[Federal Register: April 22, 2009 (Volume 74, Number 76)]
[Proposed Rules]
[Page 18304-18329]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ap09-11]
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FEDERAL TRADE COMMISSION
16 CFR Part 317
[Project No. P082900]
RIN 3084-AB12
Prohibitions on Market Manipulation in Subtitle B of Title VIII
of The Energy Independence and Security Act of 2007
AGENCY: Federal Trade Commission.
ACTION: Revised notice of proposed rulemaking; request for public
comment.
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SUMMARY: Pursuant to Section 811 of Subtitle B of Title VIII of The
Energy Independence and Security Act of 2007 (``EISA''),\1\ the Federal
Trade Commission (``Commission'' or ``FTC'') is issuing a Revised
Notice of Proposed Rulemaking (``RNPRM''). The revised proposed Rule in
this RNPRM would prohibit any person, directly or indirectly, in
connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale, from knowingly engaging in any act,
practice, or course of business--including the making of any untrue
statement of material fact--that operates or would operate as a fraud
or deceit upon any person, or intentionally failing to state a material
fact that under the circumstances renders a statement made by such
person misleading, provided that such omission distorts or tends to
distort market conditions for any such product. Violations of the
revised proposed Rule, if such Rule is adopted, would require proof by
a preponderance of the evidence. Anyone violating an FTC rule
promulgated under Section 811 of EISA, such as this revised proposed
Rule would be if adopted, may face civil penalties of up to $1 million
per violation per day, in addition to any relief available to the
Commission under the Federal Trade Commission Act (``FTC Act'').\2\ The
Commission invites written comments on issues raised by the revised
proposed Rule and seeks answers to the specific questions set forth in
Section IV.I. of this RNPRM.
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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.
\2\ 15 U.S.C. 41-58.
DATES: Written comments must be received by May 20, 2009. The
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Commission does not contemplate any extensions of this comment period.
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. Please note that your comment--including your name and your
state--will be placed on the public record of this proceeding,
including on the publicly accessible FTC website, at (http://
www.ftc.gov/os/publiccomments.shtm).
Because comments will be made public, they 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 or other individually identifiable health information. In
addition, comments should not include any ``[t]rade secret or any
commercial or financial information which is obtained from any person
and which is privileged or confidential,'' as provided in Section 6(f)
of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR
4.10(a)(2).
[[Page 18305]]
Comments containing material for which confidential treatment is
requested must be filed in paper form, must be clearly labeled
``Confidential,'' and must comply with FTC Rule 4.9(c), 16 CFR
4.9(c).\3\
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\3\ See also FTC Rule 4.2(d), 16 CFR 4.2(d). 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 FTC 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:
(https://secure.commentworks.com/ftc-marketmanipulationRNPRM), (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 (https://secure.commentworks.com/ftc-
marketmanipulationRNPRM). If this RNPRM 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/opa/2009/04/rnprm.shtm) to read the RNPRM 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, N.W., Washington, DC 20580.
The 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: Patricia V. Galvan, Deputy Assistant
Director, Bureau of Competition, Federal Trade Commission, 600
Pennsylvania Avenue, N.W., Washington, DC 20580, (202) 326-3772.
SUPPLEMENTARY INFORMATION:
I. Background
EISA became law on December 19, 2007.\4\ Subtitle B of Title VIII
of EISA targets market manipulation in connection with the purchase or
sale of crude oil, gasoline, or petroleum distillates at wholesale, and
the reporting of 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.''\5\
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\4\ 42 U.S.C. 17001-17386.
\5\ 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.''\6\
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\6\ 42 U.S.C. 17302.
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Subtitle B also contains three additional sections that address,
respectively, enforcement of the Subtitle (Section 813),\7\ penalties
for violations of Section 812 or any FTC rule published pursuant to
Section 811 (Section 814),\8\ and the interplay between Subtitle B and
existing laws (Section 815).\9\
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\7\ Section 813(a) 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 (15
U.S.C. 41 et seq.) were incorporated into and made a part of
[Subtitle B].'' Section 813(b) provides that a violation of any
provision of Subtitle B ``shall be treated as an unfair or deceptive
act or practice proscribed under a rule issued under [S]ection
18(a)(1)(B) of the [FTC] Act (15 U.S.C. 57a(a)(1)(B)).'' 42 U.S.C.
17303.
\8\ 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.
\9\ 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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The revised proposed Rule in this RNPRM retains the anti-fraud
approach of the initial proposed Rule published by the Commission in a
Notice of Proposed Rulemaking (``NPRM'') on August 19, 2008.\10\ The
revised proposed Rule would achieve the anti-manipulation objectives of
Section 811 by prohibiting any person, directly or indirectly, in
connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale, from (a) knowingly engaging in any
act, practice, or course of business--including the making of any
untrue statement of material fact--that operates or would operate as a
fraud or deceit upon any person, or (b) intentionally failing to state
a material fact that under the circumstances renders a statement made
by such person misleading, provided that such omission distorts or
tends to distort market conditions for any such product.\11\
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\10\ FTC, Prohibitions On Market Manipulation and False
Information in Subtitle B of Title VIII of The Energy Independence
and Security Act of 2007, 73 FR 48317 (Aug. 19, 2008). The NPRM was
preceded by the publication for comment of an Advance Notice of
Proposed Rulemaking (``ANPR''). 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).
\11\ As the Commission stated in the ANPR and the NPRM, the
phrase ``crude oil gasoline or petroleum distillates'' is used
without commas in Section 811 (as well as in the first clause of
Section 812), while the phrase is used with commas in Section
812(3): ``crude oil, gasoline, or petroleum distillates.'' The
absence of commas is presumably a non-substantive, typographical
error; therefore, the Commission reads all parts of both sections to
cover all three types of products: crude oil, gasoline, and
petroleum distillates. See 73 FR at 25621 n.59; 73 FR at 48320 n.40.
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[[Page 18306]]
The Commission believes additional public comment on the revised
proposed Rule will assist in evaluating the desirability and contours
of any final rule. The Commission requests that comments focus on
changes between the initially proposed Rule and the revised proposed
Rule. The Commission also invites written responses to, and comments
on, the questions and alternative rule language posed in Section IV.I.
Because the public has already had the opportunity to comment on many
of the concepts contained in this revised proposed Rule--through both
written comments and workshop presentations and participation--the
Commission believes that a 30-day comment period is appropriate, and
requests for extension of the comment period are unlikely to be
granted.
II. The Rulemaking Proceeding
The rulemaking proceeding began with the publication of an ANPR on
May 7, 2008.\12\ In the ANPR, the Commission solicited comments on
whether it should publish a rule under Section 811, and, if so, the
appropriate scope and content of such a rule.\13\ In response to the
ANPR, the Commission received 155 comments from interested parties.\14\
Commenters expressed differing views regarding the desirability of, and
appropriate legal basis for, any such rule. Commenters also proposed a
variety of models upon which to base a market manipulation rule,
including those used by other federal agencies, such as the Securities
and Exchange Commission (``SEC''),\15\ the Federal Energy Regulatory
Commission (``FERC''),\16\ and the Commodity Futures Trading Commission
(``CFTC''),\17\ pursuant to each agency's respective market
manipulation authority.
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\12\ 73 FR 25614. Rulemaking documents can be found at (http://
www.ftc.gov/ftc/oilgas/rules.htm).
\13\ 73 FR at 25620-24. The comment period for the ANPR closed
on June 23, 2008, after the Commission granted an extension
requested by a major industry trade association. 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).
\14\ Attachment C contains a list of commenters who submitted
comments on the ANPR, together with the abbreviations used to
identify each commenter referenced in this RNPRM. Electronic
versions of the comments can be found at (http://www.ftc.gov/os/
comments/marketmanipulation/index.shtm).
\15\ See Securities Exchange Act of 1934 (``SEA'') 10(b), 15
U.S.C. 78j(b); 17 CFR 240.10b-5 (``Rule 10b-5'').
\16\ See Natural Gas Act 4A, 15 U.S.C. 717c-1; Federal Power Act
222, 16 U.S.C. 791a; Prohibition of Natural Gas Market Manipulation,
18 CFR 1c.1; Prohibition of Electric Energy Market Manipulation, 18
CFR 1c.2.
\17\ See Commodity Exchange Act (``CEA'') 9(a)(2), 7 U.S.C.
13(a)(2).
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After reviewing the ANPR comments, on August 19, 2008, the
Commission published an NPRM, setting forth the text of a proposed Rule
and inviting written comments on issues raised by the proposed
Rule.\18\ The NPRM described the basis for and scope of the proposed
Rule; definitions of terms in the Rule; conduct prohibited by the Rule;
and the elements of a cause of action under the Rule. The NPRM also set
forth questions designed to elicit further information from interested
parties. In response to a petition from a major trade association,\19\
the Commission extended the deadline for submission of comments on the
NPRM from September 18, 2008 to October 17, 2008.\20\
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\18\ 73 FR 48317.
\19\ Letter from the American Petroleum Institute to FTC
Secretary Donald S. Clark, (Sept. 5, 2008), available at (http://
www.ftc.gov/os/comments/marketmanipulation2/538416-00006.pdf).
\20\ FTC, Prohibitions On Market Manipulation and False
Information in Subtitle B of Title VIII of The Energy Independence
and Security Act of 2007, 73 FR 53393 (Sept. 16, 2008).
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In response to the NPRM, the Commission received 34 comments from
interested parties, including consumers, a consumer advocacy group,
academics, a federal agency, state government agencies, a Member of
Congress, industry members, and trade and bar associations.\21\ On
November 6, 2008, Commission staff held a one-day public workshop on
the proposed Rule.\22\ Commenters and workshop participants provided
valuable feedback on several key issues relating to the proposed Rule,
particularly regarding the application of a rule based on SEC Rule 10b-
5 and the relevance of legal precedent under securities law to the
petroleum industry. An overview of the major issues reflected in the
comments and at the workshop follows.
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\21\ Attachment A contains a list of commenters who responded to
the NPRM, together with the abbreviations used to identify each
commenter. In calculating the number of comments submitted in
response to the NPRM, the Commission treated the multiple filings
from Argus, CFA, CFDR, ISDA, and NPRA as a single comment for each
commenter.
\22\ Attachment B contains a list of participants in the
workshop, together with the abbreviations used to identify each
workshop participant. The discussion topics for the workshop
included the use of SEC Rule 10b-5 as a model for an FTC market
manipulation rule; the proper scienter standard for a rule; the
appropriate reach of a rule; the type of conduct that would violate
a rule; and the desirability of including market or price effects as
an element of a rule violation. Information relating to the
workshop, including a program, transcript, and archived webcast, can
be found at (http://www.ftc.gov/bcp/workshops/marketmanipulation/
index.shtml).
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Many commenters expressed general support for an anti-fraud rule,
noting that fraud provides a ``good demarcation'' for a market
manipulation rule and would provide the necessary guidance to market
participants.\23\ Although a few commenters affirmatively supported the
Commission's proposed Rule, as articulated in the NPRM,\24\ the
majority of commenters raised concerns about the scope and application
of the proposed Rule. Many commenters thought that the proposed Rule,
as drafted, created a substantial risk of reaching and chilling
legitimate conduct undertaken in the ordinary course of business.\25\
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\23\ CFDR (Mills), Tr. at 38; see, e.g., API at 8-9
(``[S]upport[ing] the Commission's initial determination that the
scope of the rule should be `narrowly tailored to address fraudulent
practices.''' (quoting 73 FR at 48320)); NPRA at 2 (stating that a
rule should target fraudulent and deceptive practices); PMAA
(Bassman), Tr. at 46-47 (explaining that, in general, fraud is an
appropriate basis for a Section 811 rule); ATAA at 11 (expressing
support for the Commission's decision to propose an anti-fraud
rule); see also ISDA (Velie), Tr. at 40 (expressing support for an
anti-fraud rule if it is coupled with specific intent); ABA Energy
(McDonald), Tr. at 246 (urging the Commission to focus a rule on
deceptive conduct).
\24\ See, e.g., MS AG at 3 (``[T]he scope of the proposed Rule
is well tailored to ensure that it will address . . . concerns
without deterring desirable market practices that could ultimately
benefit consumers.''); PMAA at 3 (``The proposed rule allows
regulated entities to understand both its intent and how it will be
applied . . . .''); CA AG at 2 (expressing support for the FTC's
proposed Rule).
\25\ See, e.g., Flint Hills at 3 (``[T]he breadth of the
proposed rule would create a significant amount of uncertainty as to
what conduct may be captured by the Rule, and could apply to
completely legitimate conduct . . . .''); API at 9 (arguing that the
proposed Rule ``would create substantial legal uncertainty for
market participants'' that will ``deter[] firms from engaging in
legitimate activity''); Sutherland at 2 (stating that the proposed
Rule ``is considerably more intrusive of legitimate business
behavior than is necessary''); Plains at 3 (``Given the general
nature of the proposed rule and the uncertainties that will exist
with respect to its scope and applicability, the imposition of
liability without any finding of an effect on the market . . . will
restrict legitimate market activity . . . .''); NPRA at 3 (stating
that ``the proposed Rule falls far short of the Commission's goal''
of prohibiting ```manipulative and deceptive conduct without
discouraging pro-competitive or otherwise desirable market
practices''' (quoting 73 FR at 48323)) (emphasis added by
commenter).
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To remedy perceived shortcomings in the proposed Rule, some
commenters suggested modifications, including: (1) rejecting SEC Rule
10b-5 as a model for an FTC rule,\26\ and (2) making other
[[Page 18307]]
changes in the text of the proposed Rule.\27\ Commenters also offered
recommendations regarding the elements of proof the Commission should
require in order to establish a rule violation. Specifically, the
commenters discussed: (1) whether a showing of recklessness should be
sufficient to establish the requisite level of scienter required by a
rule;\28\ (2) whether a showing of price effects should be required in
order to prove a rule violation;\29\ and (3) whether prohibiting
statements that are misleading because they omit material facts is
appropriate for a rule that applies to wholesale petroleum markets.\30\
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\26\ See, e.g., Sutherland at 4 (``We believe that the
Commission is mistaken in proposing to adopt the [SEC Rule] 10b-5
anti-fraud model . . . .''); API at 11 (arguing against borrowing,
without modification, the language and precedent of Rule 10b-5);
ISDA at 6 (stating that ``[s]ecurities precedent does not provide a
helpful framework'' for creating a Section 811 rule); NPRA at 2
(stating that an SEC-based rule is ``not an appropriate or workable
model for an FTC market manipulation rule that applies to wholesale
petroleum markets''); Plains at 2 (``The types of protective rules
and doctrines that may be appropriate for the securities markets . .
. cannot simply be applied without modification to the petroleum
markets.'').
\27\ See, e.g., NPRA at 17, 31 (recommending modifications to
the proposed Rule's text and also suggesting alternative rule
language); Navajo Nation at 7-9 (urging that the Commission define
the term ``manipulative'' in the proposed Rule); API at 11
(requesting that the Commission modify the text of the proposed Rule
to account for differences between wholesale petroleum and
securities markets).
\28\ Many commenters urged the Commission to require a showing
of specific intent instead of recklessness to prove a violation of
an FTC rule. See, e.g., CFDR at 4 (recommending that an FTC rule
require a ``[specific] intent to cause a false, fictitious and
artificial impact on market prices or market activity''); ISDA at 3-
4 (urging the Commission to require proof of specific intent rather
than recklessness); NPRA at 18 (stating that a recklessness standard
is not appropriate for wholesale petroleum markets); Sutherland at 5
(encouraging the Commission to require specific intent rather than
recklessness); Muris at 11 (recommending that the Commission require
proof of specific intent); see also Argus at 2 (stating that ``a
specific intent requirement would encourage those who already
provide market data to index publishers to continue to do so''); API
at 16 (stating that the proposed Rule's recklessness standard ``is
not sufficient . . . to `ensure that the proposed Rule does not
chill competitive behavior''' (citing 73 FR at 48328)). But see,
e.g., SIGMA at 2 (stating that the association is content with the
scienter requirement that the FTC has adopted in its proposed Rule);
MS AG at 3 (stating that ``both intentional and reckless conduct
should be covered by the scienter requirement''); CAPP at 1
(commending the Commission's proposed scienter requirement, which is
designed to avoid chilling legitimate business behavior); ATAA at 12
(expressing support for the FTC's proposed scienter requirement);
PMAA at 3-4 (stating that the Commission's proposed elements of
proof provide ``needed clarity''); CA AG at 2-3 (supporting the
scienter standard proposed in the NPRM).
\29\ Many commenters supported the showing of price effects as
an element of a cause of action under an FTC market manipulation
rule. See, e.g., Van Susteren at 2 (``The lack of a requirement of a
showing of price effects to establish culpability leaves the rule
overbroad and risks inconsistent or unwarranted enforcement efforts
by the Commission.''); ISDA at 3-4 (asking that the Commission
require proof of price effects); Muris at 2 (encouraging the
Commission to adopt an effects requirement); see also Plains at 3
(urging the Commission to make clear that only conduct that has a
``manipulative effect on the relevant market'' will be actionable);
API at 34 (recommending that the Commission require ``proof that a
party's deceptive or fraudulent conduct caused market conditions to
deviate materially from the conditions that would have existed but
for that conduct''); Sutherland at 6 (urging the FTC to ``require
that market manipulation actually impact the market''). But see,
e.g., MS AG at 3 (asserting ``that proof of price effects should not
be required to establish a violation''); ATAA at 12 (supporting the
FTC's decision not to require proof of price effects); IPMA at 4
(``[A]gree[ing] that the proposed Rule should not require proof of
an identifiable price effect.''); CA AG at 3 (expressing support for
the Commission's decision not to include an effects requirement).
\30\ Several commenters argued that, although the proposed
Rule's omissions language may be appropriate in securities markets,
differences exist between securities and wholesale petroleum markets
that make such language inapplicable to the latter. See, e.g., API
at 25 (stating that unlike wholesale petroleum markets, securities
markets are ``are governed by detailed disclosure obligations
designed to protect unsophisticated investors''); Muris at 2 (urging
the FTC to ``avoid importing broad disclosure requirements from
highly regulated markets that simply have no place in wholesale
petroleum markets''); NPRA at 4 (arguing that the full disclosure
rationale underlying SEC Rule 10b-5 does not fit wholesale petroleum
markets); Plains at 3 (stating that in the crude oil markets, unlike
securities markets, ``there is no presumption that one market
participant owes any duties to its counterparties that would require
disclosure of any information'').
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Commenters also presented varying views regarding the proper reach
of an FTC market manipulation rule.\31\ A few commenters believed that
the proposed Rule should reach conduct other than fraud, and these
commenters suggested that the Commission should modify the focus of the
proposed Rule\32\ or amend it to reach specific types of conduct.\33\
Most argued that an FTC market manipulation rule should not reach
activity in futures markets.\34\ Several offered views as to whether an
FTC rule should reach pipelines\35\ or renewable fuels, including
ethanol.\36\ The Commission has considered these comments and, where
appropriate, has revised the initial proposed Rule to address these
concerns.
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\31\ See, e.g., Boxer at 1 (advocating for a rule to reach ``oil
traded on the [NYMEX] and ICE exchanges''); API at 22-23 (``[T]he
Commission should, at a minimum, provide a safe harbor for
statements or omissions that are not made in connection with
`reporting . . . to government agencies, to third-party reporting
services, and to the public through corporate announcements,' at
least absent concrete evidence that such statements or omissions
were part of a broader scheme to manipulate a market.'' (citing 73
FR at 48326)); Platts at 8 (asking that the Commission adopt a safe
harbor to alleviate concerns that the Commission could capture
inadvertent errors under an FTC rule); see also Argus at 3 (``The
FTC should also refrain from mandating any particular methodological
approach for the assessment of spot markets in petroleum.'').
\32\ See, e.g., Pirrong at 2 (asserting that the proposed Rule's
focus on fraud and deceit is misguided and contending that market
power is the biggest threat to efficiently functioning petroleum
markets); CFA2 at 19 (urging the Commission to take ``vigorous
action to reign in the speculative bubble'' in energy commodities
markets); Consumer (urging the Commission to address excessive
speculation in commodities markets); Navajo Nation at 3 (expressing
concern that the proposed Rule may fall short in addressing
manipulative conduct).
