effect to all statutory
schemes that may address the conduct at issue here.\91\ Nothing in EISA
itself indicates that Congress intended to exempt conduct in the
futures markets from the reach of any rule that the Commission might
promulgate under Section 811. Accordingly, the Commission believes that
its proposed Rule proscribes manipulative or deceptive conduct in
wholesale futures markets and it would not improperly intrude upon the
jurisdiction of the CFTC or any other agency whose authority may
overlap in whole or in part with respect to such activities.\92\
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\90\ See CEA 2(a)(1)(A) (CFTC exclusive jurisdiction is not
intended to remove jurisdiction conferred to other agencies under
other laws); FTC v. Ken Roberts Co., 276 F.3d 583, 593 (D.C. Cir.
2001) (holding that the Commission's authority under the FTC Act to
investigate deceptive marketing of commodities trading courses did
not conflict with the CFTC's exclusive authority under CEA
2(a)(1)(A)); SEC v. Hopper, No. 04-1054, 2006 U.S. Dist. LEXIS
17772, at *35 (S.D. Tex. Mar. 24, 2006) (allowing the SEC to
challenge fraudulent and deceptive energy trading transactions under
Rule 10b-5, despite assertions that the CFTC and FERC had exclusive
jurisdiction to regulate commodities transactions and interstate
wholesale electricity rates, respectively). Cf. CEA 9(a)(2), 7
U.S.C. 13(a)(2) (making it unlawful for ``[a]ny person to manipulate
or attempt to manipulate the price of any commodity in interstate
commerce''); 7 U.S.C. 13b (authorizing the CFTC to issue cease and
desist orders against commodities price manipulation); United States
v. Reliant Energy Serv., 420 F. Supp. 2d 1043, 1062 (N.D. Cal. 2006)
(holding that FERC's exclusive jurisdiction to regulate wholesale
electricity markets did not bar CFTC enforcement action against
commodities price manipulation); Amaranth Advisors LLC, 120 F.E.R.C.
] 61,085; 2007 FERC LEXIS 1463, at *52 (July 26, 2007) (show cause
order) (observing that the ``CFTC has jurisdiction over trading on
its regulated exchanges [under the CEA], we have jurisdiction [under
the EPAct 2005] over certain types of natural gas and electric
markets, and where these markets are interconnected, both agencies
have jurisdiction to prohibit market manipulation.'').
\91\ See Ken Roberts, 276 F.3d at 593 (``[In] `an age of
overlapping and concurring regulatory jurisdiction,''' declining to
conclude ``that one agency may not regulate merely because another
may.'') (citations omitted).
\92\ Likewise, certain commenters urge the Commission to avoid
any overlap with FERC authority to regulate certain energy markets.
See, e.g., API at 15 n.26 (noting that a rule reaching oil pipelines
would address conduct and markets already subject to FERC
regulation); Plains at 1 (``FERC has extensive authority over oil
pipelines and the adoption of an anti-manipulation provision
applicable to these same entities by another regulatory authority
creates a risk of conflicting and inconsistent standards, with
resulting uncertainty.''); AOPL at 12, 20 (arguing that the
Commission should avoid conflicts of jurisdiction with FERC because
the cost of inconsistent and overlapping enforcement standards would
be substantial). FERC's authority with respect to price manipulation
in such markets is not exclusive, however, and would not preclude
the Commission from promulgating an anti-manipulation rule that may
reach conduct also subject to FERC's authority. See United States v.
Reliant Energy Serv., 420 F. Supp. 2d 1043 (N.D. Cal. 2006).
---------------------------------------------------------------------------
The proposed Rule is not intended to impose contradictory
requirements on regulated entities in the futures markets or otherwise.
To the extent, if any, that the proposed Rule's requirements could
duplicate requirements already
[[Page 48325]]
established by other agencies for such markets, it would not impose
additional compliance costs. Although the Commission acknowledges that
different agencies could simultaneously initiate enforcement action
with respect to the same activities, the Commission has had a
longstanding practice of coordinating its enforcement efforts with
agencies with which it shares overlapping jurisdiction.\93\ The
Commission expects that it would continue that practice here, as
feasible and appropriate, to ensure fairness to regulated entities and
to conserve enforcement resources and maximize agency efficiency.\94\
The Commission seeks additional comments on the scope of persons
covered by the proposed Rule.
---------------------------------------------------------------------------
\93\ One commenter warns that poor coordination between the
Commission and other agencies could lead to a situation wherein
``multiple agencies may pursue certain potential violations, while
other violations are left unchecked because each oversight agency
expects or desires another to take the appropriate action.'' NPGA at
2. To prevent such pitfalls of regulatory overlap, NPGA encourages
the issuance of an Executive Order that clearly draws lines of
jurisdiction among agencies. NPGA at 3.
\94\ See, e.g., PMAA at 6 (urging the formation of a standing
inter-agency task force on market manipulation charged with
coordination and information sharing tasks); ISDA at 4 (encouraging
the Commission to work with the CFTC to ensure that both agencies
implement their anti-manipulation enforcement programs in a
coordinated and efficient manner); CFDR at 6 (encouraging the
Commission to work with the CFTC and FERC to adopt a clear anti-
manipulation standard for the wholesale crude oil, gasoline and
petroleum distillates markets); ICE at 2 (``The Commission should
coordinate with FERC and the CFTC to define their respective roles
in the energy markets.''); SIGMA at 10 (urging the Commission to
coordinate its present rulemaking with the CFTC to ``ensure that
regulated parties are governed appropriately''); MFA at 22 (stating
the Commission could avoid duplicative efforts if it developed a
formal or informal arrangement to coordinate investigatory
activities and even enforcement actions with the CFTC); Sutherland
at 8 (urging the Commission and the CFTC to ``develop clear rules as
to which agency will assume jurisdiction when the futures and
financial market conditions are not in issue'').
---------------------------------------------------------------------------
C. Section 317.2: Definitions
The proposed Rule sets forth five definitions, adding precision to
the following terms used in EISA: ``crude oil;'' ``gasoline;''
``person;'' ``petroleum distillates;'' and ``wholesale.'' The proposed
definitions establish the scope of the proposed Rule's coverage and
provide guidance as to the Commission's intended enforcement of the
proposed Rule. It is important to note, however, that Section 811
prohibits manipulative or deceptive devices or contrivances ``in
connection with'' the purchase or sale of the defined commodities at
wholesale. As discussed in Section II.E.3 below, the proposed Rule
would also reach manipulative conduct that extends beyond the defined
terms if that conduct directly or indirectly impacts wholesale prices
for the covered products.\95\ The Commission solicits comments on these
proposed definitions, as well as any alternative or additional
definitions, or other comments on this Section of the proposed Rule.
---------------------------------------------------------------------------
\95\ The Commission does not believe, as some commenters argue,
that the terms in Section 811 preclude the Commission from reaching
supply decisions or services. See, e.g., API at 25-26 (urging the
Commission to avoid construing the language of Section 811 to apply
to supply decisions unconnected with a wholesale transaction); AOPL
at 10 (arguing that EISA does not expressly cover ``transportation
and related services provided by oil pipelines'').
---------------------------------------------------------------------------
1. Section 317.2(a): Crude oil
The proposed Rule is intended to capture the direct or indirect use
or employment of any manipulative or deceptive device or contrivance in
connection with the wholesale purchase or sale of enumerated petroleum
products, including crude oil. Section 317.2(a) of the proposed Rule
defines ``crude oil'' to mean: ``the mixture of hydrocarbons that
exist: (1) in liquid phase in natural underground reservoirs and which
remain liquid at atmospheric pressure after passing through separating
facilities, or (2) as shale oil or tar sands requiring further
processing for sale as a refinery feedstock.'' As defined, ``crude
oil,'' includes liquid crude oil and any hydrocarbon form that can be
processed into a refinery feedstock. ``Crude oil'' does not include
natural gas, natural gas liquids, or non-crude refinery feedstocks.
2. Section 317.2(b): ``Gasoline''
The proposed Rule also covers the use or employment of any
manipulative or deceptive device or contrivance in connection with the
wholesale purchase or sale of ``gasoline.'' Section 317.2(b) of the
proposed Rule defines ``gasoline'' to mean: ``(1) finished gasoline,
including, but not limited to, conventional, reformulated, and
oxygenated blends, and (2) conventional and reformulated gasoline
blendstock for oxygenate blending.'' The proposed definition of
``gasoline'' is intended to capture those commodities regularly traded
as finished products or as products requiring only oxygenate blending
to be finished.
Manipulative or deceptive conduct involving non-petroleum based
commodities that directly or indirectly affect the price of gasoline
(e.g., ethanol, reformate, or alkylate that may be blended into the
finished product) may be the subject of Commission enforcement under
the proposed Rule.\96\ For example, although ethanol is excluded from
the definition of ``gasoline,'' the Commission believes that
manipulation of ethanol may be covered under the proposed Rule where
changes in ethanol prices directly or indirectly affect wholesale
gasoline prices.
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\96\ Two commenters express concern about practices involving
ethanol. TOMA at 2-3; IPMA at 2-3. But see ISDA at 19 (encouraging
the Commission to ``exclude non-petroleum based ethanol products
from the definition of petroleum distillates'').
---------------------------------------------------------------------------
3. Section 317.2(c): ``Person''
The proposed Rule makes it unlawful for any ``person'' to engage in
manipulative or deceptive conduct in connection with the wholesale
purchase or sale of the enumerated petroleum products. Section 317.2(c)
defines the term ``person'' to mean: ``any individual, group,
unincorporated association, limited or general partnership,
corporation, or other business entity.'' This definition is identical
to that used in other Commission rules,\97\ and is consistent with the
jurisdictional reach of the FTC Act.\98\
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\97\ See, e.g., Telemarketing Sales Rule, 16 CFR Part 310;
Disclosure Requirements and Prohibitions Concerning Franchising, 16
CFR Part 436.