\33\ See, e.g., NPCA at 1; MPA at 2; IPMA at 3-4 (requesting
that the Commission treat an oil company's decision to sell only
gasoline pre-blended with ethanol at the terminal rack as a
potentially manipulative practice); Murkowski at 1 (recommending
that the Commission use its authority to address anti-competitive
conduct in circumstances in which ``a single company gains exclusive
control of energy-related infrastructure . . . for moving domestic
crude to a consuming market'').
\34\ See, e.g., CFTC (Arbit) at 1 (urging the Commission to
``incorporate an exception from its rule for commodity futures and
options trading activity on regulated futures exchanges''); CFTC
(Chilton) at 2; CFDR at 8 (asking that the Commission refrain from
encroaching on the CFTC's exclusive jurisdiction over futures
transactions); Brown-Hruska at 8-9 (``[I]t is my hope that the
Commission will narrow the focus of the rule tightly upon
manipulative and deceptive conduct in the wholesale petroleum
markets [to avoid overlap with the CFTC].''); ISDA at 14 (``[T]he
Commission should clarify that it will refer to the CFTC any
manipulative activity that it becomes aware of that does not
directly involve a wholesale, physical petroleum products
transaction.''); MFA at 2 (recommending that the Commission adopt a
safe harbor for futures markets activities); Sutherland at 2 (urging
the Commission to reconsider its decision to reach futures markets
activities under any Section 811 rule). But see, e.g., Pirrong at 8
(noting that objections that ``FTC actions against manipulation will
interfere with the [CFTC's] jurisdiction over commodity market
manipulation . . . are moot, because Congress has decided
otherwise''); CA AG at 3 (``EISA . . . provide[s] the FTC with the
power to monitor for and prevent fraud and deceit in the commodity
futures market, insofar as it affects oil and gas futures.''); CFA2
at 19 (urging the Commission to take ``vigorous action to reign in
the speculative bubble and return the futures markets to their
proper role to improve the functioning of physical commodity
markets'').
\35\ ATAA at 4-5 (asserting that the FTC properly concluded that
oil pipelines are subject to the proposed Rule); IPMA at 4 (``We
agree that Commission jurisdiction should extend to pipelines.'').
But see AOPL at 1 (urging the Commission to revise its proposed Rule
``to clarify that it does not apply to interstate common carrier oil
pipelines regulated by the [FERC] under the Interstate Commerce Act
(`ICA')'').
\36\ See, e.g., ATA at 3 (urging the Commission to ``expand the
scope of [the proposed Rule] to include alternative and renewable
energy markets''); IPMA at 4 (agreeing that ``manipulation of non-
petroleum based commodities such as ethanol'' that affect the price
of gasoline should be ``subject to Commission enforcement''); NPRA
(Drevna), Tr. at 221-22 (agreeing that the Commission should reach
blending components that are inputs to gasoline or diesel); SIGMA
(Columbus), Tr. at 222-23 (agreeing that mandated alternative fuels
and components should be covered under a rule). But see MFA at 3
(asking that the Commission exclude from the Rule's coverage ethanol
and commodities that may be used in the process of making ethanol
``that are the subject of futures and options trading'').
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III. Basis for the Rule
Section 811 of EISA provides the legal basis for any petroleum
market manipulation rule. Section 811
[[Page 18308]]
prohibits ``any person'' from ``directly or indirectly'' using or
employing ``any manipulative or deceptive device or contrivance''--in
connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale--that violates a rule or regulation
that the Commission ``may prescribe'' ``as necessary or appropriate in
the public interest or for the protection of United States
citizens.''\37\
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\37\ 42 U.S.C. 17301; see also 73 FR at 48320.
---------------------------------------------------------------------------
The Commission has carefully considered concerns raised by
commenters about the propriety of a rule.\38\ Most of the commenters
who addressed the rulemaking standard agreed generally that a Section
811 rule would be necessary or appropriate, and that it would be in the
public interest to combat fraud in wholesale petroleum markets.\39\ A
few commenters, however, specifically questioned the necessity or
appropriateness of the proposed Rule.\40\ Sutherland, for example,
argued that the proposed Rule failed to ``balance the Congressional
directive for regulatory oversight with the goal of allowing economic
efficiency,'' and was ``more intrusive of legitimate business behavior
than is necessary.''\41\ NPRA stated that the proposed Rule's reliance
on SEC Rule 10b-5 and related legal precedent as a model would create
confusion and potentially discourage procompetitive activity, and,
thus, would be neither necessary nor appropriate in the public
interest.\42\
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\38\ Some commenters opined on the meaning of the language ``in
the public interest or for the protection of United States
citizens'' in the ANPR. See, e.g., CFDR, ANPR, 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
that will allow market participants to conduct their business with a
clear understanding of the relevant legal boundaries.''); MFA, ANPR,
at 17 (``FTC rules that purport to overlap with CFTC exclusive
jurisdiction would not serve the public interest.''); Flint Hills,
ANPR, at 17-18 (stating that the statutory language--``in the public
interest''--reflects Congress' intention that the Commission draw
upon its long experience in articulating ``the public interest''
under its other statutes).
\39\ See, e.g., ATAA at 3 (noting that the proposed Rule is
necessary to guard against conduct that undermines the integrity of
petroleum markets); MS AG at 2 (``The proposed Rule will benefit
consumers significantly because market manipulation can artificially
inflate prices of petroleum products and cause consumers to pay more
for essential goods, such as gasoline.''); IPMA at 4 (``The proposed
Rule does meet the rulemaking standard that it is `necessary or
appropriate in the public interest or for the protection of United
States[] citizens.'''); see also PMAA at 2 (stating that the
proposed Rule fulfilled ``the Commission's intention to, `prohibit
manipulative and deceptive conduct without discouraging pro-
competitive or otherwise desirable market practices''' (quoting 73
FR at 48323)); ATA at 2 (supporting the proposed Rule ``as an
additional tool to help preserve the integrity of vital energy
markets'').
\40\ Most commenters directed their comments to the application
of the Rule, rather than to whether the proposed Rule met the
rulemaking standard articulated in Section 811.
\41\ Sutherland at 2.
\42\ NPRA at 15-16; see also API at 1 (arguing that a rule is
unnecessary because ``repeated FTC investigations have found no
evidence of significant harmful or illegal conduct [in petroleum
markets]'').
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As stated in the NPRM, Section 811 of EISA targets manipulative or
deceptive conduct in wholesale petroleum markets. In enacting this
provision, Congress specifically authorized the Commission to determine
whether a rule would be appropriate and in the public interest. Based
upon its experience and perspective from several decades of protecting
consumers and analyzing competition in petroleum markets, the
Commission believes that it is both appropriate and in the public
interest to publish a revised proposed rule prohibiting fraudulent and
deceptive conduct in wholesale petroleum markets that serves no
legitimate purpose.
To achieve these objectives, the revised proposed Rule defines, for
market participants, the Section 811 statutory prohibition of the use
or employment of any ``manipulative or deceptive device or
contrivance.''\43\ Like the initially proposed Rule, the revised
proposed Rule would prohibit conduct that injects false information
into market transactions. However, the revised proposed Rule more
precisely identifies the conduct prohibited, and thus achieves a more
appropriate balance between consumer protection interests and
compliance burdens.\44\ Consequently, the Commission believes that it
is both appropriate and in the public interest to publish the revised
proposed Rule.
---------------------------------------------------------------------------
\43\ 42 U.S.C. 17301.
\44\ Several commenters expressed concern that a lack of clarity
about the type of conduct covered by the proposed Rule could chill
legitimate conduct, owing to potentially significant monetary
penalties that might be imposed for any violation. See, e.g., API at
9-10 n.12 (``[V]iolations of a market manipulation rule would expose
market participants to substantial monetary penalties. This
significantly increases the risk of chilling desirable practices as
companies seek to minimize the risk of liability.''); Muris at 2
(arguing that the necessary generality of the proposed Rule,
``[c]oupled with the extraordinarily high penalties . . . creates
the risk of chilling legitimate business decisions''); NPRA at 3
(arguing that the harsh penalties associated with a Section 811 rule
and the uncertainty created by the proposed application of SEC
precedent, ``would prompt corporate compliance systems that would
impair the procompetitive and cost-efficient functioning of
wholesale petroleum markets'').
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IV. Discussion of the Revised Proposed Rule
A. The Revised Proposed Rule is an Anti-Fraud Rule
The Commission stated in the NPRM that its proposed Rule was
modeled on the SEC's broad, anti-fraud Rule 10b-5.\45\ The Commission
further stated that it intended to rely on only relevant SEC precedent
in applying its rule.\46\ Although some commenters supported this
approach, others raised concerns about basing a rule on SEC Rule 10b-5.
The revised proposed Rule retains the anti-fraud concept of SEC Rule
10b-5, but it is further tailored to wholesale petroleum markets. The
following discussion addresses the use of SEC Rule 10b-5 as a model,
and provides Commission responses to commenter concerns about this
approach. The Commission invites written comments on the revised
proposed Rule, particularly regarding the modifications made to the
initially proposed Rule, and responses to the questions in Section
IV.I.
---------------------------------------------------------------------------
\45\ 73 FR at 48322.
\46\ 73 FR at 48322 (stating that the Commission ``[was] not
invoking the entire body of SEC law in this rulemaking, but rather
the anti-fraud provisions of SEC Rule 10b-5'').
---------------------------------------------------------------------------
Many commenters expressed general support for an anti-fraud rule,
contending that a fraud standard would provide necessary guidance to
market participants.\47\ A few commenters specifically endorsed the
proposed Rule as articulated in the NPRM, without modification.\48\
Some commenters also
[[Page 18309]]
agreed with the Commission's decision to model the proposed Rule after
SEC Rule 10b-5.\49\ For example, SIGMA argued that a SEC Rule 10b-5
model would ``ensure[] consumer protection while affording business
owners a wealth of certainty with respect to their market
practices.''\50\ A few commenters expressly embraced the Commission's
decision to use the legal precedent under SEC Rule 10b-5 for guidance
in interpreting a Section 811 rule.\51\
---------------------------------------------------------------------------
\47\ See, e.g., CFDR (Mills), Tr. at 38-39 (``From my point of
view, fraud is a good demarcation for any antimanipulation rule,
because it provides a basis by which people can govern themselves
and know with some understanding of what kind of conduct is going to
violate a rule or not.''); API (Long), Tr. at 33 (stating that ``in
general, fraud is a useful limiting concept''); PMAA (Bassman), Tr.
at 47 (``[U]sing fraud . . . is very clear, because none of the
people operating in this market operate without the benefit of legal
counsel. Any legal counsel understands the concept of fraud, and
fraud does belong here.''); ATAA at 11 (stating that the ``proposed
rule properly contains a broad anti-fraud provision''); ABA Energy
(McDonald), Tr. at 246 (urging the Commission to ``focus on
deceptive conduct that hinders the operations of markets by
misleading participants''); see also ISDA (Velie), Tr. at 40 (``[W]e
think fraud is a good standard, as long as it's coupled with
specific intent to manipulate a market.''); Flint Hills (Hallock),
Tr. at 46 (``I think it's important to keep a focus, though, on the
aim of the fraud, and the aim of the fraud that I believe that the
agency has been looking for is fraud upon a market . . . .''); NPRA
at 2 (``NPRA endorses the FTC's determination that implementation of
the EISA should be accomplished through a rule against fraud and
deception that harms the competitive functioning of wholesale
petroleum markets and, ultimately, consumers.'').
\48\ See, e.g., MS AG at 2 (``The proposed Rule will benefit
consumers significantly because market manipulation can artificially
inflate prices of petroleum products and cause consumers to pay more
for essential goods, such as gasoline.''); PMAA at 2 (stating that
the proposed Rule prohibits manipulative and deceptive conduct
without chilling pro-competitive behavior); CA AG at 2 (expressing
support for the FTC's proposed Rule).
\49\ See, e.g., SIGMA at 2 (expressing support for the
Commission's decision to base its proposed Rule on Rule 10b-5); ATAA
at 11 (``[ATAA] supports the proposed rule's use of SEC Rule 10b-5
as the model for a rule designed to proscribe market
manipulation.''); see also PMAA at 2 (supporting the Commission's
decision not to ``slavishly follow[]'' the Rule 10b-5 model); Boxer
at 1 (``I think it's [great] to have Rule 10b-5 essentially extended
to the oil traded on the [NYMEX] and ICE exchanges . . . .'').
\50\ SIGMA at 2.
\51\ See, e.g., CFDR at 2 (``The Commission . . . rightly looks
to securities law precedents for guidance in shaping the legal
standards and jurisprudence under EISA.''); ATAA at 11 (``[Rule 10b-
5] provides the FTC with a well-developed framework to follow.'').
---------------------------------------------------------------------------
Other commenters expressed concern about the Commission's reliance
on SEC Rule 10b-5 language and its legal precedent.\52\ Generally,
these commenters argued that the legal precedent developed under SEC
Rule 10b-5 cannot be divorced from the language of Rule 10b-5
itself.\53\ They contended that securities markets are characterized by
legal relationships of trust and an emphasis on full disclosure which
do not exist in wholesale petroleum markets.\54\ These commenters
argued that relying upon SEC Rule 10b-5 legal precedent therefore would
create confusion and uncertainty as to what conduct would violate the
proposed Rule.\55\ Some commenters asserted that, as a result, the
proposed Rule potentially would chill legitimate business conduct, and
that its uncertain scope would make it difficult for companies to
create effective programs for compliance with the Rule.\56\
---------------------------------------------------------------------------
\52\ As a threshold matter, some of these commenters disagreed
with the Commission's tentative determination in the NPRM that the
language of Section 811 indicated that the FTC should model a
Section 811 rule after Rule 10b-5, arguing that if this had truly
been the intent of Congress, it would have included an explicit
directive in the statute similar to the directive in the FERC's
anti-manipulation authority. See 15 U.S.C. 717c-1; 16 U.S.C. 824v;
FERC, Prohibition of Energy Market Manipulation, 71 FR 4244, 4246
(Jan. 26, 2006). See, e.g., NPRA at 15-16 (stating that the language
of Section 811 does not require that the Commission model an FTC
rule after SEC Rule 10b-5); API at 12 (``The language of Section 811
thus authorizes the Commission to take a different approach than the
[FERC] . . . .''); ISDA at 6 (stating that, unlike the FERC's market
manipulation statute, Section 811 does not contain express language
directing it to rely on securities precedent).
\53\ See, e.g., API at 15 (``The Rule 10b-5 regulatory regime is
deeply intertwined with the disclosure obligations imposed by
Section 10(b) and other provisions of the SEA, the scope of which,
in turn, are highly dependent on the fiduciary duties and
obligations that exist between various market participants.''); see
also ISDA at 7 (stating that disclosure requirements are
``[i]nterwoven and inextricably part of securities regulation'').
\54\ See, e.g., NPRA at 4, 7 (arguing that due to the absence of
fiduciary and other duties and disclosure obligations in wholesale
petroleum markets, it would be ``bad public policy to apply [Rule
10b-5] to purchasers or sellers in wholesale petroleum markets'');
ISDA at 7 (stating that in the absence of legal trust relationships,
it is unclear if Rule 10b-5 principles are applicable to wholesale
petroleum markets); Pirrong Tr. at 36 (stating that a Rule 10b-5
case raises ``issues related to fiduciary duty that are inherent in
the securities laws, but which are not really appropriate or really
that relevant in a commodities context''); API at 25 (arguing that
unlike wholesale petroleum markets, the securities marketplace is a
regulated industry ``governed by detailed disclosure obligations
designed to protect unsophisticated investors''); Plains at 3
(stating that in crude oil markets, unlike securities markets,
``there is no presumption that one market participant owes any
duties to its counterparties that would require disclosure of any
information'').
\55\ See, e.g., API at 9 (applying Rule 10b-5 precedent
``without any modification . . . would create confusion and chill
pro-competitive behavior''); NPRA at 16 (``[A] blanket transfer of
the language and precedent of Rule 10b-5 from securities markets to
wholesale petroleum markets would likely create significant
confusion and discourage procompetitive activity.'').
\56\ See, e.g., Flint Hills at 5 (stating that the proposed Rule
does not ``provide practical, clear, articulate guidance to its
staff, traders and others dealing on [its] behalf'' as to prohibited
conduct); API at 8 (stating that the benefits of an FTC rule are
outweighed by ``potentially significant compliance costs'' and the
risk of ``interfer[ing] with the efficient functioning of petroleum
markets and deter[ring] procompetitive, welfare-enhancing
behavior''); NPRA at 3 (``[A]s drafted, the language of the proposed
rule instead would prompt corporate compliance systems that would
impair the procompetitive and cost-efficient functioning of
wholesale petroleum markets.''); see also ISDA at 9 (``Under the
proposed Rule, market participants are likely to be concerned that
their competitive trading strategies or inadvertent miscalculations
may later be misconstrued by regulators . . . .'').
---------------------------------------------------------------------------
Many commenters offered modifications to the proposed Rule intended
to adapt it to wholesale petroleum markets.\57\ Commenters who urged
the Commission to diverge from SEC Rule 10b-5 legal precedent suggested
revising the proposed Rule to include express language requiring both a
showing of specific intent--to satisfy the scienter requirement\58\--
and a showing of price effects.\59\ Some commenters recommended that
the Commission draw instead upon legal precedent construing the
CEA.\60\ Others argued that an anti-fraud manipulation rule would not
go far enough, or that it should reach different types of conduct.\61\
One commenter, for example, suggested that the rule should target the
exercise of market power intended to benefit a derivatives
[[Page 18310]]
position.\62\ Other commenters specifically urged the Commission to
prohibit refiners and suppliers from refusing to sell unblended
gasoline to distributors.\63\
---------------------------------------------------------------------------
\57\ API and NPRA suggested that the Commission retain the
elements of a violation but not the language of the proposed Rule,
or at least modify the language of the proposed Rule to clarify its
application. API at 15-16; NPRA at 16-17 (stating that the elements
of SEC Rule 10b-5 detached from securities precedent and with
modifications are a ``better starting point'' for a rule rather than
the specific language of Rule 10b-5); see also API at 12 (``The
language of Section 811 thus authorizes the Commission . . . to
modify the Rule 10b-5 regime in light of its extensive experience
with the petroleum industry.''); ISDA at 6 (stating that, unlike the
FERC's market manipulation statute, Section 811 does not contain
express language directing it to rely on securities precedent).
\58\ Some commenters recommended that the Commission adopt the
CEA's specific intent standard. See, e.g., ISDA at 10-11 (stating
that the CEA's intent requirement is better suited for commodities
markets than the FTC's proposed scienter requirement); API at 21-22
(advocating for a specific intent standard similar to that of the
CEA); see also NPRA at 32 (stating that the proposed Rule should
require specific intent in order to harmonize the proposed Rule with
the CFTC's market manipulation authority); CFDR at 7 (stating that a
specific intent standard ``would substantially help to harmonize the
legal standard between the Commission's rule and the CFTC's
interpretation of the CEA'').
\59\ See, e.g., ISDA at 3-4 (asking that the Commission require
proof of price effects); Plains at 3 (urging the Commission to make
clear that only conduct that has a ``manipulative effect on the
relevant market'' will be actionable); API at 34 (recommending that
the Commission require ``proof that a party's deceptive or
fraudulent conduct caused market conditions to deviate materially
from the conditions that would have existed but for that conduct'').
\60\ A few commenters asserted that the standards applied to
commodities markets, including futures commodities markets, under
the CEA are more applicable to petroleum markets than is securities
legal precedent. See, e.g., ISDA at 11 (stating that CEA ``precedent
is much more analogous to the markets the EISA seeks to protect'');
API at 15 (urging the Commission to ``draw on relevant commodities
law precedents in addition to elements of Rule 10b-5''); see also
Brown-Hruska at 4 (``[T]he mission of the Commission is more
analogous to that of the commodities market regulator, the CFTC,
which has the responsibility to ensure that the prices derived from
and used by futures markets are fair and free from fraud and
manipulation.''). See generally Pirrong at 5 (recommending that the
Commission follow a modified CEA price manipulation model). But see
NPRA (DeSanti), Tr. at 251 (``I want to be explicit that the NPRA
does not support using [a] CEA model here.'').