\98\ 73 FR at 25616 n.14. For a discussion of comments submitted
on the scope of the application of the proposed rule, see Section
II.B.
---------------------------------------------------------------------------
4. Section 317.2(d): ``Petroleum distillates''
The proposed Rule also covers the use or employment of a
manipulative or deceptive device or contrivance in connection with the
wholesale purchase or sale of ``petroleum distillates.'' Section
317.2(d) of the proposed Rule defines ``petroleum distillates'' to
mean: ``(1) jet fuels, including, but not limited to, all commercial
and military specification jet fuels, and (2) diesel fuels and fuel
oils, including, but not limited to, No. 1, No. 2, and No. 4 diesel
fuel, and No. 1, No. 2, and No. 4 fuel oil.''
``Petroleum distillates'' include the middle distillate refinery
streams from heavy fuel oils to lighter products such as on-road
diesel, heating oil, and kerosene-based jet fuels. Similar to the
Commission's proposed definition of ``gasoline,'' the definition of
``petroleum distillates'' is limited to finished fuel products, other
than ``gasoline'' produced at a refinery or blended in tank at a
terminal. The proposed definition of ``petroleum distillates'' also
responds to the request of ANPR commenters that the Commission
[[Page 48326]]
specifically define the term ``petroleum distillates'' more
precisely.\99\
---------------------------------------------------------------------------
\99\ See, e.g., MFA at 2 n.2 (encouraging the Commission to
define the term ``petroleum distillate''); API at 23 n.42 (proposing
that the definition of ``petroleum distillates'' include diesel,
kerosene, jet fuel, and home heating oil); ISDA at 19 (proposing
that the definition of ``petroleum distillates'' include diesel,
home heating oil, and jet fuel).
---------------------------------------------------------------------------
5. Section 317.2(e): ``Wholesale''
As previously noted, the proposed Rule prohibits the use or
employment of a manipulative or deceptive device or contrivance in
connection with the wholesale purchase or sale of enumerated petroleum
products -- crude oil, gasoline, and petroleum distillates. The
proposed Rule defines the term ``wholesale'' to mean: ``purchases or
sales at the terminal rack level or upstream of the terminal rack
level. Transactions conducted at wholesale do not include retail
gasoline sales to consumers.''
This definition is intended to make it clear that the proposed Rule
would apply to any conduct that directly or indirectly affects market
prices of an enumerated petroleum product at the terminal rack level or
upstream of the terminal rack level.\100\ The proposed definition of
``wholesale'' also makes explicit that the proposed Rule does not apply
to ordinary sales of gasoline or other covered products to consumers at
gasoline stations or other retail establishments.
---------------------------------------------------------------------------
\100\ See, e.g., CFDR at 3 n.1; PMAA at 4-5.
---------------------------------------------------------------------------
The Commission disagrees with commenters that define wholesale to
exclude transactions at the terminal rack level. API, for example,
asserts that wholesale transactions should not include terminal rack
transactions, Dealer Tankwagon sales to dealers, and other terminal-
level sales.\101\ The Department of Energy's Energy Information
Administration (``EIA''), however, defines a ``wholesale price'' to
include rack prices.\102\ Moreover, a common definition of
``wholesale'' is ``the sale of goods in quantity, as to retailers or
jobbers, for resale.''\103\ Accordingly, the Commission believes it is
appropriate for the proposed Rule to cover transactions at the terminal
level.
---------------------------------------------------------------------------
\101\ API at 24-25. See also PMAA at 4-5 (urging the Commission
to exclude activities that occur at the terminal rack level).
\102\ (http://www.eia.doe.gov/glossary/glossary_w.htm).
\103\ (http://dictionary.reference.com/browse/wholesale).
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D. Section 317.3: Prohibited Practices
The Commission intends its proposed Rule to prohibit manipulative
or deceptive conduct in connection with the purchase or sale of crude
oil, gasoline, or petroleum distillates at wholesale. Specifically,
Section 317.3 states:
It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale,
(a) To use or employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of business that
operates or would operate as a fraud or deceit upon any person.
1. Section 317.3(a): Device, scheme, or artifice to defraud
Section 317.3(a) prohibits the use or employment of any ``device,
scheme, or artifice to defraud.'' As noted before, this language is
derived from SEA Section 10(b) and SEC Rule 10b-5. It is intended to be
a broad anti-fraud provision that will enable the Commission to police
all forms of fraud and manipulation that affect wholesale petroleum
markets. At the same time, the term ``fraud'' is not intended to cover
every act that happens to affect a wholesale market for petroleum.
Rather, as discussed in greater detail in the required elements section
of this NPRM, it covers intentional acts that obstruct or impair
wholesale petroleum markets.\104\ Determining whether specific conduct
constitutes fraud is a question of fact that requires a case-by-case
determination in light of all the circumstances.
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\104\ See, e.g., Dennis v. United States, 384 U.S. 855, 861
(1966) (noting that fraud within the meaning of a statute need not
be confined to the common law definition of fraud: any false
statement, misrepresentation or deceit may suffice).
---------------------------------------------------------------------------
2. Section 317.3(b): False material facts and omissions of material
fact
Section 317.3(b) of the proposed Rule prohibits covered entities
from misrepresenting, and in some instances omitting, material
information in a wholesale petroleum market. Consistent with securities
law, a fact is material if there is a substantial likelihood that a
reasonable market participant would consider it in making its decision
to transact because the material fact significantly alters the total
mix of information available.\105\ As the Supreme Court has stated,
``[t]he role of the materiality requirement is . . . to filter out
essentially useless information that a reasonable investor would not
consider significant, even as part of a larger `mix' of factors to
consider in making his investment decision.''\106\ Thus, it is often
not enough simply to show that a particular statement is false or
incomplete if the misrepresented fact is otherwise insignificant.\107\
However, under securities law precedent, it is not necessary to prove
that an investor would have acted differently if he or she had known
the actual truth of the matter.\108\
---------------------------------------------------------------------------
\105\ TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)
sets forth the ``total mix'' or ``substantial likelihood'' test of
materiality: a substantial likelihood that the disclosure of the
omitted fact would have been viewed by a reasonable investor as
having significantly altered the total mix of information made
available. Accord Basic, Inc. v. Levinson, 485 U.S. 224, 231-2
(1988) (adopting TSC Indus. test for materiality in Section 10(b)
and Rule 10b-5 context).
\106\ Basic, Inc. 485 U.S. at 234.
\107\ Id. at 238.
\108\ See Folger Adam Co. v. PMI Indus., Inc., 938 F.2d 1529,
1534 (2d Cir. 1991), cert. denied, 502 U.S. 983 (1991).
---------------------------------------------------------------------------
a. Misrepresentations of material fact
One type of misrepresentation of material fact captured by the
proposed Rule is the reporting of false or misleading information to
government agencies, to third-party reporting services, and to the
public through corporate announcements. Many commenters agree that this
type of behavior is problematic because industry participants rely on
such market information to conduct business transactions.\109\ For
example, false or deceptive announcements by refiners or pipelines, in
particular, are likely to have an adverse impact on the market and the
pricing of petroleum products, thereby harming market participants and
ultimately consumers, because of the close attention paid to even
slight changes in supply or inventory. Similarly, the reporting of
false or misleading information to private data reporting services may
have an impact on market prices and supply decisions.\110\
---------------------------------------------------------------------------
\109\ API at 50; Plains at 4; PMAA at 7 (urging the Commission
to prohibit the dissemination of false or misleading information
made with the intent to defraud).
\110\ Congress recognized the importance of truthful reporting
by adopting Section 812 of EISA, which prohibits false reporting to
the government. 42 U.S.C. 17302. See Platts at 2 (``Confidence in
price discovery processes is vital for market participants,
regulators and the public alike . . . .'').
---------------------------------------------------------------------------
b. Omissions of material information
Section 317.3(b) imposes no general duty upon covered entities to
disclose information such as cost and volume data. Nonetheless, Section
317.3(b) prohibits omissions of material fact that
[[Page 48327]]
are necessary to ensure that a previously made statement is not
misleading.\111\ Accordingly, there may be a violation of Section
317.3(b) if a covered entity voluntarily provides information -- or is
compelled to provide information by statute, order, or regulation --
but then fails to disclose a material fact, thereby making the
information provided misleading.
---------------------------------------------------------------------------
\111\ Based on securities law precedent, the relevant time
period for determining materiality is at the time of the statement
or omission, and not in hindsight. See Ganino v. Citizens Utils.
Co., 228 F.3d 154, 165 (2d Cir. 2000).
---------------------------------------------------------------------------
3. Section 317.3(c): Conduct operating as a fraud or deceit
Section 317.3(c) of the proposed Rule prohibits any act, practice,
or course of business that ``operates or would operate as a fraud or
deceit.'' This provision, also modeled after SEC Rule 10b-5, is
intended to be a catch-all provision that prohibits any other conduct
that constitutes a fraud on wholesale petroleum markets.
In proposing this language -- ``operates as a fraud'' -- the
Commission is mindful of objections raised to the identical language
used in the FERC market manipulation rulemaking proceeding. A few
commenters to FERC's proposed rule questioned whether the phrase
``would operate as a fraud'' implied that no scienter is required, and
some urged FERC specifically to add a scienter requirement to this
language in the FERC rule.\112\ Following FERC's analysis, the
Commission stresses that the phrase ``would operate as a fraud'' is to
be read consistently with securities law precedent, meaning that there
can be no law violation without a showing of scienter.\113\ Commenters
to the FERC proceeding also questioned whether this language in the
FERC rule is necessary in light of the anti-fraud language in the first
section of the FERC rule, which is the same language used in proposed
Rule Section 317.3(a).\114\ FERC noted in its final rule that the SEC
brings numerous cases under this language in SEC Rule 10b-5, and
removing this language from the FERC rule would ``create uncertainty by
distinguishing the final rule from SEC Rule 10b-5 as to render
analogous securities law precedent inapplicable.''\115\ That same
reasoning applies here as well. Consequently, the Commission has
tentatively decided to include subsection (c) (prohibiting conduct
operating as a fraud or deceit) in the proposed Rule.
---------------------------------------------------------------------------
\112\ 71 FR at 4252.
\113\ See id.
\114\ Id.
\115\ Id.
---------------------------------------------------------------------------
4. Section 317.3 imposes no affirmative duties or obligations upon
covered entities
Based upon the comments and its own experience, the Commission
chooses at this time not to propose any specific conduct obligations,
such as a duty to supply, provide access, or disclose. The Commission
in the ANPR requested comment on whether specific types of conduct
should be prohibited by an anti-manipulation rule. In response,
commenters generally oppose requiring specific conduct standards and
focus their comments instead upon whether there should be a duty to:
(1) supply product;\116\ (2) provide access to terminals or
pipelines;\117\ or (3) disclose information.\118\ The Commission agrees
with commenters that the market is generally the best determiner of
supply and demand decisions. The Commission does not, however,
foreclose the possibility that facts and circumstances may lead it to
find that a decision to withhold supply or access that otherwise meets
the requirements of the proposed Rule violates the proposed Rule.
---------------------------------------------------------------------------
\116\ Several commenters state that a firm's supply decisions
could be considered manipulative or deceptive, but only under
limited circumstances. For example, IER recommends that the
Commission reach supply decisions only if they are fraudulent, but
it does not recommend new rules. IER at 4. Sutherland asserts that
the only circumstance in which a firm's market supply decisions
could be considered manipulative is if there is evidence of both ``a
specific intent to manipulate a properly defined market [which the
Commission can properly define, ``given its long experience under
the antitrust laws.''] and the power to do so.'' Sutherland at 5 &
n.9. Likewise, ISDA states that a rule should reach only supply
decisions involving intentional deceptive or anticompetitive conduct
resulting in manipulated prices. ISDA at 17.
By contrast, many commenters oppose any attempt to regulate
supply decisions. ABA, Flint Hills, and API contend that regulation
of supply decisions should be beyond the authority of Section 811.
ABA at 6-7; API at 47. See also Flint Hills at 19 (``The idea that
the Commission can regulate business decisions about how much
petroleum to sell, to whom to sell it, and at what price is
misguided and potentially dangerous.''); Plains at 2-3 (FTC should
not impose a duty to supply). ABA asserts that the antitrust laws
are the best vehicle for determining the circumstances in which
unilateral supply decisions should be lawful or unlawful. ABA at 6-
7. Moreover, ABA, API, and Flint Hills suggest that it would be
difficult for the Commission to regulate such complex supply
decisions. ABA at 6-7; API at 43-44; Flint Hills at 20.
Similarly, several commenters assert that the Commission should
not regulate supply decisions after natural disasters or require
firms to release inventory during price spikes. IER, Flint Hills,
ABA, and API describe the need for markets to respond freely to
natural disasters. IER at 8; Flint Hills at 21; ABA at 7; API at 42-
43. ABA and API note the aftermath of Hurricanes Katrina and Rita as
an example of the petroleum industry's quick response to a product
shortage after a natural disaster. They assert that high prices were
short-lived due to the industry's quick response. ABA at 7 n.20; API
at 42-43.
\117\ Several commenters, API, AOPL, and Plains, oppose any rule
imposing a duty to provide access to terminals or pipelines, because
a terminal or common carrier pipeline operator may have legitimate
business reasons for denying access to third parties, or because
FERC already regulates such access and terms of access. API at 15
n.26, 51-52; AOPL at 25-27; Plains at 3. By contrast, Navajo Nation
contends that a denial of pipeline access or to ``exchange
transportation'' can result in an artificial limitation on a crude
producer's ability to reach refineries, which may depress prices,
thereby reducing output and discouraging investment to expand crude
production. Navajo Nation proposes that the Commission adopt a rule
``prohibiting an owner-operator of an interstate pipeline from
denying a request for either actual physical transportation or
exchange transportation on the pipeline when the owner-operator or
its affiliate is an actual or potential purchaser or consumer of the
crude oil supplied by the requesting party,'' unless the owner-
operator can provide an enumerated defense. Navajo Nation at 5-7.
\118\ Some commenters observe that the SEC has broad authority
to regulate the sale of and trade in securities, including imposing
disclosure requirements. They voice concern that, by basing the
proposed Rule on Section 10(b) and Rule 10b-5, the Commission is
adopting the SEC's disclosure requirements as well. Although the
proposed Rule is based on SEC law, the Commission is invoking only
the SEC's anti-fraud provisions, not the entire body of SEC law in
the proposed Rule. In a similar vein, the Commission chooses not to
include any record-keeping requirement in the proposed Rule. See,
e.g., API at 20 (arguing that the Commission ``should not create new
disclosure obligations similar to those imposed on securities market
participants by SEC regulations'').
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The Commission seeks comments on the foregoing, and specifically on
the use of the SEC 10b-5 Rule as a model for the conduct prohibitions
in the proposed Rule.
E. Elements of Proof Under a Rule Promulgated Pursuant to EISA
The Commission believes that clarifying the elements of a violation
under the proposed Rule will reduce regulatory uncertainty and assure
greater compliance. In doing so, the Commission has looked to SEC
precedent for guidance in the application of the proposed Rule. The
Commission has determined that it would not likely act except in cases
where an entity: (1) uses a fraudulent device, scheme or artifice, or
makes a material misrepresentation or a material omission, or engages
in any act, practice, or course of business that operates or would
operate as a fraud or deceit upon any entity; (2) with scienter; and
(3) in connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale.
These elements track the elements that courts have prescribed under
SEC
[[Page 48328]]
Rule 10b-5.\119\ Specifically, in enforcement actions under Rule 10b-5,
the SEC must show: (1) a material misrepresentation; (2) in connection
with the purchase or sale of a security; (3) scienter; and (4) use of
the jurisdictional means.\120\ The SEC does not need to prove investor
reliance, loss causation, or damages (or harm)\121\ because ``the
[SEC's] duty is to enforce the remedial and preventive terms of the
statute in the public interest, and not merely to police those whose
plain violations have already caused demonstrable loss or
injury.''\122\
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\119\ The elements are also similar to those that FERC adopted
for its final market manipulation rule. See 71 FR at 4253.
\120\ Geman v. SEC, 334 F.3d 1183, 1192 (10th Cir. 2003); SEC v.
C. Jones & Co., 312 F. Supp. 2d 1375, 1379 (D. Colo. 2004); SEC v.
Autocorp Equities, Inc., 292 F. Supp. 2d 1310, 1318 (D. Utah 2003);
SEA, 10(b), 15 U.S.C. 78j(b); 17 CFR 240.10b-5.
\121\ SEC v. Credit Bancorp, Ltd., 195 F. Supp. 2d 475, 490-91
(S.D.N.Y. 2002) (citing SEC v. North Am. Research & Dev. Corp., 424
F.2d 63, 84 (2d Cir. 1970)). See also SEC v. Todt, 2000 U.S. Dist.
LEXIS 2087, at *27 (S.D.N.Y. Feb. 25, 2000), aff'd, 2001 U.S. App.
LEXIS 6042 (2d Cir. 2001); SEC v. Norton, 1997 U.S. Dist. LEXIS
15167, at * 9 n.2 (S.D.N.Y. Oct. 3, 1997); 71 FR 4244, 4253; 3
Thomas Lee Hazen, Treatise on the Law of Securities Regulation 12.1
(5th ed. 2005) (``[A] successful government prosecution does not
depend on a showing the price was actually driven above or below the
security's fair value. It is sufficient to establish that the
manipulator engaged in conduct calculated to artificially affect the
security's price. However, in the context of private suit, an actual
effect on price must be shown.'' (emphasis added)).
\122\ SEC v. Credit Bancorp, Ltd., 195 F. Supp. 2d at 491
(quoting Berko v. SEC, 316 F.2d 137, 143 (2d Cir. 1963), and citing
SEC v. North American Research & Dev. Corp., 424 F.2d 63, 84 (2d
Cir. 1970) (reliance not an element of a Rule 10b-5 claim in the
context of an SEC proceeding)). Similarly, the government need not
demonstrate specific reliance by the investor in a criminal
prosecution for securities fraud, although it must show that the
scheme at issue had some impact on the investor. See United States
v. Ashdown, 509 F.2d 793, 799 (5th Cir. 1975); United States v.
Schaefer, 299 F.2d 625, 629 (7th Cir. 1962). Although reliance, loss
causation, and damages are not necessary for a violation of the
proposed Rule, the Commission, like FERC, has determined that these
elements will inform the assessment of any remedies, such as
disgorgement or civil penalties, that may be appropriate under the
circumstances. See 71 FR at 4253 n.102.
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1. The first element is a showing of manipulative conduct
Under the first element, the Commission would need to show a
completed manipulative or deceptive act. A manipulative or deceptive
act is one that injects information that is materially false,
misleading, or deceptive into the marketplace. For example, providing
information that is false or misleading to companies that report
details of transactions to the industry, such as price reporting
services, would satisfy this element. Uncompleted acts would not be
sufficient, however. For example, preparing false or misleading data
for a reporting service but not actually transmitting it would not
likely satisfy this element. Preparing a public announcement containing
false or misleading information about sales or available supplies --
but not actually making the announcement -- also would not likely
satisfy this element.