\61\ See, e.g., Navajo Nation (Piccone), Tr. at 37-38 (arguing
that a rule should address nonfraudulent, manipulative acts such as
a refiner denying producers access to other markets); Navajo Nation
at 3 (seeking confirmation that an FTC rule ``will be applied to
prohibit all manipulative conduct that artificially distorts
wholesale petroleum markets or undermines incentives to find and
develop reserves of domestic crude oil''); see also CFA (Cooper),
Tr. at 160 (stating that fraud is too narrow a focus and the
proposed Rule also should cover market power issues); CFA2 at 8
(urging the FTC to ``identify and attack the broad range of
practices and structural conditions that can and have been moving
prices in the markets'').
\62\ Pirrong at 2-5 & n.2 (defining ``derivatives'' to include
``exchange-traded futures contracts, and options on futures, and
forward and options contracts traded in the over-the-counter . . .
market'').
\63\ MPA at 2 & n.1 (noting that MPA's members share the
experiences described by IPMA and TOMA in their ANPR comments and
IPMA in its NPRM comment, and that distributors and retailers can
often obtain more competitive prices if they buy unblended gas
separately from ethanol, which they then add to the gasoline before
selling it at retail); see also NPCA at 1; IPMA at 2-3. MPA also
recommended that the Commission reach the aforementioned conduct,
which has ``an adverse effect on competition'' under an FTC rule.
MPA at 2. The Commission does not intend to focus on anti-
competitive conduct in its application of the final Rule, which
remains the province of antitrust law. The approach is consistent
with Section 815 of EISA. See 42 U.S.C. 17305(b); see also ABA
Energy (McDonald), Tr. at 244 (arguing that the final Rule should
not reach conduct that is already covered by the antitrust laws,
such as the unilateral exercise of market power).
---------------------------------------------------------------------------
Based on the rulemaking record developed thus far, as well as its
extensive experience with the petroleum industry, the Commission
believes that modifying the proscriptions of the initially proposed
Rule will better focus it on wholesale petroleum markets, which differ
significantly from securities markets. As explained in the ANPR and the
NPRM, the conduct prohibition in Section 811 is identical to language
found in SEA Section 10(b), which prohibits the use of any
``manipulative or deceptive device or contrivance.''\64\ The Commission
believes that this language directs the agency to be guided by SEC Rule
10b-5,\65\ a broad anti-fraud rule.\66\ However, the inclusion of the
language ``as necessary or appropriate'' in Section 811 further directs
the Commission to use its expertise to tailor the rule in a manner
appropriate for wholesale petroleum markets.\67\
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\64\ See 73 FR at 25619; 73 FR at 48322. The anti-manipulation
authority granted to the FERC also contains the identical conduct
prohibition, and the statute granting that authority explicitly
directed the FERC to rely upon SEA Section 10(b) in defining the
terms ``manipulative or deceptive device or contrivance.'' See 15
U.S.C. 717c-1; 16 U.S.C. 824v.
\65\ The language of Section 811 reflects congressional intent
that the Commission look to SEC Rule 10b-5 in crafting a market
manipulation rule. See Evans v. United States, 504 U.S. 255, 260 n.3
(```[I]f a word is obviously transplanted from another legal source,
whether the common law or legislation, it brings the old soil with
it.''') (quoting Felix Frankfurter, Some Reflections on the Reading
of Statutes, 47 Colum. L. Rev. 527, 537 (1947)); Morissette v. U.S.,
342 U.S. 246, 263 (1952) (noting where Congress borrows terms of art
it ``presumably knows and adopts the cluster of ideas that were
attached to each borrowed word''); see also National Treasury
Employees Union, et al. v. Chertoff, 452 F.3d 839, 858 (D.C. Cir.
2006) (stating that ``there is a presumption that Congress uses the
same term consistently in different statutes'').
\66\ Superintendent of Ins. of N.Y. v. Bankers Life & Cas. Co.,
404 U.S. 6, 12 (1971) (stating that preserving the integrity of
securities markets is one of the purposes of Rule 10b-5); U.S. v.
Russo, 74 F.3d 1383, 1391 (2d Cir. 1996) (``[F]rauds which
`mislead[] the general public as to the market value of securities'
and `affect the integrity of the securities markets' . . . fall well
within [Rule 10b-5].'') (citations omitted); In re Ames Dep't
Stores, Inc. Stock Litig., 991 F.2d 953, 966 (2d Cir. 1993) (stating
that frauds affecting the integrity of securities markets fall under
Rule 10b-5).
\67\ To do otherwise would violate a canon of statutory
construction. See TRW, Inc. v. Andrews, 534 U.S. 19, 31 (2001) (``It
is `a cardinal principle of statutory construction' that `a statute
ought, upon the whole, to be so construed that, if it can be
prevented, no clause, sentence, or word shall be superfluous, void,
or insignificant.''') (citations omitted).
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The Commission has modified the initially proposed Rule after
considering comments provided during the public comment period and at
the public workshop. The modifications should clarify the requirements
imposed by the revised proposed Rule for market participants. The
Commission recognizes that, in the absence of a more extensive
regulatory scheme, the omissions provision in Section 317.3 of the
initially proposed Rule could discourage legitimate business conduct in
wholesale petroleum markets that benefits consumers. Therefore, the
Commission has consolidated the three subsections of Section 317.3 into
two subsections, and has added language both to sharpen its focus on
fraudulent and deceptive conduct and to reduce potential adverse
effects on legitimate business conduct. Specifically, the Commission
has added an explicit scienter standard for each subsection of Section
317.3, and has added language to the omissions provision now contained
in Section 317.3(b) to ensure that it prohibits only the omission of
material facts that is both misleading under the circumstances and
distorts or tends to distort market conditions for the covered
products.
The Commission has retained the general anti-fraud prohibition
contained in Section 317.3(c) of the initially proposed Rule in revised
proposed Section 317.3(a). Thus, revised proposed Section 317.3(a)
would prohibit any person from knowingly engaging in conduct--including
making any untrue statement of material fact--that operates or would
operate as a fraud or deceit on any person. Revised proposed Section
317.3(a) would not prohibit omissions of material facts. Such omissions
would instead be covered by revised proposed Section 317.3(b), which
would prohibit any person from intentionally failing to state a
material fact which both makes a given statement misleading under the
circumstances and distorts or tends to distort market conditions for a
covered product. These modifications are intended to eliminate
redundancy and more precisely define the conduct that revised proposed
Rule Section 317.3 would prohibit; that is, fraudulent or deceptive
conduct that injects false information into wholesale petroleum market
transactions.
The Commission believes that this framework best reflects both
congressional intent and the nature of the markets covered by the
revised proposed Rule. The Commission recognizes, however, that this
approach may be too narrow to prevent all manipulative conduct. The
Commission therefore does not foreclose the possibility of extending
the scope of any final rule in the future if new information or
enforcement experience warrant such modifications.
B. Section 317.1: Scope
Section 813 provides the Commission with the same jurisdiction and
power under Subtitle B of EISA as does the FTC Act, 15 U.S.C. 41 et
seq.\68\ With certain exceptions, the FTC Act provides the agency with
jurisdiction over nearly every economic sector. Because EISA does not
expand or contract coverage under the FTC Act, any ``person'' currently
subject to the Commission's jurisdiction--that is, any individual,
group, unincorporated association, limited or general partnership,
corporation, or other business entity--would be covered by the revised
proposed Rule. Conversely, any ``person'' not subject to Commission
jurisdiction under the FTC Act would also not be subject to Commission
jurisdiction under the revised proposed Rule.
---------------------------------------------------------------------------
\68\ Section 813(a) of EISA 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 (15 U.S.C. 41 et seq.) were incorporated into and made a
part of [Subtitle B].'' 42 U.S.C. 17303 (emphasis added).
---------------------------------------------------------------------------
In response to the NPRM, some commenters asked the Commission to
clarify the jurisdictional scope of any final rule. With respect to
pipelines, one commenter, AOPL, asserted that ``interstate common
carrier oil pipelines regulated by the FERC under the ICA are exempt
from Commission jurisdiction'' and should be excluded from the coverage
of any FTC rule.\69\ AOPL
[[Page 18311]]
further suggested that the Commission provide a ``safe harbor
protecting oil pipelines against any culpability under the rule so long
as they are acting in accordance with the ICA and FERC regulation of
oil pipelines pursuant to the ICA.''\70\ In support of this position,
AOPL argued that the FERC already regulates pipelines extensively\71\
and that the potential for manipulation of commodities prices by oil
pipelines is small.\72\ Another commenter, ATAA, opposed any safe
harbors or exemptions for pipelines in order to give full effect to the
purpose of EISA.\73\ According to ATAA, it is important for the
Commission to police this area because ``it is far from clear that
FERC's jurisdiction extends to price manipulation,'' and because the
``FERC has never pursued `price manipulation' claims'' against oil
pipelines.\74\
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\69\ AOPL at 1 & n.3 (urging the Commission to clarify that it
will not apply a Section 811 rule to reach common carrier oil
pipelines, defining ``oil pipelines'' to include crude oil and
petroleum products pipelines).
\70\ AOPL at 14.
\71\ AOPL asserted that comprehensive regulation of oil
pipelines by the FERC makes regulation by the FTC under any final
rule ``neither necessary nor appropriate in the public interest or
for the protection of U.S. citizens.'' AOPL at 11.
\72\ AOPL at 11-12 (contending that ``there is little or no
potential for manipulation of oil commodities prices on the part of
oil pipelines'' because regulations and competition limit pipeline
companies' ability to engage in anticompetitive conduct).
\73\ ATAA at 4 (arguing that the Commission should reach
manipulative conduct relating to oil pipelines in order to give full
effect to EISA); see also Navajo Nation (Piccone), Tr. at 37-38
(arguing that Congress gave the FTC new authority to combat anti-
competitive practices, including practices by pipelines); IPMA at 4
(``We agree that Commission jurisdiction should extend to
pipelines.'').
\74\ ATAA at 5 (asserting that the FERC ``exercises what at best
can be described as `light-handed' regulation of oil pipelines and
[it] has never pursued `price manipulation' claims at all''); see
also Navajo Nation (Hollis), Tr. at 239 (explaining the FERC's
limited authority over oil pipelines).
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In response, the Commission notes that not all pipelines
necessarily fall outside the coverage of the FTC Act.\75\ Certain
pipeline companies or their activities may fall outside the coverage of
the FTC Act to the extent that they are acting as ``common carriers.''
However, pipeline companies and their owners or affiliates are often
involved in multiple aspects of the petroleum industry--including the
purchase or sale of petroleum products, and the provision of
transportation services--and they may engage in conduct in connection
with wholesale petroleum markets covered by EISA.
---------------------------------------------------------------------------
\75\ Under the Clayton Act, the Commission has the power and
authority to regulate mergers and acquisitions of pipelines. See
Clayton Act, Sections 7 and 11, 15 U.S.C. 18, 21.
---------------------------------------------------------------------------
FERC regulation of pipelines would be an insufficient basis upon
which to exempt pipeline companies if they engage in prohibited conduct
in connection with the wholesale purchase or sale of crude oil,
gasoline, or petroleum distillates. The Commission therefore must
assess on a case-by-case basis whether any particular ``person'' as
defined in the revised proposed Rule--or any conduct at issue--may fall
outside the scope of the revised proposed Rule, and/or whether the
conduct at issue falls under the ``in connection with'' language in the
revised proposed Rule, which is discussed below.
Some commenters argued that any final rule should not extend to
fraud in futures markets, as the Commission had proposed. Many of these
commenters observed that the CFTC has exclusive jurisdiction pursuant
to Section 2(a)(1)(A) of the CEA,\76\ and that the Commission should
therefore grant a safe harbor for futures markets activities.\77\ These
commenters argued in particular that Congress granted the CFTC
exclusive jurisdiction over futures markets in order to create uniform
rules and to avoid applying inconsistent legal standards to futures
markets.\78\ They further argued that if an FTC rule applied to futures
trading, market participants could face duplicative and possibly
inconsistent enforcement by multiple agencies based on the same
conduct.\79\ One commenter maintained that if the Commission declined
to adopt a safe harbor, the Commission should harmonize any final rule
with the elements of a cause of action for price manipulation under the
CEA, which are not part of the statutory provision.\80\
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\76\ Section 2 of the CEA states that ``[t]he [CFTC] 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 [S]ection 7 or 7a of this title'' of
the CEA. 7 U.S.C. 2(a)(1)(A).
\77\ See, e.g., CFTC (Arbit) at 1 (``We again urge the FTC to
incorporate an exception from its rule for commodity futures and
options trading activity on regulated futures exchanges, which is
subject to the CFTC's exclusive jurisdiction granted by the
[CEA].''); CFTC (Chilton) at 2 (``I urge the FTC to incorporate an
exception for futures trading subject to the exclusive jurisdiction
of the CEA.''); MFA at 2 (urging the Commission on behalf of futures
associations and exchanges to grant a safe harbor for futures and
options trading). But see CA AG at 3-4 (advocating against
application of safe harbors designed specifically to avoid overlap
with the CFTC's regulatory jurisdiction and warning of potential
jurisdictional limitations created by ``shackling the FTC with the
restrictions placed upon CFTC authority''); ATAA at 4 (``[T]he rule
proscribes `manipulation or deceptive conduct' in a narrow and
straightforward manner that does not `improperly intrude upon the
jurisdiction of the CFTC or any other agency.'''); Pirrong at 8
(noting that in giving the FTC market manipulation authority,
Congress has in some respects rendered moot any questions of the
FTC's interference with the CFTC's jurisdiction); CFA2 at 19-20
(urging the Commission to reach conduct in futures markets).
\78\ See, e.g., MFA at 3 (``Congress designed the CFTC's
exclusive jurisdiction to make absolutely certain that the
provisions of the CEA . . . would be the sole legal standards
applicable to futures trading.''); CFTC (Arbit) at 3 (stating that
Congress granted the CFTC exclusive jurisdiction over futures
trading to avoid applying inconsistent standards to futures
markets); see also CFDR at 9 (stating that it seems illogical to
apply a rule specifically intended to govern activities in the
commodities markets to futures markets); CFTC (Chilton) at 1
(stating that applying a Section 811 rule to futures markets ``would
seriously undermine the Congressional grant of exclusive
jurisdiction in the CEA, and impair the CFTC's ability to
effectively oversee futures activity''); see also Sutherland at 2
(asserting that the proposed Rule ``impinges upon the [CFTC's]
exclusive jurisdiction with respect to the futures and other purely
financial markets'').
\79\ See, e.g., Sutherland at 2 (``The proposed rule creates a
duplicative and potentially highly burdensome enforcement
regime.''); CME (Dow), Tr. at 29 (explaining that application of an
FTC rule to futures markets is a ``recipe for disaster . . . because
it results in overlapping regulatory regimes by multiple
regulators''); MFA at 3 (arguing that the legislative history and
the language of CEA's exclusive jurisdiction provision demonstrates
that Congress believed that applying conflicting or duplicative
regulations to futures markets would ``impair the operations of U.S.
futures markets''); Brown-Hruska at 8-9 (recommending that the
Commission narrow the focus of the rule to manipulative and
deceptive conduct in wholesale petroleum markets to avoid regulatory
overlap ``that would give rise to legal uncertainty in the exchange-
traded and over-the-counter derivative markets'').
\80\ MFA at 3 (urging the Commission ``to avoid having [the
Rule's] provisions contradict and conflict with CEA legal
requirements'' by requiring specific intent and a showing of price
effects as elements of an offense).
---------------------------------------------------------------------------
At this time, the Commission does not intend to adopt a blanket
safe harbor for futures market activities. Nonetheless, the Commission
recognizes the CFTC's jurisdiction ``with respect to accounts,
agreements . . . and transactions involving contracts of sale of a
commodity for future delivery.''\81\ Consistent with its longstanding
practice of coordinating its enforcement efforts with other federal or
state law enforcement agencies where it has overlapping or
complementary jurisdiction, the Commission intends to work
cooperatively with the CFTC in furtherance of the Commission's duty to
prevent fraud in wholesale petroleum markets.\82\
---------------------------------------------------------------------------
\81\ 7 U.S.C. 2(a)(1)(A).
\82\ This position is consistent with the views of commenters
who urged the FTC to work with the CFTC where appropriate, including
the CFTC itself. See, e.g., CFTC (Arbit) at 3 (``[T]he CFTC looks
forward to working in close cooperation with the FTC to efficiently
prosecute illegal activity in the petroleum industry where our
agencies share jurisdiction.''); Sutherland at 4 (``[C]ooperative
arrangements in place between the FTC and CFTC . . . can be tailored
to allow each agency to pursue the compliance matters within its
greatest competence--the physical markets in the case of the FTC and
the financial markets in the case of the CFTC.''); MFA at 9 (urging
the Commission and the CFTC to coordinate enforcement in areas
outside the CEA's exclusive jurisdiction provision for futures
markets).
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[[Page 18312]]
Finally, some commenters voiced the concern that if the Commission
relies upon the text and judicial construction of SEC Rule 10b-5
language and securities law precedent, courts would be more inclined to
find an implied private right of action under any final rule.\83\
Commenters urged the Commission to clarify that any final rule would
not create or imply a private right of action.\84\ In response, the
Commission notes that EISA does not expressly create a private right of
action.\85\ Whether a private right of action might be implied,
however, is a question of legislative intent for Congress or the
courts, not the Commission, to resolve.
---------------------------------------------------------------------------
\83\ See, e.g., NPRA at 15 (``The greater the emphasis on SEC
authorities as a source of the Commission's Rule, the greater the
likelihood that courts would follow the SEC model to imply a private
right of action under EISA as well.''); Flint Hills at 4 (noting
that the closer the Commission adheres to a SEC Rule 10b-5 model,
the more difficult it will be to design a compliance program to
preclude third-party litigation).
\84\ See, e.g., Sutherland at 7 (``[The Commission] should make
clear that neither EISA nor the proposed Rule creates any private
right of action.''); Plains at 1 (``We urge the Commission to make
it clear that its proposed rule does not create any private right of
action and that the rule may be enforced only by the Commission
itself.''); API at 10 (``The Commission should make clear in any
final Rule that it does not create a private right of action.'').
\85\ See API at 10 (agreeing that ``Congress did not expressly
provide for a private right of action in Section 811'').
---------------------------------------------------------------------------
C. Section 317.2: Definitions
The revised proposed Rule provides definitions for six terms:
``crude oil,'' ``gasoline,'' ``knowingly,'' ``person,'' ``petroleum
distillates,'' and ``wholesale.'' Five of these terms were defined in
the initial NPRM, and the definitions of those five terms herein remain
largely the same as those in the initially proposed Rule.\86\ In
addition, the revised proposed Rule now includes a definition of the
term ``knowingly.'' These definitions establish the scope of the
revised proposed Rule's coverage and provide guidance as to the
Commission's intended enforcement of the Rule.
---------------------------------------------------------------------------
\86\ 73 FR at 48325-26.
---------------------------------------------------------------------------
Several commenters addressed the definitions proposed in the
initial NPRM, and some of them also suggested additional definitions.
These comments, together with the Commission analysis of the
definitions that are included in the revised proposed Rule, are
discussed below.
1. Section 317.2(a): ``Crude oil''
Section 317.2(a) of the initially proposed Rule defined ``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.''\87\ As explained in the NPRM, the Commission
intended the definition to include ``liquid crude oil and any
hydrocarbon form that can be processed into a refinery feedstock,'' but
to exclude ``natural gas, natural gas liquids, or non-crude refinery
feedstocks.''\88\
---------------------------------------------------------------------------
\87\ 73 FR at 48325.
\88\ 73 FR at 48325.