2. The second element is a showing of scienter
Under the second element, the Commission would need to show
scienter.\123\ As discussed below, a scienter requirement parallels
securities law precedent\124\ and would help to ensure that the
proposed Rule does not chill competitive behavior. Several commenters
support such a requirement.\125\
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\123\ Although not explicitly in its rule, FERC included an
intent requirement in its interpretation of its rule, noting that
``[t]he final rule is not intended to regulate negligent practices
or corporate mismanagement, but rather to deter or punish fraud in
wholesale energy markets.'' 71 FR at 4245-4246. See also, e.g.,
SIGMA at 6 (asserting that any rule proposed under Section 811, like
the FERC rule, ``cannot `regulate negligent practices or . . .
mismanagement but rather [are meant] . . . to deter or punish
fraud.''').
\124\ Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct.
2499, 2507 (June 21, 2007) (quoting Ernst & Ernst v. Hochfelder, 425
U.S. 185, 193-194 & n.12 (1976)); Ernst & Ernst, 425 U.S. at 197. In
Ernst & Ernst, the Court continued that the terms ```manipulative,'
`device,' and `contrivance' . . . make unmistakable a congressional
intent to proscribe a type of conduct quite different from
negligence.'' Ernst & Ernst, 425 U.S. at 199. See also Schreiber v.
Burlington Northern, Inc., 472 U.S. 1, 6-7 (1985); Santa Fe Indus.,
Inc. v. Green, 430 U.S. 462, 476 (1977). See, e.g., API at 28
(stating that `manipulative' and `deceptive,' as found in SEA
Section 10(b), are generally understood to denote conduct that is
deliberately intended to deceive); ISDA at 7-8 (arguing that through
Section 10(b), ``Congress intended to prohibit only knowing or
intentional misconduct''); CFDR at 13 (arguing that Section 10(b)
does not embrace a lesser standard than specific intent).
\125\ See, e.g., API at 27 (urging the Commission to adopt a
specific intent standard); CAPP at 3 (stating ``that intent or state
of mind should be made an essential element of prohibited
conduct''); ISDA at 7 (urging the Commission to require specific
intent); CFDR at 7 (``Manipulation should require proof of
intentionally or recklessly deceptive conduct.''); SIGMA at 3
(stating that any Section 811 rule ``must have a strict scienter
requirement''); Muris at 11 (``In any manipulation rule, the
Commission should require specific intent . . . .''); PMAA at 4
(encouraging the Commission to include a scienter requirement). But
see, e.g., NPGA at 4-5 (arguing that the rule should not include a
scienter requirement).
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As an initial matter, the conduct addressed by Section 811 -- use
or employment of a manipulative or deceptive device or contrivance --
is substantially similar to the conduct prohibited by Section 10(b) of
the SEA.\126\ The Supreme Court has determined that this Section 10(b)
language connotes ``intentional or willful conduct that is designed to
deceive or defraud,'' and has concluded, therefore, that a violation of
SEA Section 10(b) and Rule 10b-5 requires scienter; that is, ``a mental
state embracing intent to deceive, manipulate, or defraud.''\127\ As
several commenters argue, SEA Section 10(b) provides the most directly
relevant precedents for analyzing the market manipulation standard of
Section 811.\128\
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\126\ See, e.g., SIGMA at 6 (``[T]he Commission's authority
rests on identical language to that of [Section] 10(b) . . . .'');
API at 17 (arguing that Section 811's prohibitive language is
derived from Section 10(b)); CFDR at 3 (``[T]he language of Section
811 is effectively identical to the anti-manipulation proscriptions
found in Section 10(b) . . . .'').
\127\ Tellabs, Inc., 127 S.Ct. at 2507 (quoting Ernst & Ernst,
425 U.S. at 193-194 & n.12); accord e.g., API at 2, 28-29.
\128\ Moreover, the legislative materials cited above support
the view that when Congress enacted Section 811, it chose this
language in order to encourage the Commission to incorporate the
scienter requirement into any rule promulgated under Section 811.
See, e.g., SIGMA at 4 (``As it regards [Section] 811 of EISA,
Congress plainly chose language that it has previously used in the
context of the securities laws, knowing that the Court implies such
usage to connote a strict scienter requirement.''); ISDA at 7 (``In
enacting Section 811 . . . Congress used the same language . . .
that it has used in other contexts and that courts consistently have
interpreted to require scienter . . . .''); API at 17-18 (arguing
that Congress made a ``conscious decision to model Section 811'' on
the precedents of Section 10(b) and the EPAct 2005).
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Moreover, the Commission believes a showing of recklessness would
satisfy the scienter element.\129\ This proposal is consistent with the
legal and regulatory precedent governing SEC Rule 10b-5. As the Supreme
Court has noted, ``[e]very Court of Appeals that has considered the
issue [of civil liability under SEA Section 10(b) and Rule 10b-5] has
held that a plaintiff may meet the scienter requirement by showing that
the defendant acted intentionally or recklessly, though the Circuits
differ on the degree of recklessness.''\130\
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\129\ Some commenters note that, although a recklessness
standard makes sense in the highly regulated securities markets
characterized by fiduciary duties imposed on brokers and issuers and
by a variety of disclosure obligations, it should not suffice to
satisfy the scienter requirement with respect to transactions in
physical commodities markets such as petroleum wholesale markets
that lack similar disclosure obligations and fiduciary duties. See,
e.g. API at 30 (``Importing a `recklessness' standard from the
highly regulated securities markets into unregulated petroleum
wholesale markets would create new market uncertainty.''); ISDA at 9
(stating that a recklessness standard ``is not appropriate in the
wholesale, physical Petroleum Products markets . . . .''). See also,
e.g., SIGMA at 5 (arguing that allowing recklessness to satisfy the
scienter requirement of Section 811 would ``[make] the rule an open
ended invitation to litigate any grievance'').
\130\ Tellabs, Inc., 127 S. Ct. at 2507 n.3 (citing Ernst &
Ernst, 425 U.S. at 194 n.12); Ottman v. Hunger Orthopedic Group,
Inc., 353 F.3d 338, 343 (4th Cir. 2003) (collecting Court of Appeals
cases). Note, however, the Supreme Court has reserved the question
whether reckless behavior is, in fact, sufficient for civil
liability under SEA Section 10(b) and Rule 10b-5. See Tellabs. Inc.,
127 S. Ct. at 2507 n.3.
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[[Page 48329]]
Indeed, the Courts of Appeals have adopted a number of different
formulations as to precisely what constitutes recklessness. Thus, for
example, the Court of Appeals for the Seventh Circuit has defined
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reckless conduct as a
highly unreasonable [act or] omission, involving not merely
simple, or even inexcusable negligence, but an extreme departure from
the standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the defendant or
is so obvious that the actor must have been aware of it.\131\
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\131\ Sundstrand Corp. v. Sun Chemical Corp., 553 F. 2d 1033,
1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) (quoting
Franke v. Midwestern Oklahoma Development Authority, CCH Fed. Sec.
L. Rep. [*] 95,786 at 90,850 (W.D. Okl. 1976)).
More recently, the Court of Appeals for the District of Columbia
Circuit has relied upon Sundstrand Corp. to conclude that establishing
recklessness requires evidence from which it can be reasonably inferred
that the violator both acted with an extreme departure from standards
of ordinary care and either knew or must have known that its conduct
created a danger of misleading buyers or sellers.\132\ The Commission
believes that a recklessness standard as articulated by the Seventh and
District of Columbia Circuits would be adequate to establish scienter
for any future violation.
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\132\ SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992)
(citingSundstrand Corp., 553 F.2d at 1045).
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3. The third element is that a person engage in conduct ``in connection
with'' the purchase or sale of a covered commodity at wholesale
Finally, under the third element, the Commission would need to show
a nexus between the manipulative conduct and the purchase or sale of
crude oil, gasoline, or petroleum distillates at wholesale. Guided by
Supreme Court precedent in the securities area, the Commission
interprets the phrase ``in connection with'' as requiring fraudulent
conduct to coincide with a purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale.\133\ At the same time, the
Commission does not interpret the ``in connection with'' requirement so
broadly as to turn every common law fraud that happens to touch a
purchase or sale of a covered or uncovered petroleum product into a
rule violation.\134\ Specifically, the proposed Rule would reach
manipulative conduct that extends beyond the defined terms if that
conduct directly or indirectly impacts wholesale prices for the covered
products.
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\133\ 42 U.S.C. 17301. See SEC v. Zanford, 535 U.S. 813, 820
(2002); Superintendent of Ins. of State of N.Y. v. Bankers Life &
Cas. Co., 404 U.S. 6, 12-13 (1971) (holding that the ``in connection
with'' requirement was met because the plaintiff had ``suffered an
injury as a result of deceptive practices touching its sale of
securities.''). See also Merrill Lynch, Pierce, Fenner & Smith, Inc.
v. Dabit, 547 U.S. 71, 85 (2006) (``Moreover, when this court has
sought to give meaning to the phrase [`in connection with'] in the
context of [Section] 10(b) and Rule 10b-5, it has espoused a broad
interpretation.'').
\134\ See Zanford, 535 U.S. at 820.
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In response to the ANPR, some commenters urge the Commission not to
apply the ``in connection with'' requirement to specific types of
conduct. For example, CAPP suggests that the Commission not construe
``in connection with'' to cover importing crude oil,\135\ while API
argues that the Commission not construe ``in connection with'' to refer
to supply decisions.\136\ Other commenters take the position that the
Commission should interpret ``in connection with'' to exempt
transactions not within the Commission's jurisdiction, specifically
commodity trading, because those transactions, they assert, are within
the exclusive jurisdiction of the CFTC.\137\
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\135\ CAPP at 4. Other commenters raise questions that relate
more to wholesale purchase and sale transactions. See, e.g. API at
26-27 (asserting that Section 811 should not apply to over-the-
counter derivatives contracts); Hess at 10-11 (arguing that futures
and over-the-counter markets should not be regulated by the
Commission); ISDA at 5 (stating that a Commission market
manipulation rule should not apply to futures transactions); PMAA at
4-5 (arguing that regulations should not apply to ``participants or
activities'' that occur below the rack).