---------------------------------------------------------------------------
Two commenters, PMAA and Navajo Nation, supported the proposed
definition of ``crude oil,''\89\ and no commenter provided a basis for
changing it. Section 317.2(a) of the revised proposed Rule thus retains
the substantive definition of ``crude oil'' in the initially proposed
Rule. However, the definition in the revised proposed Rule has three
non-substantive modifications.\90\ Section 317.2(a) of the revised
proposed Rule therefore defines ``crude oil'' as ``any mixture of
hydrocarbons that exists: (1) in liquid phase in natural underground
reservoirs and that remains 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.''
---------------------------------------------------------------------------
\89\ PMAA at 3 (``The definition[] of `crude oil' . . . seem[s]
appropriate.''); Navajo Nation at 7 (adopting the FTC's proposed
definition of ``crude oil'' in its recommended rule text).
\90\ The word ``exist'' in the definition has been replaced with
the word ``exists''; the phrase ``the mixture'' has been changed to
``any mixture''; and in the first part of the definition, the phrase
``which remain'' has been changed to ``that remains.''
---------------------------------------------------------------------------
2. Section 317.2(b): ``Gasoline''
Section 317.2(b) of the initially proposed Rule defined
``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.''\91\ Three commenters generally supported the proposed
definition.\92\
---------------------------------------------------------------------------
\91\ 73 FR at 48325.
\92\ PMAA at 3 (``The definition[] of . . . `gasoline' . . .
seem[s] appropriate.''); IPMA at 4 (agreeing with the Commission's
proposed definition of ``gasoline''); Navajo Nation at 7 (adopting
the FTC's proposed definition of ``gasoline'' in its recommended
rule text).
---------------------------------------------------------------------------
Several commenters offered views on whether ethanol or renewable
fuels should be included as covered products under any final rule. Some
of them expressed general support for including ethanol or renewable
fuels.\93\ One commenter specifically opposed including ethanol in the
definition of ``gasoline.''\94\
---------------------------------------------------------------------------
\93\ See, e.g., ATA at 1 (encouraging the Commission to include
renewable fuels markets in the proposed Rule's reach); PMAA at 3
(stating that the Commission should reach the manipulation of
ethanol under the rule); see also IPMA at 4 (``[A]gree[ing] with the
language that manipulation of non-petroleum based commodities such
as ethanol and other oxygenates that directly or indirectly affect
the price of gasoline should be subject to Commission enforcement
under the proposed Rule.'').
\94\ MFA at 12 (requesting that the Commission ``delete its
reference to `ethanol' as a subset of `gasoline''').
---------------------------------------------------------------------------
Section 317.2(b) of the revised proposed Rule retains, without
modification, the definition of ``gasoline'' in the initially proposed
Rule. Consistent with its position in the NPRM, the Commission intends
to capture those commodities regularly traded as finished gasoline
products or as gasoline products requiring only oxygenate blending to
be finished, under this definition.\95\
---------------------------------------------------------------------------
\95\ See 73 FR at 48325.
---------------------------------------------------------------------------
The Commission tentatively has determined not to treat products not
listed in Section 811--such as renewable fuels (e.g., ethanol) and
blending components (e.g., alkylate and reformate)--as separate covered
products under its definition of ``gasoline.'' The Commission may
nonetheless apply the revised proposed Rule to conduct implicating non-
covered commodities if appropriate under the ``in connection with''
language in the revised proposed Rule, as discussed below in Section
IV.D.2.a.2. This approach would provide the Commission with sufficient
flexibility to achieve the statutory goal of protecting wholesale
petroleum markets from manipulation without expanding the reach of a
Section 811 rule to cover products not identified in the statute.
3. Section 317.2(c): ``Knowingly''
Section 317.2(c) of the revised proposed Rule defines ``knowingly''
to mean ``with actual or constructive knowledge such that the person
knew or must have known that his or her conduct was fraudulent or
deceptive.'' This definition has been added to provide guidance as to
the level of scienter required to establish a violation of the general
anti-fraud provision contained in revised proposed Rule Section
317.3(a). Consistent with the position the Commission adopted in the
NPRM, the definition of ``knowingly'' derives from the extreme
recklessness standard articulated by the Seventh Circuit and the
District of Columbia Circuit Courts of Appeals in decisions delineating
the appropriate scienter
[[Page 18313]]
standard under SEC Rule 10b-5.\96\ The Commission discusses in further
detail the intended application of the term ``knowingly'' in Section
IV.D.2.b.1. below.
---------------------------------------------------------------------------
\96\ 73 FR at 48329 (citing SEC v. Steadman, 967 F.2d 6436, 641-
42 (D.C. Cir. 1992)); see also Sundstrand Corp. v. Sun Chemical
Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. denied, 434 U.S.
875 (1977).
---------------------------------------------------------------------------
4. Section 317.2(d): ``Person''
Section 317.2(c) of the initially proposed Rule defined the term
``person'' to mean: ``any individual, group, unincorporated
association, limited or general partnership, corporation, or other
business entity.''\97\ PMAA and Navajo Nation were the only commenters
to address this definition, and both agreed that the definition is
appropriate.\98\ The Commission believes that this definition is
consistent with the jurisdictional reach of the FTC Act,\99\ as well as
with prior usage in other FTC rules.\100\ Therefore, the initially
proposed definition of ``person'' is retained without modification and
set forth in Section 317.2(d) of the revised proposed Rule.
---------------------------------------------------------------------------
\97\ 73 FR at 48325.
\98\ PMAA at 3 (``The definition[] of . . . `person' . . .
seem[s] appropriate.''); Navajo Nation at 8 (adopting the FTC's
proposed definition of ``person'' in its recommended rule text).
\99\ See 73 FR at 48325.
\100\ See, e.g., Telemarketing Sales Rule, 16 CFR 310.2(v);
Disclosure Requirements and Prohibitions Concerning Franchising, 16
CFR 436.1(n).
---------------------------------------------------------------------------
5. Section 317.2(e): ``Petroleum distillates''
Section 317.2(d) of the initially proposed Rule defined ``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.''\101\ The
initially proposed Rule also defined ``petroleum distillates'' to
include ``finished fuel products, other than `gasoline,' produced at a
refinery or blended in tank at a terminal.''\102\ Two commenters
supported the proposed definition of ``petroleum distillates,''\103\
while another asked whether the definition of ``petroleum distillates''
included heavy fuel oils (e.g., No. 5 and No. 6 fuel oils).\104\
Another commenter argued that any final rule should reach biodiesel and
other renewable fuels.\105\
---------------------------------------------------------------------------
\101\ 73 FR at 48325.
\102\ 73 FR at 48325.
\103\ PMAA at 3 (``The definition[] of . . . `petroleum
distillates' . . . seem[s] appropriate.''); Navajo Nation at 8
(adopting the FTC's proposed definition of ``petroleum distillates''
in its recommended rule text).
\104\ Sutherland at 7.
\105\ ATA at 3.
---------------------------------------------------------------------------
The definition of ``petroleum distillates'' now in revised proposed
Rule Section 317.2(e) remains unchanged from the initially proposed
Rule. The Commission clarifies that the term ``petroleum distillates''
includes middle distillate refinery fuel streams, and thus encompasses
all product streams above heavy fuel oils, up to and including lighter
products such as on-road diesel, heating oil, and kerosene-based jet
fuels. The definition, therefore, does not include heavy fuel oils.
As discussed in the definition of ``gasoline,'' the Commission
tentatively has determined not to extend the definition of ``petroleum
distillates'' to include renewable fuels, such as biodiesel. To do so
would expand the reach of the revised proposed Rule beyond the
products--``crude oil[,] gasoline or petroleum distillates''--expressly
specified in Section 811 of EISA. The Commission further addresses the
intended application of the revised proposed Rule to conduct
implicating non-covered products, such as renewable fuels, in its
discussion of the ``in connection with'' language in Section
IV.D.2.a.2. below.
6. Section 317.2(f): ``Wholesale''
Section 317.2 (e) of the initially proposed Rule defined 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.''\106\ A
few commenters generally agreed with the Commission's proposed
definition,\107\ and two commenters, MS AG and PMAA, expressly
supported including sales at the terminal rack level.\108\ PMAA
asserted that manipulation at the rack level would directly affect
``the thousands of PMAA members whose trucks load at these terminal
racks tens of thousand times each day.''\109\
---------------------------------------------------------------------------
\106\ 73 FR at 48326.
\107\ See, e.g., Navajo Nation at 8 (adopting the FTC's proposed
definition of ``wholesale'' in its recommended rule text); PMAA at 3
(``PMAA is in agreement with the Commission's definition of
`wholesale' . . . .'').
\108\ MS AG at 3; PMAA at 3; see also IPMA at 4 (agreeing that
```wholesale' means purchases at the terminal rack or upstream of
the terminal rack''); Platts (Kingston), Tr. at 154 (stating that
``[w]hen I hear wholesale, I tend to think of [it] as rack'').
\109\ PMAA at 3.
---------------------------------------------------------------------------
Other commenters, however, opposed including transactions at or
downstream of the terminal rack level, and they proposed revising the
definition of ``wholesale'' to limit its meaning to purchases or sales
of product in ``bulk'' quantities.\110\ A few commenters argued that,
although the term by definition included rack sales, public policy
considerations supported limiting its scope. These commenters contended
that ``rack pricing decisions are qualitatively different from those
that arise in market-based bulk transactions,''\111\ and that rack
pricing practices were unlikely to affect overall price levels in
markets served by a terminal or group of terminals.\112\ They further
argued that applying the Rule to rack transactions ``could jeopardize
the ability of wholesale suppliers to respond to market conditions,''
and would also impose significant compliance burdens on the
industry.\113\
---------------------------------------------------------------------------
\110\ API and NPRA, for example, suggested that the Commission
limit the term ``wholesale'' to ``bulk purchases or sales in
contract quantities of 20,000 barrels or more, delivered or received
via pipeline, marine transport or rail, at or near a location for
which a price publication firm publishes a reference price.'' API at
30; NPRA at 30-31, see also SIGMA at 3 (suggesting that the
Commission define ``wholesale'' to include only ``transactions
involving quantities of product equal to or greater than the minimum
pipeline tenders or barge volumes via which a terminal or terminal
cluster receives supplies'').
\111\ API at 29; NPRA at 30.
\112\ SIGMA at 2 (contending that although ``[p]articular
pricing practices at the rack level may have an impact on a
particular supplier's customers,'' such practices would likely not
``alter overall price levels in the markets served out of a terminal
or terminal cluster''); see also API at 30; NPRA at 30 n.46
(``Wholesale rack prices are limited to a relatively small
geographic area.'').
\113\ Additionally, API and NPRA argued that the Commission
already has a price monitoring program for terminal rack pricing in
place and it has not identified a ``problem at the wholesale rack
level that would suggest a regulatory remedy is required.'' API at
29-30; NPRA at 30.
---------------------------------------------------------------------------
The Commission finds the arguments advocating the exclusion of rack
sales from the definition of ``wholesale'' to be unpersuasive, and at
this time tentatively has determined not to limit the definition to
bulk volume sales. As the Commission stated in the NPRM, and as some
commenters conceded, terminal rack sales are ``wholesale'' transactions
as that term is commonly defined.\114\ Excluding rack sales from the
definition would place the revised proposed Rule at odds with the
express language of EISA, which directs the Commission to prohibit
manipulative conduct in wholesale markets. Moreover, prohibited conduct
may in fact occur at the terminal rack level in connection with
wholesale petroleum transactions, to the detriment of consumers. Such a
determination requires analysis on a case-by-case
[[Page 18314]]
basis. Furthermore, the inclusion in the revised proposed Rule of an
explicit scienter requirement limiting the reach of the Rule to
``knowing'' or ``intentional'' conduct should assuage commenter
concerns about reaching rack transactions. Thus, the revised proposed
Rule covers terminal rack sales.
---------------------------------------------------------------------------
\114\ 73 FR at 48326; see NPRA at 30; API at 29-30 (stating that
its reasons for excluding practices at the terminal rack level and
below ``from the scope of the Rule are not definitional, but rather
based on public policy'').
---------------------------------------------------------------------------
The Commission has, however, modified the proposed definition of
``wholesale'' in recognition of the differences that may exist in the
patterns of distribution for crude oil, gasoline, and petroleum
distillates.\115\ As the Commission noted in the NPRM, the term
``wholesale'' may encompass one or both of the following concepts: (1)
the sale of large quantities of product, and (2) the sale of a product
for anticipated resale.\116\ With regard to the sale of products listed
in Section 811, the Commission recognizes that crude oil is sold in
bulk quantities independent of terminal racks. Similarly, large
quantities of jet fuel are often sold directly to airlines at airports
independent of any terminal rack. Therefore, the Commission is revising
the proposed definition of ``wholesale'' to address these differences,
clarifying that all bulk sales of crude oil and jet fuel--even when not
for resale--are encompassed by the revised proposed definition.
---------------------------------------------------------------------------
\115\ One commenter stated that the Commission's proposed
definition ``leaves uncertainty as to the status of retail
transactions that involve large end users.'' Sutherland at 7.
\116\ A common definition of ``wholesale'' is ```the sale of
goods in quantity, as to retailers or jobbers, for resale.''' See 73
FR at 48326 (citing (http://dictionary.reference.com/browse/
wholesale)) (emphasis added).
---------------------------------------------------------------------------
Specifically, Section 317.2(f) of the revised proposed Rule defines
``wholesale'' to mean ``(1) all purchases or sales of crude oil or jet
fuel; and (2) all purchases or sales of gasoline or petroleum
distillates (other than jet fuel) at the terminal rack level or
upstream of the terminal rack level.'' As modified, this revised
definition would not extend to retail sales of gasoline, diesel fuels,
or fuel oils to consumers;\117\ therefore, the language in the
originally proposed definition excluding such sales is now redundant
and has been deleted.\118\
---------------------------------------------------------------------------
\117\ See SIGMA at 1 (agreeing that any Section 811 rule should
not apply to retail gasoline sales); NPRA at 29; API at 30.
\118\ The definition of ``wholesale'' in the NPRM had stated
that ``[t]ransactions conducted at wholesale do not include retail
gasoline sales to consumers.'' 73 FR at 48326.
---------------------------------------------------------------------------
7. Other Suggested Definitions
A few commenters suggested adding definitions to any final rule to
clarify its scope and operation.\119\ Specifically, several commenters
proposed definitions for the terms ``manipulative or deceptive device
or contrivance,'' a phrase included in the text of Section 811.\120\
One commenter recommended that an FTC rule include a broad definition
of the terms ``manipulative or deceptive device, scheme or
contrivance'' that encompasses ``manipulative conduct that artificially
distorts wholesale petroleum markets or undermines incentives to find
and develop reserves of domestic crude oil.''\121\ Borrowing language
from the NPRM, another commenter urged the Commission to define a
``manipulative or deceptive act'' as an act that ``injects materially
false or deceptive information into the marketplace.''\122\ One
commenter proposed that any rule, regardless of scope, should define
``manipulation [as] an act that is deceptive, that causes an effect on
market prices, and [that] is intended by the actor to have such a
result.''\123\
---------------------------------------------------------------------------
\119\ See generally Van Susteren at 1 (noting that EISA provided
neither a definition for ``market manipulation'' nor the specific
elements that constitute a Section 811 violation).
\120\ One commenter suggested using SEC Rule 10b-5 language to
define this term. IPMA at 3-4 (contending ``that the [SEA] and SEC
Rule 10b-5 definition of `manipulative device or contrivance' as
`employ[ing] any device, scheme, or artifice to defraud' is
appropriate in this case'').
\121\ Navajo Nation at 3. Specifically, Navajo Nation
recommended the following definition for ``manipulative device,
scheme or contrivance'' be added: ``[C]onduct without substantial
efficiency justification that is intended to artificially stimulate,
depress or distort market prices or that foreseeably could
artificially stimulate, depress, or distort market prices.'' Id at
8.
\122\ NPRA at 28 (agreeing ``fundamental[ly]'' with the FTC's
definition of ``manipulative or deceptive act'' in the NPRM). NPRA
suggested that the FTC further define the type of information
injected into the market, by specifying that the information must be
about important aspects of supply or demand. Id. at 21.
\123\ Muris at 2; see also ISDA at 10 (stating that CEA legal
precedent has defined ``manipulative'' as ```an intentional exaction
of a price determined by forces other than supply and demand'''
(quoting Frey v. CFTC, 931 F.2d 1171, 1175 (7th Cir. 1991)). But see
NPRA (DeSanti), Tr. at 250-51 (arguing against the use of the CFTC's
definition of ``market manipulation'').
---------------------------------------------------------------------------
As described in greater detail in the discussion of Section 317.3
below, the Commission believes that the conduct prohibition in the
revised proposed Rule would give meaning to the term ``manipulative or
deceptive devices or contrivances'' found in Section 811, obviating the
need for an additional definition in the Rule itself. Moreover,
modifications to the proposed Rule's language clarify the type of
conduct that the revised proposed Rule would prohibit, providing better
guidance to market participants about its scope. Consistent with its
position in the NPRM, the Commission intends to focus on fraudulent and
deceptive conduct that injects false information into market
transactions.\124\ At this time, the Commission believes that it
remains unnecessary to define either ``manipulative or deceptive device
or contrivance'' or ``manipulative or deceptive act.''
---------------------------------------------------------------------------
\124\ See Section IV.A. for a discussion of the Rule as an anti-
fraud rule.
---------------------------------------------------------------------------
D. Section 317.3: Prohibited Practices
1. Initial Proposed Rule
Section 317.3 of the initially proposed Rule contained three
subparts (a) - (c), which respectively would have made it unlawful for
any person:
(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.\125\
---------------------------------------------------------------------------
\125\ 73 FR at 48326 (proposing language nearly identical to
that employed in SEC Rule 10b-5); see also 17 CFR 240.10b-5.
---------------------------------------------------------------------------
The NPRM discussed the scope and application of each subpart and
articulated the elements of a cause of action under the proposed Rule.
Commenters responded to the NPRM by discussing both the language of the
proposed Rule and its proposed elements. Several industry commenters
addressed the conduct provisions contained in proposed Section
317.3(a)-(c). Some commenters believed that the conduct provisions were
generally appropriate,\126\ and some expressed specific support for
individual subparts. For example, PMAA advised that it would support
the language used in proposed Section 317.3(a), as long as the proposed
Rule also contained a scienter requirement.\127\ ATAA also supported
proposed Section 317.3(c), noting that ``[t]his flexible standard is
exactly the sort of general prohibition of illegality that the FTC has
successfully enforced over its almost 100 year history.''\128\ In
addition, some commenters agreed with
[[Page 18315]]
including general, rather than specific, conduct prohibitions in the
proposed Rule.\129\
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\126\ See, e.g., CA AG at 2 (agreeing with the conduct
provisions of the proposed Rule); MS AG at 2 (endorsing the
Commission's proposed Rule); ATA at 2 (stating that the proposed
Rule properly prohibits manipulation); see also SIGMA at 2 (``In
particular, the Commission's decision to base its rule on Section
10b-5 of the [SEA] properly ensures consumer protection while
affording business owners a wealth of certainty with respect to
their market practices.'').
\127\ PMAA at 3.
\128\ ATAA at 12.
\129\ See, e.g., Sutherland at 2 (``We welcome the Commission's
decision not to propose specific conduct obligations or other
affirmative duties that superimpose government norms for the rules
of the marketplace.''); ATA at 2 n.3 (``We support the FTC's attempt
to preserve flexibility by issuing general conduct prohibitions so
as to allow for adaptation to changing market conditions and to
avoid a `laundry list of specifically proscribed conduct [that]
could quickly become out of date.''' (quoting 73 FR at 48322-23));
ATAA at 11 (``[T]he proposed rule properly contains a broad anti-
fraud provision.''); see also Platts at 9 (``Platts generally agrees
with a non-prescriptive approach for entities' participation in
price formation processes.''). Although they did not endorse a
``laundry list'' approach, a few other commenters sought to ensure
that a rule would proscribe specific conduct as manipulative under a
rule. See NPCA at 1; MPA at 2; IPMA at 3-4 (requesting that the
Commission treat an oil company's decision to sell only gasoline
pre-blended with ethanol at the terminal rack as a potentially
manipulative practice).