\136\ API at 25 (asserting that ``Section 811 . . . should not
apply to supply decisions that are unconnected to [wholesale
petroleum transactions]''). API lists various supply decisions it
does not believe should be covered under the ``in connection with''
requirement, including: ``refining decisions, facility maintenance
and upgrades, [and] the management of inventory levels.'' API at 25-
26.
\137\ MFA at 6-12; CFDR at 6 n.4; Hess at 12 n.10; CFTC at 1-2;
API at 3, 26-27; ISDA at 5 n.9. These comments are addressed above
in Section II.B.
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The Commission disagrees. The Commission may enforce the proposed
Rule if the conduct directly or indirectly affects a covered wholesale
petroleum transaction within the Commissions's jurisdiction -- in this
matter, a purchase or sale of crude oil, gasoline, or petroleum
distillates. Therefore, any conduct that is done in connection with the
wholesale purchase or sale of a covered or uncovered product --
including importing covered or uncovered products and making supply
decisions related to covered or uncovered products -- could be subject
to the proposed Rule.
4. A showing of price effects is not an element of a cause of action
The Commission does not intend to require proof of effects as an
element of a cause of action. First, a plain reading of EISA does not
require such proof. Section 811 prohibits the ``use or employment'' of
any manipulative or deceptive device or contrivance.\138\ The proposed
Rule would be violated at the stage when the actor uses or employs a
manipulative or deceptive device or contrivance -- whether or not those
actions can be shown to result in discernible price effects. Nothing in
the statute or proposed Rule suggests that manipulative or deceptive
conduct must result in identifiable price effects before such conduct
is culpable.\139\
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\138\ The enabling statute is clear: ``It is unlawful . . . to
use or employ . . . any manipulative or deceptive device or
contrivance.'' 42 U.S.C. 17301.
\139\ Not requiring proof of effects as an element is consistent
with precedent established under SEC Rule 10b-5. See generally
United States v. Smith, 155 F.3d 1051, 1063 (9th Cir. 1988); see
also SEC v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996).
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Second, there is no economic justification for fraud or deception
in an exchange economy. Thus, harm to the market can be inferred.
Fraudulent behavior interferes with market signals, reduces
transparency in the market, and casts into doubt the very information
that allows markets to function properly.\140\ There is no need to
determine separately whether there is evidence of harm; therefore,
requiring proof of price effects is unnecessary.\141\
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\140\ See United States v. Hall, 48 F. Supp. 2d 386, 387
(S.D.N.Y. 1999) (``Whether the price of a stock is `artificial' does
not turn on whether the stock is trading above or below its `true
worth.' Rather, the trading price of a stock is determined by
available information and market forces, and a stock is trading at
an `artificial level' when it is trading at a level above what
market forces would otherwise dictate.''). See also CAPP at 1
(``CAPP recognizes that fraud and manipulation pose a potential
threat to the successful and efficient functioning of petroleum
markets in North America.''); MFA at 1 (``Price manipulation has a
corrosive effect on the proper functioning of any market.'').
\141\ While the Commission does not intend to require
discernible price effects as an element of a rule violation, it
will, nevertheless, consider the extent of any price effects or
other harm resulting from the market manipulation in assessing a
civil penalty.
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Third, the Commission believes that requiring a showing of price
effects raises an unnecessary risk of regulatory error. Prices of
commodity products such as petroleum are inherently volatile and are a
function of many factors.\142\ The Commission's
[[Page 48330]]
experience in investigating petroleum pricing anomalies demonstrates
the difficulty of identifying price changes that result directly from
any specific act or conduct.\143\
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\142\ See, e.g., API at 53 (stating that the artificial price
concept is difficult to apply to petroleum markets because petroleum
markets, in contrast to futures markets, use many non-standardized
contracts); ISDA at 15-16 (stating that the artificial price
standard ``has proven to be very difficult to understand and apply
in practice'').
\143\ The practical difficulty in discerning accurately what
constitutes an artificial price is discussed by the ABA. ABA at 7
(``[D]etermining what supply allocations and price levels would most
benefit consumers over the long run would be impossible for the FTC
or any regulator in this complex industry.''); see also IER at 4
(arguing that regulators should not second-guess the decisions of
market participants in the petroleum industry because it could lead
to ``an inefficient amount of risk-taking among producers.''); Muris
at 8 (``Judgments about the `right' mix of sales and distribution
are beyond the capacity of any individual or organization to make
accurately. That, of course, is why our economy relies on markets to
make such decisions, and on the profit motive to guide the behavior
of individual firms.'').
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Finally, the Commission believes that the scienter requirement, in
addition to proof of an overt act, should provide sufficient safeguards
against overbreadth.\144\ Consequently, the Commission believes the
proposed Rule addresses commenters' concerns that, absent an effects
requirement, any rule would be overbroad and interfere with pricing
signals.\145\ The Commission seeks comment on the foregoing, including
in particular whether its articulation of the appropriate elements of a
cause of action under the Rule furthers the goals of EISA and the
proposed Rule.
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\144\ Proof of an overt manipulative or deceptive act together
with proof of requisite intent provide sufficient safeguards against
both regulatory overreach and judicial error.
\145\ See Flint Hills at 19 (stating that a market economy
relies on prices and profit motive to allocate resources
efficiently; thus, regulators must allow market participants to
respond to market signals when making production and product
allocation decisions without ``fear of being second guessed'');
Muris at 9 (``One way to reduce the risk of errors is to require a
showing of (1) an effect on price . . . .''); API at 31 (``Applying
Section 811 to conduct that does not cause a material deviation in
market prices would unduly expand the FTC's regulatory oversight and
would likely harm consumer welfare in the long run by chilling
competitive market behavior, thereby potentially increasing
prices.'').
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F. Section 317.4: Preemption
Section 815(c) of EISA states that ``[n]othing in this subtitle
preempts any State law.''\146\ To give effect to that provision,
Section 317.4 of the proposed Rule contains a standard preemption
provision, making clear that the Commission does not intend to preempt
the laws of any state or local government, except to the extent of any
conflict. Section 317.4 also explains that there is no conflict between
federal and state and local law, and therefore no preemption, if such
state or local law affords equal or greater protection from the
manipulative conduct prohibited by the proposed Rule.\147\
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\146\ 42 U.S.C. 17305.
\147\ See, e.g., Disclosure Requirements and Prohibitions
Concerning Franchising, 16 CFR 436.10(b); Disclosure Requirements
and Prohibitions Concerning Business Opportunities, 16 CFR 437 n.2.
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G. Section 317.5: Severability
Section 317.5 of the proposed Rule contains a standard severability
provision. This provision makes clear that, if any part of the Rule is
held invalid by a court, the remainder of the Rule will still be in
effect.\148\
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\148\ See, e.g., Telemarketing Sales Rule, 16 CFR 310.9; Used
Motor Vehicle Trade Regulation Rule, 16 CFR 455.7.
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H. Invitation to Comment and Advance Notice of Workshop
All persons are hereby given notice of the opportunity to submit
written data, views, facts, and arguments addressing the issues raised
in this NPRM. All comments should be filed as prescribed in the
ADDRESSES Section above, and must be received by September 18, 2008. In
addition, the Commission anticipates that it may be advantageous to
hold a public workshop to discuss in greater detail the written
comments submitted by the public in response to the NPRM, and, in
particular, any areas of significant controversy or divergent opinion
that may arise from the comments. In order to be eligible to
participate in a workshop, should one be held, a person must submit a
comment in response to this NPRM. If it is determined that a workshop
is necessary, details about the event will be announced in a press
release and be available at (http://www.ftc.gov/ftc/oilgas/index.html).
I. Communications by Outside Parties to the Commissioners or Their
Advisors
Written communications and summaries or transcripts of oral
communications respecting the merits of this proceeding from any
outside party to any Commissioner or Commissioner's advisor will be
placed on the public record.\149\
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\149\ See 16 CFR 1.26(b)(5).
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J. Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980 (``RFA'')\150\ generally
requires a description and analysis of proposed and final rules that
will have significant economic impact on a substantial number of small
entities. The RFA requires an agency to provide an Initial Regulatory
Flexibility Analysis (``IRFA'')\151\ with a proposed Rule and a Final
Regulatory Flexibility Analysis (``FRFA'')\152\ with the final rule, if
any. The Commission is not required to make such analyses if a rule
would not have such an effect.\153\
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\150\ 5 U.S.C. 601-612.
\151\ 5 U.S.C. 603.
\152\ 5 U.S.C. 604.
\153\ 5 U.S.C. 605.
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Although the scope of the proposed Rule may reach a substantial
number of small entities as defined in the RFA, the Commission does not
believe that the proposed Rule will have a significant economic impact
on those businesses.\154\ The Commission specifically requested
comments on the economic impact of a proposed Rule and received
none.\155\ Given that there are no reporting requirements, document or
data retention provisions, or any other affirmative duties imposed, it
is unlikely that the proposed Rule imposes costs to comply beyond
standard costs associated with ensuring that behavior and statements
are not manipulative or deceptive. Therefore, the Commission believes
that the proposed Rule, if finalized, will not have a significant
economic impact on a substantial number of small entities.
Notwithstanding this belief, the Commission provides a full IRFA
analysis to aid in its solicitation for comments on this topic.
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\154\ The RFA definition of ``small entity'' refers to the
definition provided in the Small Business Act, which defines a
``small business concern'' as a business that is independently owned
and operated and that is not dominant in its field of operation. 15
U.S.C. 632.
\155\ 73 FR at 25624.
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1. Description of the reasons that action by the agency is being
considered
Section 811 grants the Commission the authority to promulgate a
rule that ``is necessary or appropriate in the public interest or for
the protection of United States citizens.''\156\ As discussed above,
the Commission believes that promulgating the proposed Rule is
appropriate to prevent manipulative practices affecting wholesale
markets for petroleum products and the Commission has tailored its
proposed Rule specifically to reach manipulative behavior that likely
impacts those commodities described in Section 811.
---------------------------------------------------------------------------
\156\ 42 U.S.C. 17301.
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2. Succinct statement of the objectives of, and the legal basis for,
the proposed Rule
The legal basis of the proposed Rule is Section 811 of EISA, which
makes illegal manipulative and deceptive conduct in the purchase or
sale of petroleum products at wholesale in
[[Page 48331]]
contravention of rules, if any, that the Commission may promulgate. The
proposed Rule is intended to define the conduct that the law
proscribes. If adopted, such rule will supplement the Commission's
existing antitrust and consumer protection law enforcement tools.
3. Description of, and where feasible, estimate of the number of small
entities to which the proposed Rule will apply
The proposed Rule applies to entities engaging in the purchase or
sale of crude oil, gasoline, and petroleum distillates. These
potentially include petroleum refiners, blenders, wholesalers and
dealers (including terminal operators that sell covered commodities).
Although many of these entities are large international and domestic
corporations, the Commission believes that a number of these covered
entities may fall into the category of small entities.\157\ According
to the SBA size standards, and utilizing SBA source data, the
Commission estimates that between approximately 1700 and 5200 covered
entities would be classified as ``small entities.''\158\
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\157\ Directly covered entities under this proposed Rule are
classified as small businesses under the Small Business Size
Standards component of the North American Industry Classification
System (``NAICS'') if they are: petroleum refiners (NAICS code
324110) with no more than 1,500 employees nor greater than 125,000
barrels per calendar day Operable Atmospheric Crude Oil Distillation
capacity; petroleum bulk stations and terminals (NAICS code 424710)
with no more than 100 employees; or petroleum and petroleum products
merchant wholesalers (except bulk stations and terminals (NAICS code
424720) with no more than 100 employees. See U.S. Small Business
Administration, Table of Small Business Size Standards Matched to
North American Industry Classification System Codes (Mar. 11, 2008),
available at (http://www.sba.gov/idc/groups/public/documents/sba_
homepage/serv_sstd_tablepdf.pdf).
\158\ The SBA publication that provides data on number of firms
and number of employees by firm does not provide sufficient
precision to gauge accurately the number of small business that may
be impacted by the proposed Rule. The data are provided in
increments of 1-4 employees, fewer than 20 employees and fewer than
500 employees. Small Business Administration, Employer Firms, &
Employment by Employment Size of Firm by NAICS Codes, 2005,
available at (http://www.sba.gov/advo/research/us05_n6.pdf). Thus
for the 177 petroleum refiners listed, 139 show that they have less
than 500 employees. Although the Commission is unaware of more than
5 refiners with less than 125,000 barrels of crude distillation
capacity, the data may be kept by refinery, rather than refiner.
Similar problems exist for the bulk terminal and bulk wholesale
categories listed above, in which the relevant small business cut
off is greater than 100 employees. Thus, the range of ``small''
entities appears unreliable and the Commission seeks comment or
information providing better data.
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The scope of the proposed Rule could be broader depending on
whether illegal manipulative conduct impacts covered commodities
directly or other commodities with the effect of impacting the covered
commodities contemplated by the proposed Rule. The Commission seeks
comments on whether the proposed Rule may reach other small entities
and what economic impact, if any, the proposed Rule would have on those
entities.
4. Projected reporting, record-keeping, and other compliance
requirements, including an estimate of the classes of small entities
that will be subject to the requirement and the type of professional
skills necessary for preparation of the report or record
The Commission does not propose, and the proposed Rule does not
contain, any requirement that covered entities create, retain, submit,
or disclose any information. Accordingly, the proposed Rule will impose
no new record-keeping or related data retention and maintenance or
disclosure requirements on any covered entity, including small
entities. The Commission has not identified additional costs necessary
to comply with the proposed Rule beyond existing costs associated with
behaving in a nondeceptive, truthful manner. The Commission seeks
comments on whether the proposed Rule imposes costs on any covered
entities including a description of specific costs and estimates of the
magnitude of those costs.
5. Other duplicative, overlapping, or conflicting federal rules
As discussed previously, other federal agencies have regulatory
authority to prohibit in whole or in part manipulative and deceptive
practices involving petroleum products. The SEC has authority to stop
manipulative and deceptive practices involving the securities and
securities offerings of companies involved in the petroleum industry.
The CFTC also has authority to bring an action against any person who
is manipulating or attempting to manipulate the petroleum futures
markets.\159\
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\159\ Commenters such as MFA specifically argue that the
proposed Rule should have a safe harbor provision or other explicit
exemption for the futures markets in order to avoid an overlap with
the CFTC's jurisdiction under Section 2 of the CEA. MFA at 5.
According to commenters, including the CFTC, such an overlap would
create potentially duplicative or inconsistent regulatory
requirements, thus undermining uniform regulatory scheme that
Congress sought to establish for the futures markets under the CEA.
See, e.g., CFTC at 1-2; API at 14, 16, 27; Flint Hills at 12; Hess
at 12 n.10; NPGA at 2 (``A flawed regulatory scheme may result in
reporting requirements being duplicative, standards and definitions
of proscribed behavior being inconsistent . . . .''); MFA at 13-14
(arguing that any proposed rule should not reach futures trading
activities regulated by the CFTC). Several other commenters express
concern that even if the Commission could avoid inconsistent
regulatory requirements, market participants would still be unfairly
burdened by duplicative enforcement. See Flint Hills at 14; Hess at
12; NPGA at 2.
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As explained in Section II.B, above, the proposed Rule is not
intended to impose contradictory requirements on regulated entities in
the futures markets or otherwise. To the extent, if any, that the
proposed Rule's requirements could duplicate requirements already
established by other agencies for such markets, the proposed Rule
should not impose any additional compliance costs. Although the
Commission acknowledges that different agencies could simultaneously
initiate enforcement action with respect to the same activities, the
Commission has had a longstanding practice of coordinating its
enforcement efforts with agencies that have overlapping
jurisdiction.\160\ The Commission expects to continue that practice
here, as feasible and appropriate, to ensure fairness to regulated
entities and to conserve enforcement resources and maximize agency
efficiency.\161\ However, the Commission is requesting comment on the
extent to which other federal standards on manipulation may duplicate,
satisfy, or inform the proposed Rule's requirements. In addition, the
Commission seeks comment and information about any statutes or rules
that may conflict with the proposed requirements, as well as any other
state, local, or industry rules or policies that require covered
entities to implement practices that comport with the requirements of
the proposed Rule.
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\160\ One commenter warned that poor coordination between the
Commission and other agencies could lead to a situation wherein
``multiple agencies may pursue certain potential violations, while
other violations are left unchecked because each oversight agency
expects or desires another to take the appropriate action.'' NPGA at
2. To prevent such pitfalls of regulatory overlap, NPGA encouraged
the issuance of an Executive Order that clearly draws lines of
jurisdiction among agencies. Id. at 3.
\161\ See Section II.B (and footnotes therein) for a discussion
of concerns raised by commenters about potentially duplicative or
inconsistent regulatory requirements.
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[[Page 48332]]
6. Description of any significant alternatives to the proposed Rule
that would accomplish the stated objectives of applicable statutes and
that minimize any significant economic impact of the proposed Rule on
small entities, including alternatives considered, such as: (1)
establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (2) clarification, consolidation, or simplification of
compliance and reporting requirements under the rule for such small
entities; and (3) any exemption from coverage of the rule, or any part
thereof, for such small entities
The proposed Rule is narrowly tailored to reduce compliance burdens
on covered entities, regardless of size. In formulating the proposed
Rule, the Commission has taken several significant steps to minimize
potential burdens. Most significantly, the proposed Rule focuses on
preventing manipulation and deception in wholesale petroleum markets.
The Commission has declined to include specific conduct or duty
requirements, such as a duty to supply product or a duty to provide
access to pipelines and terminals. In addition, the proposed Rule makes
clear that covered entities need not disclose price, volume, and other
data to the market. Finally, the proposed Rule contains no record-
keeping requirement.
While the Commission believes that the proposed Rule imposes no
unique compliance costs, it nonetheless requests comment on this issue,
in particular, whether the proposed Rule's prohibited practices impose
a significant impact upon a substantial number of small entities, and
what modifications to the Rule the Commission should consider to
minimize the burden on small entities.
7. Questions for comment to assist regulatory flexibility analysis
The Commission requests commenters to provide information as to the
potential scope and economic impact of the proposed Rule so that the
Commission may better assess the economic impact of the language of any
final rule if it determines to promulgate such rule. Specifically, the
Commission requests comment on:
a. the number and type of small entities affected by the proposed
Rule;
b. any or all of the provisions in the proposed Rule with regard
to: (i) the impact of the provision(s) (including benefits and costs to
implement and comply with the Rule or Rule provision), if any; (ii)
what alternatives, if any, the Commission should consider, as well as
the costs and benefits of those alternatives, paying specific attention
to the effect of the proposed Rule on small entities;
c. ways in which the proposed Rule could be modified to reduce any
costs or burdens on small entities, including whether and how
technological developments could further reduce the costs of
implementing and complying with the proposed Rule for small entities;
d. any information quantifying the economic costs and benefits of
the proposed Rule on the entities covered, including small entities;
and
e. the identity of any relevant federal, state, or local rules that
may duplicate, overlap, or conflict with the proposed Rule.