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Most industry commenters, however, argued that a perceived lack of
specificity about the conduct the proposed Rule would prohibit would
lead to adverse consequences, such as a reduction in voluntary
information disclosures by industry participants, and a reduction in
the number of new participants entering the marketplace.\130\ For
example, NPRA opposed the use of the phrase ``device, scheme, or
artifice to defraud'' in proposed Section 317.3(a),\131\ arguing that
the proposed Rule should ``identify more precisely the types of conduct
that the FTC may target as market manipulation . . . to avoid the
unintended chilling of procompetitive conduct.''\132\ Commenters also
expressed concerns about applying proposed Section 317.3(c) to
wholesale petroleum markets.\133\ One commenter argued that subpart (c)
should only cover conduct that has an effect on the market, rather than
on any individual person.\134\
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\130\ See, e.g., API at 9-10, 26 (arguing that the proposed Rule
was overly broad and would prompt market participants to adopt
compliance programs that restrict voluntary disclosures); ISDA at 9
(arguing that market liquidity, particularly in times of greater
market stress, would be adversely affected if ambiguous rule
provisions artificially constrain ``critical market activities'' or
dissuade potential market participants from entering the market);
NPRA at 3 (``Market participants believe they will need to implement
conservative compliance systems due to the uncertainty created by
the Commission's proposal to apply SEC precedent to enforcement of
the Rule . . . .''); Flint Hills at 3 (noting with approval the
concerns raised by NPRA that the ``breadth of the proposed rule
would create a significant amount of uncertainty as to what conduct
may be captured by the Rule''); Plains at 3 (``Given . . . the
uncertainties that will exist with respect to the [proposed Rule's]
scope and applicability, the imposition of liability without any
finding of an effect on the market or third parties will restrict
legitimate market activity . . . .'').
\131\ NPRA at 15-17 (arguing that the three elements of proof
required for the proposed Rule, rather than the specific language of
SEC Rule 10b-5, provide a better starting point for the development
of an FTC rule).
\132\ NPRA at 31. NPRA further recommended that the Commission
add the language ``manipulative or deceptive'' to modify the phrase
``device, scheme, or artifice to defraud'' in proposed Section
317.3(a). Id. at 32.
\133\ See, e.g., ISDA at 8 (noting that ``[w]hile this clause
may be reasonably clear in the securities context in which it has
been applied, it is not clear to ISDA's members what this would
require of commercial participants in physical, wholesale petroleum
markets'').
\134\ See MFA (Young), Tr. at 45 (arguing that the language
``any person'' in proposed Section 317.3(c) is overreaching); NPRA
at 31.
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With respect to subpart (b) of the initially proposed Rule,
commenters have generally supported its prohibition of untrue
statements of material fact.\135\ Thus, in response to the ANPR,
several commenters generally agreed that a rule should ban untrue
statements because they interfere with well-functioning markets.\136\
Similarly, in response to the NPRM, many commenters and workshop
participants agreed that the proposed Rule should prohibit materially
false statements, provided that such statements affected the
marketplace.\137\
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\135\ See, e.g., Flint Hills at 3-4 (``[I]nstructing employees
not to knowingly lie to their purchasers about supply conditions in
order to drive up market prices draws a bright line that can be
clearly communicated and audited without the need to limit
legitimate conduct.'').
\136\ Several ANPR commenters noted that reporting false
information to private reporting services and to government agencies
can be troublesome because market participants rely on information
from private reporting services and government agencies to conduct
business transactions. See, e.g., API, ANPR, at 50 (stating that
firms rely on private reporting services to understand industry
trends and as a basis for contract pricing and that providing false
or misleading information to these services ``could be
problematic''); Plains, ANPR, at 4 (urging the Commission to
prohibit the dissemination of false or misleading information made
with the intent to defraud); PMAA, ANPR, at 7 (stating that because
its members rely on private and government data reports, the
Commission should publish a rule that ensures the accuracy of this
data); Muris at 10 (``Deliberate false reports of transaction
details to influence a price index should be a violation of a
manipulation rule.'').
\137\ See, e.g., ISDA (Velie), Tr. at 41-42, 58 (agreeing that
the Commission should focus on lies and other false statements if
made with the specific intent to manipulate the market); MFA
(Young), Tr. at 45 (agreeing that the dissemination of outright lies
that cause an artificial market price should be prohibited); CFDR
(Mills), Tr. at 48-49 (urging the Commission to only target false
statements that act as a fraud on the marketplace rather than those
made in bilateral negotiations between counterparties); API at 9
(suggesting that the Rule be limited to ``intentionally deceptive or
fraudulent statements or acts designed to manipulate a wholesale
petroleum market''); PMAA at 3; see also ATA at 2 (stating that the
Commission should go after ``[d]eceptive or manipulative practices .
. . used to disseminate false information or omit material
information that causes market participants to perceive a change in
the supply or demand''); ATAA at 2 (``The FTC's efforts in
preventing market manipulation and the providing of false
information are an important part of addressing the nation's and the
airline industry's energy crisis.''); CFA (Cooper), Tr. at 56-57
(contending that the Commission should reach all false statements
under the Rule, regardless of context, that have a potential to
affect the market).
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By contrast, although one commenter endorsed the proposed Section
317.3(b) prohibition of misleading statements through the omission of
material facts,\138\ nearly all the other commenters who addressed
proposed Section 317.3(b) opposed it. Commenters argued that
prohibiting such omissions would not make sense in petroleum markets,
because participants in wholesale petroleum markets--unlike securities
market participants--have no legal obligation to disclose certain
information to counter parties.\139\ They also argued that basing
liability upon the failure to disclose material facts in wholesale
petroleum markets would create confusion\140\ and chill legitimate
business conduct.\141\ These commenters
[[Page 18316]]
asserted that the proposed Rule therefore would discourage companies
from disclosing information voluntarily--in order to avoid liability
for material omissions--and, as a consequence, would reduce the flow of
information in petroleum markets and interfere with market efficiency
and functions.\142\
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\138\ See PMAA at 3 (approving of the use of established
securities law precedent regarding false material facts and
omissions of material fact).
\139\ See, e.g., NPRA at 7 (stating that, unlike securities
markets, wholesale petroleum market participants do not have ``a
duty to disclose to a counterparty the types of material, nonpublic
information about [their] own compan[ies] with which Rule 10b-5 is
concerned''); ISDA at 7 (noting that unlike securities markets,
wholesale petroleum markets are not characterized by relationships
that give rise to duties to disclose); API at 25 (``Permitting
courts to base liability on failure to disclose facts . . . may make
sense in the highly regulated securities industry, in which
regulated parties often have access to material non-public
information about the issuer that may affect the true value of the
security, and therefore are governed by detailed disclosure
obligations designed to protect unsophisticated investors.''); see
also CFDR (Mills), Tr. at 129 (stating that in the securities arena,
courts rely on the existence of fiduciary and other relationships to
impose an affirmative duty on market participants to provide more
information, and in the absence of such a relationship, participants
do not have a duty to provide additional information).
\140\ Commenters also asserted that to the extent disclosures
are required for market participants to comply with an FTC rule,
there may be conflicts with other laws. See, e.g., NPRA at 10 (``It
would be inconsistent with established antitrust law for a market
manipulation rule to have the perverse effect of requiring
competitors to disclose to each other a wide range of competitively
sensitive information . . . .''); Flint Hills (Hallock), Tr. at 126
(stating that ``there can arise situations where . . . information
exchanges [are] being encouraged [by the proposed Rule], whereas the
antitrust laws would greatly discourage those sorts of information
exchanges''); AOPL (Stuntz), Tr. at 176-77 (contending that if the
Rule is applied to oil pipelines, the omissions requirement would
conflict with the ICA).
\141\ See, e.g., API at 26 (``By reducing the amount of
information in the marketplace, the omissions standard set forth in
the NPRM could have a serious and harmful impact on the efficiency
of petroleum markets.''); CAPP at 2 (stating that the omissions
language is likely to have a chilling effect because it is ambiguous
in its application); Flint Hills at 3-4 (agreeing that the omissions
provision is ambiguous in its application and would present
compliance difficulties); NPRA at 33 (suggesting deletion of the
omissions language because failing to do so ``would tend to chill
procompetitive information disclosures due to a fear of liability
for having made an incomplete or insufficiently caveated, not to
mention simply mistaken, statement''); see also Muris at 12 (``[I]t
is particularly important that the Commission identify with clarity
omissions of information that would be actionable under the
rule.'').
\142\ See, e.g., Brown-Hruska at 7 (stating that unlike
securities markets, ``[a] prohibition that may result in the
prosecution of omissions discourages the collection and profitable
use of market information in decisions regarding supply,
transactions, and pricing [in commodities and physical petroleum
markets] and could harm market efficiency and impair market
function''); Flint Hills at 4 (stating that if the Rule covers
omissions it will be difficult to design a compliance program that
does not restrict legitimate conduct); NPRA at 13-14 (explaining
that if the Commission prohibits omissions under the Rule, companies
will instruct their employees to reveal less information in order to
avoid potential liability). Commenters were also concerned that
entities would use the omissions provisions to bring vexatious
litigation. See, e.g., Flint Hills at 4 (stating that in-house
counsels would advise their clients to ``reveal as little
information as possible'' to avoid third-party challenges based on
omissions and unintentional misstatements); NPRA at 10-11
(expressing concern that a ```full disclosure' rule would distort [a
company's] decisions about whether to disclose information that may
be incomplete'' due to its fear of counterparty litigation); Brown-
Hruska at 8 (warning that an overbroad interpretation of the term
``misleading'' in Section 317.3(b) ``is likely to give rise to ex
post opportunistic behavior on the part of counterparties who did
not possess the allegedly omitted information and are unhappy with
the deal they struck'') (emphasis in original); see also API at 24
(stating that the proposed Rule leaves ``open the possibility of
liability arising from `incomplete' disclosures'').
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2. Revised Proposed Rule
Section 317.3 sets forth the conduct prohibited by the revised
proposed Rule. Specifically, this provision 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, to:
(a) knowingly engage in any act, practice, or course of business--
including the making of any untrue statement of material fact--that
operates or would operate as a fraud or deceit upon any person; or
(b) intentionally fail to state a material fact that under the
circumstances renders a statement made by such person misleading,
provided that such omission distorts or tends to distort market
conditions for any such product.\143\
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\143\ This provision of the revised proposed Rule, therefore,
sets forth conduct that would be manipulative or deceptive, pursuant
to Section 811.
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The revised proposed Rule would broadly prohibit fraudulent or
deceptive conduct, which may take various forms, including the
intentional omission of material information. The modifications to the
conduct provisions in the initially proposed Rule are intended to
clarify the type of conduct that likely would violate the Rule. First,
the Commission has consolidated the conduct prohibitions language in
Section 317.3 of the initially proposed Rule to more clearly and
precisely denote the unlawful conduct it prohibits. Second, to address
the concern that the proposed Rule would chill legitimate conduct, the
revised proposed Rule explicitly sets forth a scienter standard for
each of the two conduct provisions.\144\ Third, while the revised
proposed Rule would also prohibit material omissions, the Commission
has modified the prohibition to address specific concerns about the
risk of deterring voluntary disclosures of information, by requiring a
showing that the omission at issue distorts or tends to distort market
conditions. With these modifications, the Commission believes the
revised proposed Rule would serve the public interest by appropriately
prohibiting manipulative conduct that injects false information into
market transactions, without unnecessarily burdening legitimate
business practices.
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\144\ As the Commission noted in the ANPR and the NPRM,
``nothing in connection with this Section 811 [r]ulemaking, any
subsequently enacted rules, or related efforts should be construed
to alter the standards associated with establishing a deceptive or
an unfair practice in a case brought by the Commission.''
Specifically, intent need not be shown to establish that a
particular act or practice is deceptive or unfair, and therefore
violates Section 5 of the FTC Act. See, e.g., FTC v. Bay Area
Business Council, Inc., 423 F.3d 627, 635 (7th Cir. 2005); FTC v.
Freecom Communications, Inc., 401 F.3d 1192, 1202 (10th Cir. 2005);
FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573-74 (7th Cir. 1989).
73 FR at 25619 n.55; 73 FR at 48322 n.61.
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Specifically, Section 317.3(a) of the revised proposed Rule would
prohibit any conduct that operates or would operate as a fraud or a
deceit, provided that the alleged violator engaged in the prohibited
conduct knowingly; that is--as defined in the revised proposed Rule--
with extreme recklessness. Revised proposed Rule Section 317.3(b)
separately would prohibit statements that are misleading because they
both intentionally omit material facts and threaten the integrity of
wholesale petroleum markets. In particular, Section 317.3(b) requires a
showing that the alleged violator intends to mislead by
``intentionally'' omitting material facts from statements where they
are needed in order to render such statements not misleading. The
intent requirement and the proviso that the omission threaten the
integrity of a petroleum market are intended to address many
commenters' concerns that the omissions provision in initially proposed
Rule Section 317.3(b) would have chilled legitimate business conduct by
failing to focus more precisely on prohibiting fraudulent and deceptive
conduct likely to harm wholesale petroleum markets.
The Commission does not intend the revised proposed Rule to
prohibit inadvertent mistakes, unintended conduct, or legitimate
conduct undertaken in the ordinary course of business.\145\ The revised
proposed Rule also would not impose any recordkeeping
requirements.\146\ In short, the revised proposed Rule would prohibit
fraudulent or deceptive conduct in wholesale petroleum markets without
unduly impeding beneficial market behavior.
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\145\ Consistent with its position in the NPRM, the Commission
currently does not expect to impose specific conduct or duty
requirements, such as a duty to supply product, a duty to provide
access to pipelines or terminals, a duty to disclose, or a duty to
update or correct information. In particular, the revised proposed
Rule would not require covered entities to disclose price, volume,
and other data to individual market participants, or the market at
large, beyond any obligation that may already exist. See 73 FR at
48326-27.
\146\ See 73 FR at 48332.
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The following section discusses the modifications in Section 317.3
and relevant comments. The RNPRM first discusses the meaning of the
following phrases embedded in the preamble: ``directly or indirectly''
and ``in connection with.'' It then reviews the two conduct provisions,
including in particular the scienter standard, prohibited conduct, and
other concepts that are pertinent to each provision. The Commission
seeks comments on the specific formulation of revised proposed Rule
Section 317.3, and in particular on whether the Rule would effectively
prohibit fraudulent and deceptive behavior in wholesale petroleum
markets without unduly burdening legitimate business conduct.
a. Preamble Language
(1) ``Directly or Indirectly''
In the NPRM, the Commission stated that ``[m]anipulative or
deceptive conduct involving non-petroleum based commodities that
directly or indirectly affect[s] the price of gasoline . . . may be the
subject of Commission enforcement under the proposed Rule.'' One
commenter, MFA, questioned the
[[Page 18317]]
correct interpretation of the phrase ``directly or indirectly,'' used
in the preamble to Section 317.3 of the proposed Rule. MFA argued that
Section 811 of EISA ``does not authorize the Commission to prohibit any
misconduct that directly or indirectly affects wholesale gasoline
prices.''\147\ Rather, according to MFA, ``[t]he phrase `directly or
indirectly' modifies `use or employ' in Section 811, nothing more or
less.''\148\
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\147\ MFA at 10.
\148\ MFA at 11. MFA further argues that because ethanol is
subject to futures trading and, thus, is ``a statutory `commodity'
under the CEA,'' ethanol is subject to the exclusive jurisdiction of
the CFTC and should be exempt from any FTC market manipulation rule.
Id. This argument is addressed above in Section IV.B.
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The Commission intends that the phrase ``directly or indirectly''--
which originates in Section 811 of EISA\149\ and is also included in
revised Section 317.3--delineates the level of involvement necessary to
establish personal liability under the revised proposed Rule. In
particular, it means that the revised proposed Rule will impose
liability not only upon any person who directly engages in
manipulation, but also against any person who does so indirectly. Thus,
the Commission intends that the phrase ``directly or indirectly'' in
the revised proposed Rule be interpreted and applied to prevent a
person from engaging in the prohibited conduct, either alone or through
others.
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\149\ ``It is unlawful for any person, directly or indirectly,
to use or employ . . . .'' 42 U.S.C. 17301 (emphasis added).
---------------------------------------------------------------------------
(2) ``In Connection With''
Section 811 authorizes the Commission to prohibit manipulative
conduct undertaken ``in connection with'' the purchase or sale of crude
oil, gasoline, or petroleum distillates at wholesale. In the NPRM, the
Commission proposed to construe the phrase ``in connection with''
broadly, consistent with SEC legal precedent interpreting this
language.\150\ The Commission continues to believe that the Rule should
reach market manipulation that occurs in the wholesale purchase or sale
of products covered by Section 811 (and defined in the revised proposed
Rule)--and ``in connection with'' such purchases or sales--provided
that there is a sufficient nexus between the prohibited conduct and the
markets for these products.\151\
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\150\ In the NPRM, the Commission relied upon guidance from the
Supreme Court decision in Zandford to conclude that the ``in
connection with'' requirement is satisfied where fraudulent conduct
coincides ``with a purchase or sale of crude oil, gasoline, or
petroleum distillates at wholesale.'' 73 FR at 48329 (citing SEC v.
Zandford, 535 U.S. 813, 820 (2002)).
\151\ See Zandford, 535 U.S. 813.
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The rulemaking record reflects commenter concerns about how the
Commission might use the ``in connection with'' language to reach
specific conduct or non-covered products. In particular, some
commenters expressed concerns about whether the language might reach
supply and operational decisions. API asserted that the SEC's broad
interpretation of ``in connection with''--arising from the fact that
the SEA was enacted ``to respond to the massive economic crisis of 1929
. . .''--was inappropriate for the petroleum industry.\152\ Commenters
also urged the Commission to limit any rule it publishes to statements
or acts pertaining to ``specific wholesale petroleum transactions,''
and not to cover upstream statements or conduct, including supply or
operational decisions.\153\ Otherwise, these commenters argued, an FTC
rule would result in the Commission regulating those activities,\154\
thereby creating a substantial risk of disrupting pro-competitive
activity in petroleum markets.\155\
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\152\ API at 27-28 (citing Zandford, 535 U.S. at 819).
\153\ API at 30-32; NPRA at 33 (stating that the Commission
should not interpret the ``in connection with'' language as reaching
upstream conduct and statements, including operational and supply
decisions); see also CFDR (Mills), Tr. at 218-19 (asserting that
supply decisions without misleading statements do not otherwise rise
to the level of a fraud).
\154\ API also recommended that the Commission, ``at a minimum,
make clear in the final Rule that a firm's ability to provide an
objective business justification for the challenged supply decision
should provide an affirmative defense to liability under the Rule.''
API at 32.
\155\ See, e.g., NPRA at 33 (arguing that by reaching supply
decisions under a rule, the Commission ``could seriously distort
refiners' decision making and disrupt competitive activity in
petroleum markets''); API (Long), Tr. at 214-15 (contending that the
FTC's oversight of ordinary supply and operational decisions ``could
have devastating effects on the market'').
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The Commission disagrees with the notion that the ``in connection
with'' language should never reach supply or operational
decisions,\156\ where there is a sufficient nexus between the conduct
at issue and the purchase or sale of crude oil, gasoline, or petroleum
distillates. The Commission emphasizes that this interpretation of the
phrase ``in connection with'' would not require the Commission to
regulate or otherwise second-guess market participants' legitimate
supply and operational decision-making. The scienter standard clarifies
in particular that the revised proposed Rule would not apply to conduct
that appears in hindsight to have been simply an error or
miscalculation, either because the actor did not knowingly engage in
fraudulent or deceptive conduct, or because he or she did not
intentionally mislead by omitting material facts from covered
statements. Rather, the Commission would determine on a case-by-case
basis whether to reach supply and operational decisions or any other
type of conduct that is ``in connection with'' the markets for covered
products.
---------------------------------------------------------------------------
\156\ 73 FR at 48329; Zandford, 535 U.S. at 820.
---------------------------------------------------------------------------
In addition, commenters raised concerns regarding the Commission's
interpretation of the phrase ``in connection with'' with respect to
products that are not listed in Section 811. Several commenters
supported the Commission proposal to reach purchases and sales of non-
covered products, such as renewable fuels and blending components,
under the Rule.\157\ For example, one commenter argued that renewable
fuels--such as ethanol and biodiesel--are growing in significance as a
result of federal and state government mandates to reduce dependence on
foreign oil.\158\ Another commenter, however, opposed extending the
Rule to include ethanol, as well as sugar, corn, and other commodities
that are inputs into ethanol.\159\ This commenter argued that the
language of Section 811 does not specifically list non-petroleum based
commodities, and that the Commission is not authorized to reach
them.\160\
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\157\ ATA at 3; IPMA at 4 (agreeing that manipulation of ethanol
and other oxygenates should be covered where changes in ethanol
prices directly or indirectly affect wholesale gasoline prices); MPA
at 2; NPCA at 1; NPRA (Drevna), Tr. at 221-22 (contending that the
Commission should ``absolutely'' consider blending components);
SIGMA (Columbus), Tr. at 222-23 (agreeing that a rule should reach
``[a]nything that's mandated as a component'').
\158\ ATA asserted that the Commission's effort to address
manipulation of energy markets will be incomplete if the Commission
failed to address manipulation in markets for alternative fuels. ATA
at 3; see also IPMA at 1-2 (stating that increasingly, ethanol or
other oxygenates have been added to gasoline because of
environmental concerns or other reasons); SIGMA (Columbus), Tr. at
224 (``I assure you [that] ethanol is a mandated component in
[gasoline] . . . .'').
\159\ MFA at 11-12; MFA (Young), Tr. at 224 (arguing that
Congress did not intend for corn and sugar--subcomponent parts--to
be covered under the Rule).
\160\ MFA contended that SEC precedent, upon which the
Commission relies, has never used the ``in connection with''
requirement to reach collateral markets that may affect securities.
Rather, MFA argues, the SEC has focused on securities markets. MFA
at 10-11.
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The Commission intends to reach products--such as renewable fuels
(e.g., ethanol or biodiesel) or blending components (e.g., alkylate or
[[Page 18318]]
reformate)--that are not specifically identified in Section 811 only if
there is a sufficient nexus between conduct involving those products
and wholesale petroleum markets for covered products. Renewable fuels
and blending components are integral to the overall supply of finished
motor fuels; thus, manipulating purchases or sales of these products
may have the requisite nexus with wholesale petroleum markets.\161\
Under the revised proposed Rule, the Commission would determine on a
case-by-case basis whether conduct in a market for a non-covered
product is ``in connection with'' wholesale petroleum transactions.
---------------------------------------------------------------------------
\161\ See NPRA (Drevna), Tr. at 225 (``[I]f you're going to let
potentially 35 percent of the market out of the [regulation], what's
the point?'').
---------------------------------------------------------------------------
After reviewing the existing rulemaking record, the Commission
clarifies that it does not plan to apply its revised proposed Rule to
commodities whose predominant use is in non-petroleum products, or to
commodities that are inputs for ethanol, such as corn and sugar. The
connection between these commodities and wholesale petroleum markets
would likely be too attenuated to satisfy the ``in connection with''
requirement of Section 811.
b. Section 317.3(a): General Anti-Fraud Provision
Revised proposed Section 317.3(a) is a general anti-fraud
provision, prohibiting any person from knowingly engaging in conduct,
including the making of false statements of material fact, that
operates or would operate as a fraud or deceit on any person. While the
Rule initially proposed enumerated prohibited conduct in three separate
subsections, revised proposed Section 317.3(a) now addresses prohibited
conduct in a single provision that subsumes the remaining subsections,
except for omissions of material facts, which are separately addressed
by revised proposed Section 317.3(b).\162\ Revised proposed Section
317.3(a) is substantially similar to Section 317.3(c)--and now also
includes the prohibition on false statements previously contained in
Section 317.3(b)--of the initial proposed Rule. In short, Section
317.3(a) prohibits market participants from lying in connection with
wholesale petroleum transactions.
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\162\ The Commission believes that, by treating omissions
separately, market participants can more readily understand when
alleged conduct violates revised proposed Rule Section 317.3(a).
---------------------------------------------------------------------------
As revised, Section 317.3(a) would prohibit fraudulent or deceptive
conduct that not only serves no legitimate purpose, but could also
impair the efficient functioning of wholesale petroleum markets.
Specific examples include (1) false public announcements of planned
pricing or output decisions; (2) false statistical or data reporting;
and (3) false statements in the context of bilateral or multilateral
communications with any market participant or other person--who may
serve as a conduit for the dissemination of the information, or who
might act on the information--such as traders, suppliers, brokers, or
agents; federal, state, or local governments; and government or private
publishers.\163\ Section 317.3(a) would also prohibit individual
transactions or courses of business that constitute fraudulent or
deceptive conduct, such as wash sales, that are intended to disguise
the actual liquidity or price of a particular asset or market for that
asset.\164\
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\163\ See, e.g., SEC v. Rana Research, Inc., 8 F.3d 1358 (9th
Cir. 1993) (seeking permanent injunctive relief alleging that
defendant's press release contained materially false and misleading
statements); SEC v. Softpoint, Inc., 958 F. Supp. 846 (S.D.N.Y.
1997) (finding defendant liable under SEC Rule 10b-5 when defendant
disseminated false information to the market through press releases
and SEC filings);In the Matter of CMS Mktg. Serv. & Trading Co.,
Comm. Fut. L. Rep. (CCH) ] 29,634 (C.F.T.C. Nov. 25, 2003) (finding
liability for the submission of false information to private
reporting services); see also CFTC v. Delay, 2006 WL 3359076 (D.
Neb. Nov. 17, 2006) (holding that the CFTC failed to prove that
defendant knowingly delivered any false and misleading reports to
the USDA on cattle sales under a charge of manipulation and
attempted manipulation of the feeder cattle futures markets).
\164\ See, e.g., SEC v. U.S. Envtl., Inc., 155 F.3d 107 (2d Cir.
1998) (finding that the SEC's complaint sufficiently alleged that
the defendant manipulated the market for a stock in violation of SEC
Rule 10b-5 by engaging in wash sales and other deceptive conduct);
In the Matter of Michael Batterman, 46 S.E.C. 304 (1976) (finding by
consent that the defendant engaged in wash sales in violation of the
securities laws); Wilson v. CFTC, 322 F.3d 555 (8th Cir. 2003)
(affirming the CFTC's order finding that the defendant engaged in
wash sales and imposing sanctions).
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(1) A Person Must ``Knowingly'' Engage in Conduct That Operates or
Would Operate as a Fraud or Deceit
As noted above, the Commission has modified the text of the revised
proposed Rule to articulate explicitly the scienter standards which
respectively apply to revised proposed Rule Section 317.3(a) and
Section 317.3(b).\165\ In particular, the Commission has retained the
scienter standard of extreme recklessness in the initially proposed
Rule for revised proposed Rule Section 317.3(a). Section 317.3(a) of
the revised proposed Rule now expressly provides that a person must
engage in the proscribed conduct ``knowingly'' in order to violate
subpart (a) of the Rule, and the term ``knowingly'' has been defined in
the Rule to be coextensive with the extreme recklessness standard.\166\
Thus, consistent with its position in the NPRM, the intent requirement
in revised proposed Section 317.3(a) would be satisfied by showing that
the defendant acted with extreme recklessness; that is, specifically,
that the violator both acted with an extreme departure from standards
of ordinary care in the petroleum industry and either knew or must have
known that his or her conduct created a danger of misleading buyers or
sellers.\167\ The revised proposed Rule, including Section 317.3(a) of
the Rule, would not extend to inadvertent conduct or mere
mistakes.\168\
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\165\ This represents a change from the initially proposed Rule,
which, like SEC Rule 10b-5, lacked any specific reference to
scienter in the rule text. In the NPRM, the Commission proposed to
require scienter as one of three required elements of proof. 73 FR
at 48328. The other proposed required elements were: (1) a showing
of a manipulative or deceptive act; and (2) a showing that the
conduct was undertaken ``in connection with'' the purchase or sale
of a covered commodity at wholesale. 73 FR at 48327-29.
\166\ See Section IV.C.3. for a definition of the term
``knowingly.'' For purposes of the Rule, the Commission has chosen
the term ``knowingly'' to denote extreme recklessness.
\167\ Recognizing that ``the Courts of Appeals have adopted a
number of different formulations as to precisely what constitutes
reckless,'' the Commission proposed in the initial NPRM the
recklessness standard articulated by the Seventh and District of
Columbia Circuits. 73 FR at 48329 & n.131. See Sundstrand Corp. v.
Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977) (defining
reckless conduct as a ```highly unreasonable 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''' (citing Franke v. Midwestern Oklahoma Development Authority,
CCH Fed. Sec. L. Rep. ] 95,786, at 90,850 (W.D. Okl. 1976)); SEC v.
Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992) (adopting
Sundstrand's recklessness standard).
\168\ As the Commission noted in the NPRM, FERC adopted a
similar approach 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.'' 73 FR 48328 n. 123 (quoting 71 FR at
4245-4246).
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As a threshold matter, nearly every commenter who addressed the
issue supported requiring some level of intent.\169\ However, most
commenters
[[Page 18319]]
opposed permitting a showing of recklessness to satisfy the scienter
requirement.\170\ They first contended that while recklessness may be
an appropriate standard to employ in regulated securities markets--
where many of the covered parties are in a fiduciary relationship with
their clients--it is inappropriate in petroleum markets, where business
relationships are generally unregulated and where parties generally owe
no fiduciary duties to each other.\171\ Second, commenters worried that
courts grappling with cases brought under the proposed Rule might apply
the lowest standard of recklessness because of the variety of meanings
associated with the term in different legal contexts.\172\ These
commenters argued that requiring only a showing of recklessness--
coupled with what they characterized as a vague NPRM prohibition of
``manipulation''--would permit the prohibition of some neutral or
procompetitive conduct, and introduce uncertainty as to the conduct
covered by a final rule.\173\ Third, commenters argued that, if market
participants were subject to liability under the proposed Rule for
reckless conduct, they might choose to remain silent--in order to avoid
liability for misstating or omitting a material fact--and thus reduce
the volume of information available for price discovery in petroleum
markets.\174\
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\169\ See, e.g., NPRA at 19-20 (suggesting that a specific
intent requirement be incorporated into the text of any rule); CAPP
at 1 (supporting a scienter requirement); API at 3 (``API supports
the Commission's proposal to make scienter a requirement of any rule
adopted under Section 811.''); CA AG at 2-3 (supporting a scienter
requirement); CFDR at 3 (``Relevant legal authorities characterize
market manipulation as a species of fraud that connotes fraudulent
conduct specifically intended to corrupt the integrity of market
pricing processes through rigged prices or fictitious trading . . .
.''); Muris at 2 (observing that the statutory language and
legislative history of EISA point to the SEC, the FERC, and the CFTC
as relevant regulatory models, ``all of which require proof of
scienter''); PMAA at 3-4 (supporting a scienter requirement). But
see Navajo Nation at 5 n.5 (asserting that a scienter requirement
makes the proposed Rule burdensome).
\170\ See, e.g., ISDA (Velie), Tr. At 12-13 (``[W]e would ask
the Commission to reconsider its use of a recklessness standard.'');
Flint Hills (Hallock), Tr. at 83 (``The recklessness standard is one
that gives us great pause in terms of trying to create internal
compliance policies.''); Sutherland at 5 (``Whatever the
appropriateness of [the recklessness] standard in the SEC context .
. . drawing inferences of misconduct based on imputed knowledge
rather than actual intent is not a sound regulatory exercise when
applied to the prevention of market manipulation in the commodity
markets . . . .''); see also Pirrong Tr. at 114-15 (asserting that a
recklessness standard could capture certain conduct that should not
be captured, and that would not be captured by a specific intent
standard); Brown-Hruska at 8 (``In order to encourage pro-
competitive behavior, it is important that the standard for
liability should be no less than specific intent . . . .'').
\171\ See, e.g., API at 4 (``Although a recklessness standard
may be appropriate in the highly regulated securities context, with
its fiduciary duties and strict disclosure requirements, it is not
suited to wholesale petroleum markets.''); NPRA at 18-19 (explaining
that ``[t]he application of a `recklessness' standard may make sense
in a securities context where parties owe each other fiduciary
duties or are in other relationships of trust or confidence,'' but
not in wholesale petroleum markets, in which clear standards of care
do not exist between sophisticated market participants); Sutherland
at 5 (stating that the recklessness standard may be appropriate for
securities markets but not for commodity markets ``where buyers and
sellers do not owe one another fiduciary duties''); Plains at 2-3
(explaining that the recklessness standard in the NPRM is
inapplicable to wholesale petroleum markets where ``there is no
presumption that one market participant owes any duties to its
counterparties''); ISDA at 4 (``Because the prohibitions of SEC Rule
10b-5 are derived from statutory duties that do not exist in the
wholesale commodities markets, many market participants cannot
determine what behavior (other than false or misleading statements)
may be prohibited . . . .'').
\172\ See, e.g., API at 3 (asserting that recklessness is a
``more malleable standard''); CFDR (Mills), Tr. at 92-95 (asserting
that recklessness would create uncertainty as to how the law would
be applied).
\173\ See, e.g., Plains at 3 (``[G]iven the distinctions between
the securities markets and the crude oil markets, a recklessness
standard will be ineffective in preventing or prosecuting actual
fraud and will lead only to uncertainty and confusion as to the type
of conduct that is prohibited.''); NPRA at 19 (``The application of
a `recklessness' standard in [the wholesale petroleum market]
context would create confusion and concern about how to control and
monitor the thousands of wholesale petroleum transactions that take
place every day . . . .''); API at 16-17 (``Incorporation of a
recklessness standard into the proposed Rule therefore would require
market participants to guard against the possibility that the
Commission (or courts) would base liability on conduct that falls
far short of intentional wrongdoing.''); ISDA at 4 (stating that a
recklessness standard would create uncertainty); see also Plains at
3 (explaining that the proposed Rule's lack of manipulative effect
requirement, ``when coupled with a `recklessness' standard . . .
could render unlawful an unintentional act with no consequences'').
But see SIGMA at 2 (``[T]he Commission's decision to base its rule
on Section 10b-5 of the [SEA] properly ensures consumer protection
while affording business owners a wealth of certainty with respect
to their market practices.'').
\174\ See, e.g., API (Long), Tr. at 111 (asserting that a
recklessness standard would discourage voluntary price reporting
thus leading to ``information starved'' markets); Brown-Hruska at 8
(``A standard that allows liability for mere recklessness further
discourages disclosure of information . . . .''); Flint Hills
(Hallock), Tr. at 83-84 (asserting that a recklessness standard
would result in entities limiting exchanges of information and
reporting to governmental agencies); CFDR (Mills), Tr. at 93-95
(asserting that a recklessness standard would increase the
likelihood for companies to withhold information needed for price
discovery); see also Argus at 2 (``Absent a specific intent
requirement, less transactional data will reach the index publisher,
less data will enter the price formation process, and an increased
chance of distortion in the indices produced may result.''). See
generally Platts (urging the Commission not to discourage market
activities that aid in price discovery).
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Many of these commenters urged the Commission to adopt the higher
scienter standard of specific intent, and to include this requirement
in the language of any final rule.\175\ In their view, a specific
intent standard is necessary to protect petroleum market participants
who act reasonably and in good faith. By contrast, CA AG supported the
proposed recklessness standard, maintaining that requiring a showing of
specific intent would preclude challenges to ``reckless conduct even if
it had extremely detrimental effects.''\176\
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\175\ See, e.g., API (Long), Tr. at 20 (supporting a specific
intent standard); Argus at 2 (supporting a specific intent
requirement); Brown-Hruska at 8 (``[I]t is important that the
standard for liability should be no less than specific intent to
manipulate market prices.''); CFDR at 6-7 (asserting that a specific
intent standard would help to harmonize the legal standards employed
by the FTC and CFTC, promoting ``fairness and reduc[ing] regulatory
and legal uncertainty''); Flint Hills (Hallock), Tr. at 174
(advocating for specific intent as an element of the Rule); ISDA at
3-4 (encouraging the Commission to require proof of specific
intent); Muris at 13 (urging the Commission to require ``evidence of
specific intent to manipulate the price''); Sutherland at 4-5
(urging the Commission ``to require proof of specific intent'');
NPRA at 17-18 (``[Specific intent] would give specific guidance to
industry and provide FTC staff with objective evidence to which it
can look to prove market manipulation. . . .'').
\176\ CA AG at 2-3; see also CFA (Cooper), Tr. at 24-25 (arguing
that the recklessness standard protects consumer); MS AG at 3
(supporting a recklessness standard); CAPP at 1 (asserting that by
tying the scienter standard to SEC precedent, the Commission would
afford market participants a measure of certainty); SIGMA at 2
(supporting the proposed Rule's scienter requirement); PMAA at 3
(supporting the proposed Rule's scienter requirement).
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The Commission continues to believe that an extreme recklessness
standard is appropriate for the general anti-fraud provision in revised
proposed Section 317.3(a). The scienter standard included in revised
proposed Section 317.3(a) is consistent with analogous judicial
interpretations of the statutory scienter requirement for SEC Rule 10b-
5.\177\ Recognizing that the Courts of Appeals have adopted several
formulations as to precisely what constitutes recklessness, the
Commission has defined the term ``knowingly'' to conform to the
recklessness standard articulated by the Seventh and District of
Columbia Circuits.\178\ Thus, establishing
[[Page 18320]]
recklessness requires evidence from which it can reasonably be inferred
that the violator both acted with an extreme departure from standards
of ordinary care (using a reasonable market participant standard) and
either knew or must have known that its conduct created a danger of
misleading buyers or sellers. Although the Commission recognizes that
wholesale petroleum markets are not characterized by the same degree of
regulation as the securities markets, the Commission believes that the
obligation on market participants not to engage in any fraudulent or
deceptive act, practice, or course of business in an extremely reckless
manner-- regardless of other defined duties that may exist in other,
more extensive regulated markets--is clear.
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\177\ Addressing the language of SEC Rule 10b-5, the Supreme
Court held that an intent requirement is ``strongly suggest[ed]''
where statutory language prohibits a ``manipulative or deceptive''
``device or contrivance.'' Ernst & Ernst v. Hochfelder, 425 U.S.
185, 197 (1976). The prohibitions language in Section 10(b) of the
SEA is nearly identical to that in Section 811 of EISA. See 42
U.S.C. 17301; 17 C.F.R. 240.10b-5. As the Commission noted in the
initial NPRM, most appellate courts that have considered the issue
have concluded that extreme recklessness can satisfy Ernst's
requirement of ``intentional or wilful'' conduct for the purposes of
SEA 10(b) and Rule 10b-5. See 73 FR at 48328 & n.130 and the cases
cited therein.
\178\ The Court of Appeals for the Seventh Circuit has defined
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.'' 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)). The Court of
Appeals for the District of Columbia Circuit relied upon Sundstrand
Corp. to establish the ``extreme recklessness'' scienter standard
applicable to SEC Rule 10b-5. See SEC v. Steadman, 967 F.2d 636,
641-42 (D.C. Cir. 1992) (citing Sundstrand Corp., 553 F.2d at 1045);
73 FR at 48329.
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Articulating the required intent standard in the text of revised
proposed Rule Section 317.3(a) should provide greater certainty to the
business community as to the application of any final rule, making it
less likely to inadvertently chill beneficial conduct. Moreover, the
revised proposed Rule would not reach inadvertent conduct or mere
mistakes. Thus, the Commission does not believe that prohibiting
fraudulent or deceptive conduct is likely to reduce voluntary reporting
and disclosures.\179\ As there is no legitimate basis for engaging in
conduct that would operate as a fraud or deceit upon any person, the
Commission tentatively concludes that requiring a showing of
``knowing'' conduct is the appropriate scienter standard for revised
proposed Rule Section 317.3(a).