K. Paperwork Reduction Act
The Commission does not contemplate requiring any entity covered by
the Rule to create, retain, or submit any data. Accordingly, the
proposed Rule does not include any new information collection
requirements under the provisions of the Paperwork Reduction Act of
1995 (``PRA'').\162\
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\162\ 44 U.S.C. 3501-3521. Under the PRA, federal agencies must
obtain approval from OMB for each collection of information they
conduct or sponsor. ``Collection of information'' means agency
requests or requirements that members of the public submit reports,
keep records, or provide information to a third party. 44 U.S.C.
3502(3).
---------------------------------------------------------------------------
In the ANPR, the Commission solicited comment on whether covered
entities should report market data, such as cost and volume data for
wholesale transactions.\163\ In response, one commenter notes that
Section 812 already addresses the making of false reports and should
not be construed as giving the Commission authority to impose new
reporting requirements.\164\
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\163\ 73 FR at 25622.
\164\ ISDA at 16 (``Neither Section 811 nor Section 812 of the
EISA authorizes the Commission to impose new reporting
requirements.''). See, e.g., CFDR at 16 (``The Commission should not
promulgate a rule that purports to impose disclosure obligations on
market participants where no disclosure obligations otherwise exist
under current law.''); API at 52. But see, e.g., PMAA at 8-9
(stating that the Commission has authority under Section 811 to
impose new reporting requirements); NPGA at 3 (``The authority to
mandate the maintenance and submission of [information regarding
wholesale petroleum transactions] is inherent in the EISA
prohibitions against manipulative activities in Section 811 and the
reporting of false information to Federal authorities in Section
812.'').
---------------------------------------------------------------------------
The Commission has determined that a record retention or submission
requirement is not necessary or appropriate at this time. However, the
Commission's experience with any final rule that may be adopted under
Section 811 or pursuant to its investigative and enforcement role under
Section 812 may suggest a particular need to require firms to create or
maintain particular information.\165\ If such a need arises, the
Commission may, in the future, adopt such rules as necessary or
appropriate in the public interest or for the protection of United
States citizens.
---------------------------------------------------------------------------
\165\ Platts at 3 (taking no position on reporting to government
agencies, but ``strongly endors[ing] any efforts to make more data
available on an equal basis to all market participants'').
---------------------------------------------------------------------------
L. Request for Comments
The Commission seeks comment on various aspects of the proposed
Rule. Without limiting the scope of issues on which it seeks comment,
the Commission is particularly interested in receiving comments on the
questions that follow. In responding to these questions, include
detailed, factual supporting information whenever possible.
1. General Questions for Comment
Please provide comment on each proposed aspect of the proposed
Rule. Regarding each proposed provision commented on, please include
answers to the following questions.
a. What is the effect (including any benefits and costs), if any,
on consumers?
b. What is the impact (including any benefits and costs), if any,
on individual firms that must comply with the proposed Rule?
c. What is the impact (including any benefits and costs), if any,
on industry?
d. What changes, if any, should be made to the proposed Rule to
eliminate any unnecessary cost to industry or consumers?
e. How would the proposed Rule affect small business entities with
respect to costs, profitability, competitiveness, and employment?
2. Questions on Proposed Specific Provisions
Rulemaking Standard
a. Is the Commission's determination that the proposed Rule meets
the rulemaking standard -- that the rule is ``necessary or appropriate
in the public interest or for the protection of United States
citizens'' -- correct? In what way is the proposed Rule necessary or
appropriate? In what way does the proposed Rule fail to be necessary or
appropriate?
Section 317.1 -- Scope
b. The Commission did not provide for safe harbors or exemptions
from the
[[Page 48333]]
proposed Rule. Should there be safe harbors or exemptions? If so, what
should they be? To what should they apply; that is, what types of acts
or practices should constitute a safe harbor? Why should that be so?
What types of acts or practices should be exempt? Why should that be
so?
Section 317.2 -- Definitions
c. Do the proposed definitions adequately describe the scope of the
proposed Rule's coverage? If not, how should they be modified? Are the
proposed definitions accurate? Are there alternative definitions that
the Commission should consider? Should additional terms be defined,
and, if so, how? What would be the costs and benefits of each suggested
definition?
Section 317.3 -- Prohibited Practices
d. The proposed Rule uses SEC Rule 10b-5 as a model. Will the Rule
10b-5 model function properly with respect to wholesale petroleum
markets? If not, why not? What alternative approach could be used? If
an alternative approach or model could be used here, what would be the
costs and benefits of using an alternative approach or model?
e. The proposed Rule targets practices that act as a fraud or
deceit. Has the Commission adequately delineated such practices? If
not, why not? Is there a list of practices that should be covered by
the proposed Rule? If so, what are they and why should they be
included? Are there practices that should be excluded from the proposed
Rule? If so, what are they and why should they be excluded?
f. Has the proposed Rule sufficiently laid out any affirmative
duties or other obligations upon entities covered under the proposed
Rule? If not, why not?
g. Section 317.3(a) of the proposed Rule prohibits the use or
employment of any ``device, scheme, or artifice to defraud.'' Is this
language sufficiently broad enough to enable the Commission to police
all forms of fraud and manipulation that affect wholesale petroleum
markets? If not, why not? How could the proposed Rule be modified to
ensure that all forms of devices, schemes, or artifices to defraud are
covered?
h. Section 317.3(b) of the proposed Rule prohibits covered entities
from misrepresenting, and in some instances from omitting, material
information in wholesale petroleum markets. Is this prohibition
adequate to enable the Commission to deter and punish persons who
intentionally provide false or misleading information to government
agencies, third-party reporting services, or the public through
corporate announcements? Why or why not? Does the proposed Rule need to
be modified in anyway to better address any misrepresentations or
omissions, and if so, what should those modifications be?
i. What factors should the Commission consider in weighing whether,
once an announcement is made by a person subject to the proposed Rule,
an affirmative obligation may then exist to provide full and complete
disclosure?
j. Section 317.3(b) prohibits omissions of material fact that are
necessary to ensure that a previously made statement is not misleading.
Will this provision address the harms that may occur in the reporting
of information in the wholesale petroleum industry? If not, why not and
how could the proposed Rule be modified to better address such harms?
k. Section 317.3(c) of the proposed Rule prohibits any act,
practice, or course of business that ``operates or would operate as a
fraud or deceit.'' Will this sub-section be useful to the FTC as a
``catch-all'' provision that captures fraud on wholesale petroleum
markets? If not, why not? Is this provision, in light of the inclusion
of the more specific anti-fraud provision in proposed Rule Section
317.3(a)? If not, why not?
l. Does the Rule's prohibition on manipulative or deceptive conduct
promote well-functioning market processes ``in connection with the
purchase or sale of crude oil, gasoline, or petroleum distillates at
wholesale''? If so, why not?
m. Does the proposed Rule have sound bases in economic policy for
prohibiting manipulative and deceptive conduct? Why or why not?
n. Do additional factual predicates exist to support a basis for
the proposed Rule to fill a gap in Commission jurisdiction under
Section 5 of the FTC Act or to support extending Commission authority
beyond the scope of Section 5 of the FTC Act? If so, describe such
factual predicates.
o. Should the Commission consider any affirmative defenses to rule
violations? If so, what affirmative defenses should the Commission
consider and how can those defenses be justified?
p. Is the proposed Rule's basis for requiring a showing of scienter
as an element of proof sound? Should a scienter requirement be part of
the text of Section 317.3 of the proposed Rule? Is the Commission's
tentative determination that both intentional and reckless conduct may
satisfy the scienter requirement appropriate? Why or why not?
q. The Commission tentatively has concluded that the ``in
connection with'' language in the proposed Rule would reach
manipulative conduct that extends beyond the defined terms (e.g., crude
oil, gasoline, petroleum distillates) if that conduct directly or
indirectly impacts wholesale prices for the covered products. What
would be the advantage (disadvantage) of this approach and why?
r. Should the proposed Rule be available to challenge ``attempted
manipulation,'' defined as uncompleted fraudulent or deceptive conduct?
Are there advantages to this approach and why? Are there disadvantages
to this approach and why? Are there examples of ``attempted
manipulation'' that should be covered by the proposed Rule? If so, what
are they and why should they be covered?
s. The Commission tentatively has concluded that liability should
not require proof of price effects. What would be the advantage
(disadvantage) of requiring proof of price effects?
t. The Commission tentatively has determined that a record
retention or submission requirement is not necessary or appropriate at
this time. Are there records that the Commission should, in fact,
require companies to retain or submit? If so, what types of records
should be retained or submitted and why?
Section 317.4 -- Preemption
u. The Commission has determined that the proposed Rule should not
preempt the laws of any state or local government, except to the extent
that any such law conflicts with this proposed Rule. What impact is
this approach likely to have upon the industry? Individual companies?
Consumers?
Regulatory Flexibility Act
v. Is the Commission estimate that between approximately 1700 and
5200 ``small entities'' will be covered by the proposed Rule accurate?
Why or why not?
w. The proposed Rule does not contain any requirement that covered
entities create, retain, submit, or disclose any information. Is the
Commission correct in its determination that, accordingly, the proposed
Rule will impose no record-keeping or related data retention and
maintenance or disclosure requirements on any covered entity, including
small entities? Why or why not?
x. Identify any statutes or rules that may conflict with the
proposed Rule requirements, as well as any other state,
[[Page 48334]]
local, or industry rules or policies that require covered entities to
implement practices that comport with the requirements of the proposed
Rule.
y. Do the prohibited practices in the proposed Rule impose a
significant impact upon a substantial number of small entities? If so,
what modifications to the proposed Rule should the Commission consider
to minimize the burden on small entities?