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\179\ Although the Commission never stated that the initially
proposed Rule would reach such conduct, comments as well as
discussion at the public workshop revealed significant confusion on
this point.
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(2) Materiality Standard
Section 317.3(a) of the revised proposed Rule prohibits conduct
that operates or would operate as a fraud or deceit, specifically
``including the making of any untrue statement of material fact.'' The
NPRM set forth a standard for materiality under the proposed Rule,
providing that, ``[c]onsistent 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.''\180\ NPRA was the only commenter to address
the concept of materiality specifically, and it recommended defining
the term ``material fact'' to clarify that only facts that a reasonable
market participant would consider important in making a decision to
transact are material.\181\ The Commission agrees and anticipates using
a materiality standard that focuses on a fact that a reasonable market
participant would consider important in making a decision to transact
because such information significantly alters the total mix of
information available.\182\
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\180\ 73 FR at 48326.
\181\ NPRA at 28-29 (citing TSC Indus., Inc. v. Northway, Inc.,
426 U.S. 438, 450 (1976)). NPRA also recommends that the rule
``specify that the materially false or deceptive information must be
about important aspects of supply or demand.'' NPRA at 20-21. This
change, NPRA argues, would provide useful compliance guidance to
industry, without being ``overly restrictive, because many types of
information may involve important aspects of supply or demand.''
NPRA at 21.
\182\ See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)
(```[A]n omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it important
in deciding how to vote.''') (quoting TSC Indus., Inc. v. Northway,
Inc., 426 U.S. 438, 449 (1976)).
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(3) Other Language in Section 317.3(a)
As discussed above, revised proposed Rule Section 317.3(a), like
the proposed Rule, prohibits misrepresentations of fact because such
misrepresentations are a clear example of fraudulent or deceptive
conduct. The Commission has therefore added the phrase ``the making of
any untrue statement of material fact'' in revised proposed Section
317.3(a) to make this prohibition clear.\183\ Many commenters and
workshop participants agreed that such conduct harms the marketplace
and should be prohibited. Prohibiting misrepresentations of material
fact is further supported by the enforcement approach of other
agencies; thus, for example, the CFTC challenges and seeks to prohibit
such misrepresentations in commodities markets.\184\
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\183\ The NPRM noted that this provision of the proposed Rule
would provide a clear ban on ``the reporting of false or misleading
information to government agencies, to third-party reporting
services, and to the public through corporate announcements.'' 73 FR
at 48326. Congress gave the Commission authority under Section 812,
a separate provision from Section 811, to prohibit any person from
reporting information related to the wholesale price of petroleum
products only if it is required by law to be reported to a federal
department or agency. The prohibitions embodied in Section 812
became effective with the enactment of EISA on December 19, 2007.
See 42 U.S.C. 17302.
\184\ See, e.g., In the Matter of CMS Mktg. Serv. & Trading Co.,
Comm. Fut. L. Rep. (CCH) ] 29,634 (C.F.T.C. Nov. 25, 2003) (finding
liability for the submission of false information to private
reporting services); see also CFTC v. Delay, 2006 WL 3359076 (D.
Neb. Nov. 17, 2006) (holding that the CFTC failed to prove that
defendant knowingly delivered any false and misleading reports to
the USDA on cattle sales under a charge of manipulation and
attempted manipulation of the feeder cattle futures markets); SEC v.
Rana Research, Inc., 8 F.3d 1358 (9th Cir. 1993) (seeking permanent
injunctive relief alleging that defendant's press release contained
materially false and misleading statements); SEC v. Softpoint, Inc.,
958 F. Supp. 846 (S.D.N.Y. 1997) (finding defendant liable under SEC
Rule 10b-5 when defendant disseminated false information to the
market through press releases and SEC filings).
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The Commission received comments on the meaning of the phrase
``would operate as a fraud or deceit.''\185\ The Commission clarifies
that the phrase ``would operate as a fraud'' means only that the
revised proposed Rule prohibits conduct that would defraud or deceive
another person, whether or not the impact of the prohibited conduct had
yet been manifested.\186\
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\185\ In the NPRM, the Commission also sought to clarify that
the language ``operates as a fraud'' did not negate the requirement,
present in securities law precedent, that a showing of scienter was
necessary to prove a violation of this subsection. 73 FR at 48327.
\186\ 73 FR at 48327.
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c. Section 317.3(b): Omission of Material Information Provision
Revised proposed Rule Section 317.3(b) addresses fraudulent or
deceptive statements that are misleading as a result of the intentional
omission of material facts, where that omission distorts or tends to
distort market conditions for a covered product. Specifically, revised
proposed Section 317.3(b) would make it unlawful for any person to
``intentionally fail to state a material fact that under the
circumstances renders a statement made by such person misleading,
provided that such omission distorts or tends to distort market
conditions for any such product.'' Material omissions from a statement
that is otherwise literally true may, under the circumstances present
at the time the statement is made, render that statement
misleading.\187\ Thus, the Commission believes that prohibiting
intentional omissions of material facts that distort or tend to distort
market conditions is consistent with the intent of EISA and with the
Commission's larger mandate to protect consumers and to preserve
competition.\188\
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\187\ See McMahan & Co. v. Wherehouse Ent., Inc., 900 F.2d 576,
579 (2d Cir. 1990) (``Some statements, although literally accurate,
can become, through their context and manner of presentation,
devices which mislead investors.'').
\188\ In addition, any omission that is part of a fraudulent or
deceptive act, practice, or course of business would violate revised
proposed Section 317.3(a). See, e.g., In the Matter of A.J. White &
Co., File No. 8-11962, 1975 SEC LEXIS 2564, at *61-63 (Jan. 21,
1975) (finding defendants liable under SEC Rule 10b-5 for, inter
alia, engaging in a course of conduct that operated as a fraud on
purchasers of a stock offering by means of untrue statements and
material omissions). This is consistent with the more general
principle that any otherwise lawful act, if part of an unlawful
course of business, nevertheless may be actionable. See Illinois ex
rel. Madigan v. Telemarketing Assocs., Inc., 538 U.S. 600, 606
(2003) (upholding a fraud claim when the facts presented a lawful
``nondisclosure [of information] accompanied by intentionally
misleading statements designed to deceive the listener'').
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[[Page 18321]]
The Commission has modified this component of Section 317.3(b) of
the initially proposed Rule to address concerns raised by commenters
about that section's breadth of coverage, and its potential to chill
pro-competitive or pro-consumer behavior.\189\ Many commenters argued
that while the omissions prohibition language of SEC Rule 10b-5 may be
appropriate in securities markets, it is not appropriate in wholesale
petroleum markets, owing to fundamental differences between the
markets.\190\ Cognizant of these concerns, revised proposed Rule
Section 317.3(b) now includes an express scienter requirement that
limits its reach to intentional conduct. The provision also now
requires a showing that the omission at issue ``distorts or tends to
distort market conditions for any [covered] product.'' Thus, Section
317.3(b) would prohibit intentionally omitted information that would
mislead other market participants, public officials, or the market at
large, such as material omissions made in statements to officials
during a national emergency.
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\189\ Section 317.3(b) of the initially proposed Rule would have
made it unlawful for any person 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.''
\190\ See, e.g., API at 25 (stating that unlike wholesale
petroleum markets, securities markets are ``are governed by detailed
disclosure obligations designed to protect unsophisticated
investors''); Muris at 2 (urging the FTC to ``avoid importing broad
disclosure requirements from highly regulated markets that simply
have no place in wholesale petroleum markets''); NPRA at 4 (arguing
that the full disclosure rationale underlying SEC Rule 10b-5 does
not fit wholesale petroleum markets); Plains at 3 (stating that in
the crude oil markets, unlike securities markets, ``there is no
presumption that one market participant owes any duties to its
counterparties that would require disclosure of any information'').
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Revised proposed Rule Section 317.3(b) would not, however, impose
an affirmative duty to disclose information. Rather, the provision
would apply 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.''\191\ This is consistent with legal
precedent establishing that once an entity has decided to speak, it
must do so truthfully and accurately, and it may have to provide
additional information to ensure that previously provided information
is truthful.\192\ Some commenters argued that the Commission should
clarify that a rule will not require them to release commercially
sensitive information, such as information regarding supply
availability.\193\ For example, Muris urged the Commission not to reach
``pure omissions'' under the Rule, which ``arise when a seller is
silent `in circumstances that do not give any particular meaning to his
silence.'''\194\ The Commission does not intend, under the revised
proposed Rule, either to prohibit dealings undertaken in the ordinary
course of business that are not intended to defraud or to deceive, or
to impose disclosure obligations on market participants unless the
omission of material fact is made with the intent to deceive and those
omissions are of the type that distort or tend to distort market
conditions.
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\191\ 73 FR at 48327.
\192\ See City of Monroe Employees Retirement System v.
Bridgestone Corp., 399 F.3d 651, 670 (6th Cir. 2005) (stating that
companies are generally under no obligations to disclose their
expectations for the future to the public; however if a company
chooses to volunteer such information, ```courts may conclude that
the company was obliged to disclose additional material facts . . .
to the extent that the volunteered disclosure was misleading''')
(quoting Helwig v. Vencor, Inc., 251 F.3d 540, 564 (6th Cir. 2001)
(en banc)); see also Plotkin v. IP AXESS Inc., 407 F.3d 690 (5th
Cir. 2005) (finding that material omissions from a company's press
release rendered that press release misleading regardless of the
existence of a fiduciary or other legal relationship).
\193\ See, e.g., API (Long), Tr. at 180; NPRA at 11-12.
\194\ Muris at 12 (quoting In re Int'l Harvester, 104 F.T.C.
949, 1059 (1984)).
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The Commission seeks additional comment and information on this
issue, including responses to specific questions set forth in Section
IV.I. of this Notice, to enable it to determine whether the alterations
to the omissions provision are sufficiently tailored to prohibit
conduct that threatens the integrity of wholesale petroleum markets
without imposing unnecessarily high compliance costs on industry
participants.
(1) Scienter Standard: A Person Must ``Intentionally'' Mislead By
Omitting Material Information
Sections 317.3(b) of the revised proposed Rule expressly provides
that a person must engage in the proscribed conduct ``intentionally''
in order to violate the Rule. The Commission tentatively has modified
the scienter standard for the omissions provision in this manner to
address commenter concerns that, in the absence of industry regulatory
obligations, an FTC rule might reduce voluntary reporting and
disclosures, and to clarify that this provision would not reach
inadvertent conduct or mere mistakes.\195\ To that end, establishing a
violation of revised proposed Rule Section 317.3(b) would require
establishing that the actor in question intended to mislead by making a
statement that omitted material facts. This approach represents a
different scienter standard than the showing of extreme recklessness
required to establish a violation of revised proposed Rule Section
317.3(a). This standard is also different than the specific intent
standard proposed by some commenters. In particular, this approach
should not be read to require a showing that the person intended to
influence market conditions. Rather, proving a violation of revised
proposed Rule Section 317.3(b) would require proof that the alleged
violator intended to mislead--regardless of whether he or she
specifically intended to affect market prices (e.g., specific intent)--
and regardless of whether the conduct was likely to succeed in
defrauding or deceiving the target.\196\ Conversely, conduct that is
the product of reckless or negligent behavior would not violate revised
proposed Rule Section 317.3(b).
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\195\ Although the Commission never stated that the initially
proposed Rule would reach such conduct, comments as well as
discussion at the public workshop revealed significant confusion on
this point.
\196\ However, Section 317.3(b) separately requires that an
intentional, material omission be of the kind that distorts or tends
to distort market conditions for any such product. See Section
IV.D.2.c.2. below.
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This formulation of the scienter requirement should eliminate
concern about which of the various judicial interpretations of the
``recklessness'' standard under securities law would have applied to
the omissions provision in the proposed Rule. The Commission recognizes
commenter concerns that the initially proposed omissions provision
would have imposed on wholesale market participants the obligation to
know whether a person would likely be defrauded or deceived by the
conduct at issue, which could be difficult. At the same time, using the
word ``intentionally'' in combination with the specific conduct
prohibition language in revised proposed Rule Section 317.3(b)
simplifies the evidentiary burden required to prove a violation,
thereby reducing the potential for judicial confusion and clarifying
the compliance standard for market participants. The Commission may
consider and rely upon both direct and circumstantial evidence of the
intent to mislead by a material omission to establish that an alleged
violator possessed the requisite level of intent.
[[Page 18322]]
(2) The Omission of Material Information Must Distort or Tend to
Distort Market Conditions For a Covered Product
The Commission has added limiting language to the omissions
provision in revised proposed Rule Section 317.3(b), so that a
statement made misleading by reason of the intentional omission of a
material fact violates the provision only if it ``distorts or tends to
distort market conditions'' for any covered product.\197\ The
Commission recognizes that identifying statements that are
unambiguously misleading by dint of a material omission may be
difficult in wholesale petroleum markets and create uncertainty within
the business community about the Rule's application. Thus, an unbounded
omissions provision could have an unintended chilling effect on normal
business activity, and it could unnecessarily raise the costs of
carrying out normal business activity in order to avoid potential
litigation risks. Thus, in addition to modifying the scienter standard
to require a showing of intentional conduct, the Commission believes
that Section 317.3(b) should focus on misleading statements that are of
sufficient import or scope to distort or tend to distort the market
conditions that guide market participants' decision-making.\198\ This
will enable the Commission to direct its enforcement efforts against
those instances of misconduct that are most likely to injure the
integrity of market prices.
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\197\ This proviso is similar to the anti-manipulation provision
of the CEA, which prohibits the communication of ``false or
misleading or knowingly inaccurate reports concerning . . . market
information or conditions that affect or tend to affect the price of
any commodity in interstate commerce . . . .'' 7 U.S.C. 13(a)(2)
(emphasis added). The Commission does not intend, however, to adopt
the elements of proof that are required for a finding of liability
under the CEA under the revised proposed Rule.
\198\ Markets continually absorb new information and adjust
price signals to that new information. Intentionally injecting false
information into that process leads to distorted signals.
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This approach comports with the weight of commenter responses to
the initially proposed omissions provision. In this regard, many
commenters recommended that the Commission ``require that market
manipulation actually impact the market.''\199\ These commenters argued
that if the rule did not focus on conduct harmful to the market--as
manifested by a price or other market effect--it would potentially
chill legitimate business conduct.\200\ In particular, they claimed
that the rule would reach conduct arising from routine commercial
transactions such as bilateral contract negotiations unlikely to harm
the market.\201\ One commenter suggested that an effect on market
prices would be relevant in determining whether a rule violation
occurred.\202\
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\199\ Sutherland at 6; see also API at 34 (recommending that the
Commission require ``proof that a party's deceptive or fraudulent
conduct caused market conditions to deviate materially from the
conditions that would have existed but for that conduct''); Plains
at 3.
\200\ Many commenters disagreed with the Commission's proposal
in the initial NPRM not to require a showing of price effects to
establish a rule violation. See, e.g., Van Susteren at 2 (``The lack
of a requirement of a showing of price effects to establish
culpability leaves the rule overbroad and risks inconsistent or
unwarranted enforcement efforts by the Commission.''); ISDA at 3-4
(asking that the Commission require proof of price effects); Pirrong
Tr. at 205 (``I think it would be beneficial to market participants
to have [a price effects] standard in [a rule].''); see also Plains
at 3 (urging the Commission to make clear that only conduct that has
a ``manipulative effect on the relevant market'' will be
actionable). Other commenters were concerned that if the Rule failed
to focus on conduct harmful to the market, it would have a chilling
effect on businesses. See, e.g., API at 33 (``Applying Section 811
to conduct that does not cause a material deviation in market prices
. . . would likely harm consumer welfare . . . by chilling
competitive market behavior . . . .''); ISDA at 3-4 (arguing for a
price effects requirement by explaining that ``a Rule that is
overbroad, imprecise, or both likely will chill legitimate
commercial behavior'').
\201\ See, e.g., API at 33 (``Unless the FTC requires an
appropriate connection between challenged conduct and a material
deviation in market prices, it runs the risk of having to police
every routine commercial dispute as a potential violation of Section
811.''); ISDA at 13 (``[A]s a sound policy matter, conduct that
actually harms markets is the only conduct with which the Commission
should be concerned and to which it should devote its limited public
resources.''); see also API (Long), Tr. at 220 (suggesting the
Commission consider a safe harbor for statements or omissions not
made in connection with corporate announcements, or reports to
government agencies or private reporting services); cf. NPRA at 22
(stating that the Commission's Rule ``should concentrate on whether
the defendant intended to `defraud' the market, not just one other
individual'').
\202\ For example, CFDR explained that, in instances where the
Commission is investigating multiple players, a movement in market
prices as a result of conduct by one of the alleged wrongdoers can
be probative in determining whether that player possessed the
requisite intent or ``whether other market participants were in fact
deceived by the alleged misconduct.'' CFDR at 7. Accordingly, CFDR
asked that the Commission determine the ``relevance and importance''
of a price effect requirement on a case-by-case basis. Id.
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In the initial NPRM, the Commission rejected requiring a
demonstration of market or price effects in order to prove a rule
violation, and some commenters supported that approach.\203\ CA AG, for
example, agreed with the Commission's conclusion that there is no
economic justification for fraudulent or deceptive conduct, and that
harm to wholesale petroleum markets can properly be inferred from such
conduct without more.\204\ Furthermore, MS AG and CA AG agreed that a
price effects requirement would make it difficult to prove a rule
violation even where effects had occurred, potentially encumbering law
enforcement efforts.\205\ These commenters therefore supported the
Commission's initial decision not to include a price effects
requirement.
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\203\ IPMA at 4; ATAA at 12; MS AG at 3; CA AG at 3; see also
USDOJ, ANPR, at 1 (``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.'').
\204\ CA AG at 3; see 73 FR at 48329-30.
\205\ CA AG at 3; MS AG at 3 (arguing that price effects could
be ``extremely difficult to prove'' therefore chilling enforcement
of ``obvious violations''). Specifically, CA AG noted that prior
California gas pricing investigations demonstrated that it is nearly
impossible to link a particular act to a corresponding direct effect
on price because too many variables affect price. CA AG at 3.
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The Commission continues to believe that a showing of price effects
should not be required to establish a rule violation\206\ because there
is no economic justification for fraudulent or deceptive conduct in any
market.\207\ Requiring a showing of price effects--and imposing the
concomitant additional evidentiary burden upon the Commission--would
introduce an unnecessary risk that conduct detrimental to the integrity
of the market would escape successful challenge.\208\
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\206\ This approach is also consistent with that taken by the
FERC in their market manipulation rulemaking proceedings. See 71 FR
at 4244. Manipulative conduct can harm the marketplace even without
a prolonged price effect by impeding the efficiency of the market
equilibration process and potentially introducing distrust as to the
integrity of the process. See 73 FR at 48329 (noting that
``[f]raudulent behavior interferes with market signals, reduces
transparency in the market, and casts into doubt the very
information that allows markets to function properly'').
\207\ The Commission believes that reading a price effect
requirement into EISA is not only unsupported by the text of the
Act, but also inconsistent with its aim to curb fraudulent or
deceptive conduct in wholesale petroleum markets. See 42 U.S.C
17301; see also 73 FR at 48329 n.138 (noting that ``[t]he enabling
statute is clear: `It is unlawful . . . to use or employ . . . any
manipulative or deceptive device or contrivance''').
\208\ Overcoming the practical problems associated with
identifying and proving a specific price effect from fraudulent or
deceptive conduct in wholesale petroleum markets may not be possible
in many, if not most, cases. See 73 FR at 48329-30 (``The
Commission's experience in investigating petroleum pricing anomalies
demonstrates the difficulty of identifying price changes that result
directly from any specific act or conduct.'').