List of Subjects in 16 CFR Part 317
Trade practices.
0
Accordingly, for the reasons set forth in the preamble, the Commission
proposes to amend Title 16, Chapter 1, Subchapter C of the Code of
Federal Regulations by adding Part 317 to read as follows:
PART 317--PROHIBITION OF ENERGY MARKET MANIPULATION RULE
Sec.
317.1 Scope.
317.2 Definitions.
317.3 Prohibited practices.
317.4 Preemption.
317.5 Severability.
Authority: 42 U.S.C. 17301-17305; 15 U.S.C. 41-58.
Sec. 317.1 Scope.
This part implements Subtitle B of Title VIII of The Energy
Independence and Security Act of 2007 (``EISA''), Pub. L. 110-140, 121
Stat. 1723 (December 19, 2007), codified at 42 U.S.C. 17301-17305. This
rule applies to any person over which the Federal Trade Commission has
jurisdiction under the Federal Trade Commission Act, 15 U.S.C. 41 et
seq.
Sec. 317.2 Definitions.
The following definitions shall apply throughout this rule:
(a) Crude oil means the mixture of hydrocarbons that exist:
(1) in liquid phase in natural underground reservoirs and which
remain liquid at atmospheric pressure after passing through separating
facilities, or
(2) as shale oil or tar sands requiring further processing for sale
as a refinery feedstock.
(b) Gasoline means
(1) finished gasoline, including, but not limited to, conventional,
reformulated, and oxygenated blends, and
(2) conventional and reformulated gasoline blendstock for oxygenate
blending.
(c) Person means any individual, group, unincorporated association,
limited or general partnership, corporation, or other business entity.
(d) Petroleum distillates means
(1) jet fuels, including, but not limited to, all commercial and
military specification jet fuels, and
(2) diesel fuels and fuel oils, including, but not limited to, No.
1, No. 2, and No. 4 diesel fuel, and No. 1, No. 2, and No. 4 fuel oil.
(e) Wholesale means purchases or sales at the terminal rack level
or upstream of the terminal rack level. Transactions conducted at
wholesale do not include retail gasoline sales to consumers.
Sec. 317.3 Prohibited practices.
It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale,
(a) To use or employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of business that
operates or would operate as a fraud or deceit upon any person.
Sec. 317.4 Preemption.
The Federal Trade Commission does not intend, through the
promulgation of this Rule, to preempt the laws of any state or local
government, except to the extent that any such law conflicts with this
Rule. A law is not in conflict with this Rule if it affords equal or
greater protection from the use or employment, directly or indirectly,
of any deceptive or manipulative device or contrivance, in connection
with the purchase or sale of crude oil, gasoline, or petroleum
distillates at wholesale.
Sec. 317.5 Severability.
The provisions of this Rule are separate and severable from one
another. If any provision is stayed or determined to be invalid, it is
the Commission's intention that the remaining provisions shall continue
in effect.
By direction of the Commission.
Donald S. Clark,
Secretary.
Note: The following attachment will not appear in the Code of
Federal Regulations.
Attachment A
ANPR Commenters
American Bar Association/Section of Antitrust Law (``ABA'')
Association of Oil Pipe Lines (``AOPL'')
American Petroleum Institute and the National Petrochemical and
Refiners Association (``API'')
Patrick Barrett (``Barrett'')
Lawrence Barton (``Barton'')
Dave Beedle (``Beedle'')
Stanley Bergkamp (``Bergkamp'')
Louis Berman (``Berman'')
Bezdek Associates, Engineers PLLC (``Bezdek'')
Katherine Bibish (``Bibish'')
John Booke (``Booke'')
Bradley (``Bradley'')
Jeremy Bradley (``J. Bradley'')
Charles Bradt (``Bradt'')
Wendell Branham (``Branham'')
Lorraine Bremer (``Bremer'')
Gloria Briscolino (``Briscolino'')
Rick Brownstein (``Brownstein'')
Byrum (``Byrum'')
Canadian Association of Petroleum Producers (``CAPP'')
Jeff Carlson (``Carlson'')
Jacquelynne Catania (``Catania'')
Marie Cathey (``Cathey'')
New York City Bar Committee on Futures & Derivatives Regulation
(``CFDR'')
U.S. Commodities Futures Trading Commission (``CFTC'')
Manuel Chavez (``Chavez'')
Michael Chudzik (``Chudzik'')
D. Church (``Church'')
Earl Clemons (``Clemons'')
Dan Clifton (``Clifton'')
Kim Cruz (``Cruz'')
Jerry Davidson (``Davidson'')
Don Deresz (``Deresz'')
Charlene Dermond (``Dermond'')
Kimberly DiPenta (``DiPenta'')
Penny Donaly (``Donaly1'')
Penny Donaly (``Donaly2'')
Penny Donaly (``Donaly3'')
Penny Donaly (``Donaly4'')
Harold Ducote (``Ducote'')
Deep River Group, Inc. (``DRG'')
Mary Dunaway (``Dunaway'')
Econ One Research, Inc. (``Econ One'')
Kevin Egan (``Egan'')
DJ Ericson (``Ericson'')
Mark Fish (``Fish'')
Flint Hills Resources (``Flint Hills'')
Bob Frain (``Frain'')
Joseph Fusco ( ``Fusco'' )
Tricia Glidewell (``Glidewell'')
Robert Gould (``Gould'')
James Green (``Green'')
Michael Greenberger (``Greenberger'')
Christine Gregoire, Governor, State of Washington (``Gregoire'')
Hagan (``Hagan'')
Charles Hamel (``Hamel'')
Chris Harris (``Harris'')
Thomas Herndon (``Herndon'')
Johnny Herring (``Herring'')
Hess Corporation (``Hess'')
David Hill (``Hill'')
Hopper (``Hopper'')
Sharon Hudecek (``Hudecek'')
Intercontinental Exchange, Inc. (``ICE'')
Institute for Energy Research (``IER'')
Independent Lubricant Manufacturers Association (``ILMA'')
Illinois Petroleum Marketers Association (``IPMA'')
International Swaps and Derivatives Association, Inc. (``ISDA'')
[[Page 48335]]
Micki Jay (``Jay'')
Kenneth Jensen (``Jensen'')
Paul Johnson (``Johnson'')
Tacie Jones (``Jones'')
Joy (``Joy'')
John Kaercher (``Kaercher'')
Kas Kas (``Kas'')
Kipp (``Kipp'')
Paola Kipp (``P. Kipp'')
Jerry LeCompte (``LeCompte'')
Kurt Lennert (``Lennert'')
Loucks (``Loucks'')
Robert Love (``Love'')
R. Matthews (``Matthews'')
Catherine May (``May'')
Mike Mazur (``Mazur'')
Sean McGill (``McGill'')
Kathy Meadows (``Meadows'')
Managed Funds Association; Futures Industries Association; New York
Mercantile Exchange; and CME Group Inc. (``MFA'')
Bret Morris (``Morris'')
Theresa Morris-Ramos (``Morris-Ramos'')
Scott Morosini (``Morosini'')
Timothy J. Muris and J. Howard Beales, III (``Muris'')
Navajo Nation Resolute Natural Resources Company and Navajo Nation
Oil and Gas Company (``Navajo Nation'')
Laurie Nenortas (``Nenortas'')
James Nichols (``Nichols'')
Virgil Noffsinger (``Noffsinger'')
Noga (``Noga'')
Richard Nordland (``Nordland'')
National Propane Gas Association (``NPGA'')
Kerry O'Shea, (``O'Shea'')
Jeffery Parker (``Parker'')
Pamela Parzynski (``Parzynski'')
Brook Paschkes (``Paschkes'')
Brijesh Patel (``Patel'')
Stefanie Patsiavos (``Patsiavos'')
P D (``PD'')
Guillermo Pereira (``Pereira'')
James Persinger (``Persinger'')
Mary Phillips (``Phillips'')
Plains All American Pipeline, LLP (``Plains'')
Platts (``Platts'')
Betty Pike (``Pike'')
Petroleum Marketers Association of America (``PMAA'')
Joel Poston (``Poston'')
Radzicki (``Radzicki'')
Gary Reinecke (``Reinecke'')
Steve Roberson (``Roberson'')
Shawn Roberts (``Roberts'')
Linda Rooney (``Rooney'')
Mel Rubinstein (``Rubinstein'')
secret (``secret'')
Joel Sharkey (``Sharkey'')
Society of Independent Gasoline Marketers of America (``SIGMA'')
Daryl Simon (``Simon'')
David Smith (``D. Smith'')
Donald Smith (``Do. Smith'')
Mary Smith (``M. Smith'')
Donna Spader (``Spader'')
Stabila (``Stabila'')
Alan Stark (``A. Stark'')
Gary Stark (``G. Stark'')
Robert Stevenson (``Stevenson'')
Ryan Stine (``Stine'')
Maurice Strickland (``Strickland'')
Sutherland, Asbill, and Brennan, LLP (``Sutherland'')
L.D. Tanner (``Tanner'')
Dennis Tapalaga (``Tapalaga'')
Tennessee Oil Marketers Association (``TOMA'')
Theisen (``Theisen'')
Greg Turner (``Turner'')
U.S. citizen (``U.S. citizen'')
U.S. Department of Justice, Criminal Fraud Section (``USDOJ'')
Jeff Van Hecke (``Van Hecke'')
Louis Vera (``Vera'')
Thomas Walker (``Walker'')
Victoria Warner (``Warner'')
Lisa Wathen (``Wathen'')
Watson (``Watson'')
Gary Watson (``G. Watson'')
Joseph Weaver (``Weaver'')
Webb (``Webb'')
Douglas Willis (``Willis'')
[FR Doc. E8-19154 Filed 8-18-08; 8:45 am]
BILLING CODE 6750-01-S