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Requiring a showing that a particular omission ``distorts or tends
to distort market conditions'' to establish a violation of Section
317.3(b) should not be read as requiring that the FTC show that the
market has actually been distorted.\209\ This language is rather
[[Page 18323]]
intended only to help strike an appropriate balance between achieving
enforcement goals and avoiding unintended chilling effects on normal
business activity. The provision therefore focuses only on those
statements made misleading by reason of the omission of a material fact
that threaten the integrity of wholesale petroleum markets--and thus
carry the greatest risk of injury to those markets-- without unduly
encumbering enforcement.\210\ The tendency to distort market conditions
for wholesale petroleum products may be properly inferred from the
conduct itself, without separate and additional proof of a tendency to
distort market conditions. For example, proof that an actor
intentionally reported price information to a private data reporting
company that is in the business of providing price reports to the
marketplace--and that the actor intentionally omitted material facts
which the reporting company required to be reported--would satisfy the
market conditions proviso.\211\ The Commission believes that the
limiting proviso will also help avoid unwarranted regulatory burdens on
industry by clarifying the scope of Section 317.3(b).\212\
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\209\ In response to CFDR's argument that the presence or
absence of market effects can inform the question of whether a
violation occurred, the Commission notes that nothing in the RNPRM
or the revised proposed Rule prevents it from considering market
effects if the evidence on this issue is clear enough to be useful.
See CFDR at 7.
\210\ Conduct that distorts or tends to distort market
conditions would be any conduct that arises from the intentional
distortion of the market information upon which the price discovery
process in wholesale petroleum markets depend.
\211\ In this regard, the revised proposed Rule would be
consistent with CEA precedent that, in determining whether a false
report would affect or tend to affect the price of a commodity,
courts and the CFTC have generally assumed that a false report of
price or volume information to a source widely used by market
participants would affect or tend to affect market conditions. See
CFTC v. Bradley, 408 F. Supp. 2d 1214 (N.D. Okla. 2005) (denying
defendant's motion to dismiss when complaint alleged defendants
reported fictitious trades to private reporting services); In the
Matter of Dynegy Mktg. & Trade, Comm. Fut. L. Rep. (CCH) ] 29,262
(C.F.T.C. Dec. 18, 2002) (finding liability for false reporting of
trading price and volume information to private reporting services);
In the Matter of CMS Mktg. Serv. & Trading Co., Comm. Fut. L. Rep.
(CCH) ] 29,634 (C.F.T.C. Nov. 25, 2003) (finding liability for false
information submitted to private reporting services). Further, the
Commission believes that proof that an actor falsely reported the
operational status of a refinery, terminal, or pipeline, and did so
through the intentional omission of material information, such
conduct would also allow an inference that the conduct tended to
distort market conditions.
\212\ As an example of this approach, if an actor intentionally
omits information material to the marketplace, establishing a Rule
violation would require showing only that the stated information
(i.e., the misleading statement) pertains to any process by which
prices are discovered and adjusted. Markets continually absorb new
information and adjust price signals to reflect that new
information. A variety of information can affect the process
including, e.g., information about operational activity of
refineries, transportation disruptions, product inventory levels,
and product prices.
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This proviso also should not be read as requiring the Commission to
demonstrate a direct relationship between the conduct and an effect on
price, as suggested by many commenters,\213\ or a quantifiable effect
on prices or market conditions. Moreover, it is not the Commission's
intent that the proviso require a demonstration of the presence of
market power or a reduction in competition--within a relevant antitrust
product and geographic market--as these concepts are defined by
antitrust legal precedent.
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\213\ See, e.g., Van Susteren at 2; ISDA at 13; Sutherland at 6;
API at 32.
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The Commission specifically seeks additional comment and
information on this issue, including responses to specific questions
set forth in Section IV.I. of this Notice. If, after reviewing
additional comments on the RNPRM, the Commission should find that its
tentative decision to include a market conditions proviso--or its
tentative decision not to include a required showing of price effects--
impedes optimal enforcement efforts, the Commission will revisit the
issue.
(3) Materiality
Revised proposed Rule Section 317.3(b) prohibits the omission of a
``material fact.'' The standard for materiality is addressed above in
Section IV.D.2.b.2., and that standard also applies to subpart (b).
Thus, for purposes of the omissions provision, a fact is material if
there is a substantial likelihood that a reasonable market participant
would consider it important in making a decision to transact, because
the material fact significantly alters the total mix of information
available.\214\
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\214\ This standard conforms to the approach the Commission
followed in the NPRM with respect to materiality; that is,
``[c]onsistent 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.''
73 FR at 48326.
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E. Section 317.4: Preemption
Section 815(c) of EISA states that ``[n]othing in this subtitle
preempts any State law.''\215\ Consequently, Section 317.4 of the
revised proposed Rule contains a standard preemption provision used in
other FTC rules, 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.\216\ This is consistent with the position stated in
the NPRM, where the Commission explained that there is no conflict, and
therefore no preemption, if ``state or local law affords equal or
greater protection from the manipulative conduct prohibited by the
proposed Rule.''\217\
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\215\ 42 U.S.C. 17305.
\216\ See, e.g., Disclosure Requirements and Prohibitions
Concerning Franchising, 16 CFR 436.10(b).
\217\ 73 FR at 48330.
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Few commenters addressed preemption of state law. One commenter, MS
AG, agreed that EISA does not preempt state law and urged the
Commission not to do so.\218\ Two commenters agreed that the language
of the proposed Rule does not appear to preempt state law.\219\
Accordingly, the revised proposed Rule includes the preemption
provision proposed in the NPRM.\220\
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\218\ MS AG at 3 (``[MS AG] agrees that the EISA does not
preempt state law and the proposed Rule should not.'').
\219\ Sutherland at 7 (``The proposed Rule includes language
indicating the Commission's view that the new regulatory regime does
not preempt state law.''); SIGMA at 3 (``The Commission has chosen
not to include any language in the NPRM that would preempt
applicable state law in the area of market manipulation.''); see
also SIGMA at 3 (``SIGMA recommends that the Commission adopt
hortatory language in its preamble to the NPRM that urges state
attorneys general and other law enforcement officials to use its
final rule as a guide to `market manipulation' cases.''); SIGMA
(Columbus), Tr. at 186 (asserting that state attorneys general may
chose to enforce Section 811 of EISA).
\220\ See 73 FR 48330, 48334.
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F. Section 317.5: Severability
Section 317.5 of the revised 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 rest of the Rule will remain
in effect.\221\ The Commission received no comments on this issue.
Accordingly, the Commission retains without change the severability
provision proposed in the NPRM.\222\
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\221\ Examples of FTC rules containing similar severability
provisions: Telemarketing Sales Rule, 16 CFR 310.9; Used Motor
Vehicle Trade Regulation Rule, 16 CFR 455.7.
\222\ 73 FR at 48330, 48334.
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G. Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980 (``RFA'')\223\ 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'')\224\ with the proposed Rule and a Final Regulatory
Flexibility Analysis (``FRFA'')\225\ with the final Rule, if any. The
Commission is not required to make such analyses if a rule
[[Page 18324]]
would not have such an economic effect.\226\
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\223\ 5 U.S.C. 601-612.
\224\ 5 U.S.C. 603.
\225\ 5 U.S.C. 604.
\226\ 5 U.S.C. 605.
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Although the scope of the Rule may reach a substantial number of
small entities as defined in the RFA, the Commission believes that the
revised proposed Rule would not have a significant economic impact on
those businesses.\227\ In the initial NPRM, the Commission specifically
requested comments on the economic impact of the initial proposed Rule
and received none.\228\ Given that the revised proposed Rule does not
impose any reporting or disclosure requirements, document or data
retention requirements, or any other specific conduct requirements, it
is unlikely that the revised proposed Rule will impose costs to comply
beyond the standard costs associated with ensuring that acts,
practices, and courses of conduct are not fraudulent or deceptive.
Therefore, the Commission believes that the revised proposed Rule, if
finalized, would 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
additional comments on this topic.
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\227\ 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 which is not dominant in its field of
operation.'' 15 U.S.C. 632(a)(1). As noted above, Section 317.2(d)
of the revised proposed Rule defines a ``person'' as ``any
individual, group, unincorporated association, limited or general
partnership, corporation, or other business entity.''
\228\ See 73 FR at 48332.
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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 publish a rule
that is ``necessary or appropriate in the public interest or for the
protection of United States citizens.''\229\ As discussed above, the
Commission believes that promulgating the revised proposed Rule is
appropriate to prevent fraudulent or deceptive conduct in connection
with wholesale petroleum markets for commodities listed in Section 811,
and the Commission has tailored the revised proposed Rule specifically
to reach such conduct.
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\229\ 42 U.S.C. 17301.
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2. Succinct statement of the objectives of, and the legal basis for,
the revised proposed Rule
The legal basis of the revised proposed Rule is Section 811 of
EISA, which prohibits fraudulent or deceptive conduct in the wholesale
purchase or sale of petroleum products in contravention of rules, if
any, that the Commission may publish. The revised proposed Rule is
intended to define the conduct that the law proscribes.
3. Description of and, where feasible, an estimate of the number of
small entities to which the revised proposed Rule will apply
The revised proposed Rule applies to persons, including business
entities, engaging in the wholesale 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.\230\ According to the Small
Business Administration (``SBA'') size standards, and utilizing SBA
source data, the Commission estimates that between approximately 1,700
and 5,200 covered entities would be classified as ``small
entities.''\231\
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\230\ Directly covered entities under this revised proposed Rule
are classified as small businesses under the Small Business Size
Standards component of the North American Industry Classification
System (``NAICS'') as follows: petroleum refineries (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; and petroleum and petroleum
products merchant wholesalers (except bulk stations and terminals)
(NAICS code 424720) with no more than 100 employees. See SBA, Table
of Small Business Size Standards Matched to North American Industry
Classification System Codes (Aug. 22, 2008), available at (http://
www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_
tablepdf.pdf).
\231\ The SBA publication providing data on the number of firms
and number of employees by firm does not provide sufficient
precision to gauge the number of small businesses that may be
impacted by the revised proposed Rule accurately. The data is
provided in increments of 0-4 employees, fewer than 20 employees and
fewer than 500 employees. Small Business Administration, Employer
Firms, & Employment by Employment Size of Firm by NAICS Codes, 2006,
available at (http://www.sba.gov/advo/research/us06_n6.pdf). Thus
for the 228 petroleum refiners listed, 185 show that they have less
than 500 employees. Although the Commission is unaware of more than
five 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. Although the Commission sought
additional comment on the number of small entities covered by the
initial proposed Rule, it received none. Accordingly, the small
business data set forth in this IRFA are the best estimates
available to the Commission at this time. Nonetheless, the
Commission continues to seek comment or information providing better
data.
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4. Description of projected reporting, recordkeeping, 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 revised proposed Rule does
not contain, any requirement that covered entities create, retain,
submit, or disclose any information. Accordingly, the revised proposed
Rule would impose no recordkeeping or related data retention and
maintenance or disclosure requirements on any covered entity, including
small entities. Given that the revised proposed Rule does not impose
any reporting requirements,\232\ it is unlikely that the revised
proposed Rule would impose costs to comply beyond standard costs (or
skills) associated with ensuring that conduct is not fraudulent or
deceptive.
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\232\ See 73 FR at 48332.
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5. Identification of other duplicative, overlapping, or conflicting
federal rules
As discussed previously, other federal agencies have regulatory
authority to prohibit in whole or in part fraudulent or deceptive
conduct involving petroleum products. The SEC has authority to stop
fraudulent and deceptive conduct involving the securities and
securities offerings of companies involved in the petroleum industry.
Additionally, the CFTC has authority to bring an action against any
person who is manipulating or attempting to manipulate energy
commodities.
As explained in Section IV.B. above, the Commission does not intend
for the revised proposed Rule to impose contradictory requirements on
regulated entities in the futures markets or otherwise. To the extent,
if any, that the revised proposed Rule's requirements could duplicate
requirements already established by other agencies for such markets,
the revised proposed Rule should not impose any additional compliance
costs. The Commission is requesting comment on the extent to which
other federal standards concerning fraud and deception may duplicate,
satisfy, or inform the revised proposed Rule's requirements. In
addition, the Commission seeks comment and information about any
statutes or rules that may conflict with the revised proposed Rule's
requirements, as well as any state, local, or industry rules or
policies that require covered entities to implement practices
[[Page 18325]]
that comport with the requirements of the Rule.
6. Description of any significant alternatives to the revised proposed
Rule that would accomplish the stated objectives of applicable statutes
and that minimize any significant economic impact of the revised
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 revised proposed Rule is narrowly tailored to reduce compliance
burdens on covered entities, regardless of size. In formulating the
revised proposed Rule, including the present revisions, the Commission
has taken several significant steps to minimize potential burdens. Most
significantly, the revised proposed Rule focuses on preventing fraud
and deception in wholesale petroleum markets. At this time, 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 revised proposed
Rule makes clear that covered entities need not disclose price, volume,
and other data to the market. Finally, the revised proposed Rule
contains no recordkeeping requirement.
While the Commission believes that the revised proposed Rule
imposes no unique compliance costs, it nonetheless requests comment on
this issue, including in particular on whether the revised proposed
Rule's prohibitions would have a significant impact upon a substantial
number of small entities, and what modifications, if any, to the
revised proposed Rule the Commission should consider to minimize
further the burden on small entities.
H. Paperwork Reduction Act
The Commission does not contemplate requiring any entity covered by
the revised proposed Rule to create, retain, submit, or disclose any
data. Accordingly, the revised proposed Rule does not include any new
information collection requirements under the provisions of the
Paperwork Reduction Act of 1995 (``PRA'').\233\ 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. 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, and
will accordingly notify and submit appropriate information to OMB,
where required under PRA.\234\
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\233\ 44 U.S.C. 3501-3521. Under the PRA, federal agencies must
obtain approval from the Office of Management and Budget (``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).
\234\ In the ANPR, the Commission solicited comment on whether
covered entities should report market data, such as cost and volume
data for wholesale transactions. 73 FR at 25622. In response, one
commenter noted 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. ISDA, ANPR, at 16
(``Neither Section 811 nor Section 812 of the EISA authorizes the
Commission to impose new reporting requirements.''); see also CFDR,
ANPR, 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.''). But see, e.g., PMAA, ANPR, at 8-9 (stating that the
Commission has authority under Section 811 to impose new reporting
requirements); NPGA, ANPR, 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.'').
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I. Request for Comments
The Commission seeks comment on various aspects of the revised
proposed Rule. 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
a. Does the revised proposed Rule strike an appropriate balance
between protecting consumers from petroleum market manipulation and
limiting attendant costs to industry such as the chilling of legitimate
business conduct and compliance burdens? In considering whether an
appropriate balance is stuck discuss:
(1) the merits or flaws with having a different standard of
scienter for Section 317.3(a) from Section 317.3(b);
(2) the merits or flaws of eliminating Section 317.3(b) and
consolidating the Rule into a single anti-fraud prohibition as set out
by Section 317.3(a);
(3) the merits or flaws of eliminating Section 317.3(b) and
consolidating the Rule to a single anti-fraud prohibition as set out by
Section 317.3(a), but with a scienter requirement of ``intentionally
engage'' rather than ``knowingly engage;''
(4) the merits or flaws of eliminating Section 317.3(b) and
consolidating the Rule to a single anti-fraud prohibition as set out by
Section 317.3(a), but adding a proviso that the challenged act,
practice, or course of business distort or tend to distort market
conditions; discuss the consequences of adding this proviso under both
scienter alternatives of ``intentionally'' and ``knowingly.''
b. Do the conduct provisions in revised proposed Rule Section 317.3
provide sufficient clarity and precision in articulating prohibited
conduct? Why or why not? If not, how could the Rule be modified to
achieve those goals? Would a rule limited to Section 317.3(a) improve
clarity and precision without impairing the basis for issuing a rule or
the goal of preventing market manipulation to the benefit of consumers?
Explain.
c. Does revised proposed Rule Section 317.3 prohibit the injection
of false information into market transactions? If not, how could the
provision be revised to achieve that goal? Explain.
d. Does a prohibition on the injection of false information into
market transactions protect the integrity of such markets? Why or why
not?
e. Should a market manipulation rule reach fraudulent or deceptive
conduct that does not distort or tend to distort market conditions? Why
or why not? (Note: As explained in the discussion above respecting
Section 317.3(b), the Commission does not intend that a requirement
that the challenged conduct distort or tend to distort market
conditions mean that a specific price or other market effect be an
element to be demonstrated to prove a rule violation.)
f. Discuss the benefits and costs of alternatives to promulgating
the revised proposed Rule, including the following: (i) declining to
issue a final rule; (ii) promulgating a final rule that mirrors the
initially proposed Rule; or (iii) promulgating a final rule that solely
prohibits false statements.
2. Questions on Specific Provisions
a. As drafted, does Section 317.3(a) provide sufficient clarity and
precision as to the contours of prohibited conduct? Explain.
b. Is it appropriate that the rule prohibit acts, practices, and
courses of business that operate or would operate as a fraud or deceit
on any person? Discuss the merit or lack of merit of prohibiting
fraudulent or deceptive conduct. In so discussing, explain:
(1) whether Section 811 of EISA authorizes the Commission to
publish a
[[Page 18326]]
rule that prohibits all acts, practices, or courses of conduct that
operate or would operate as a fraud or deceit on any person, including,
e.g., common law fraud in which injury may not extend beyond the
individual parties or otherwise impair the integrity of wholesale
petroleum markets at large;
(2) whether, as a policy matter, Section 317.3(a) should prohibit
all acts, practices, or courses of conduct that operate or would
operate as a fraud or deceit on any person, including, e.g., common law
fraud in which injury may not extend beyond the individual parties or
otherwise impair the integrity of wholesale petroleum markets at large;
if not, discuss how the reach of the provision should be bounded,
including, e.g., the merits of a proviso that the challenged conduct
distort or tend to distort market conditions.
c. Discuss the merits or flaws of the Section 317.3(a) scienter
standard that the challenged person ``knowingly'' act. In the context
of wholesale petroleum markets and in comparison to the tentative
``knowingly engage'' standard, how would an alternative ``intentionally
engage'' standard affect the ability of the Commission to protect
consumers from deleterious market manipulation? What differences, if
any, are there between the two alternative standards respecting the
ability of firms to comply with Section 317.3(a), including the costs
of compliance?
d. As explained in the discussion of revised proposed Rule Section
317.3(b), the Commission proposes that the Rule prohibit omissions of
material fact--specifically, omissions of material facts that are
necessary to ensure that a previously made statement is not misleading,
provided that the informative content of the misleading statement
distorts or tends to distort market conditions for any such product.
What are the costs and benefits of this provision?
e. Describe acts, practices, or courses of conduct, if any, that
would threaten the integrity of wholesale petroleum markets that could
not be reached by Section 317.3(a) but could be reached by Section
317.3(b). If such conduct exists, what is its incidence? In comparison
to conduct injurious to the integrity of wholesale petroleum markets
reached by Section 317.3(a), does the potential injury from conduct
reached by Section 317.3(b) justify its likely enforcement and
compliance costs? Explain.
f. Does the inclusion of the explicit scienter requirement in
revised proposed Rule Section 317.3(b) adequately reduce any danger of
a chilling effect on the flow of information essential to the
functioning of, and transparency in, wholesale petroleum markets? Why
or why not?
g. Does the inclusion of the explicit scienter requirement--
intentionally fail--in revised proposed Rule Section 317.3(b)
sufficiently reduce the danger of a chilling effect on benign or
desirable business activity within wholesale petroleum markets? Why or
why not?
h. What forms of information, if any, should market participants be
required to disclose in order to promote the functioning and integrity
of wholesale petroleum markets? Explain. Under what circumstances, if
any, would the failure to provide such information render otherwise
truthful statements misleading?
i. To what extent would any danger of a chilling effect on benign
or desirable business activity depend upon the existence (or lack
thereof) of mandatory disclosure obligations in the petroleum industry?
Explain.
j. If the merits of Section 317.3(b) as currently proposed outweigh
any flaws or dangers, should it be expanded to require that a person
update or correct information if circumstances change? How, if at all,
would such an expansion alter the cost/benefit calculus? Explain.
k. What, if any, danger arises if the scienter standard in revised
proposed Rule Section 317.3(b) were changed to ``knowingly fail''?
Explain.
l. Is it clear that the ``intentionally'' scienter standard in
revised proposed Rule Section 317.3(b) means that the Commission need
only show that a violator intends to engage in fraudulent or deceptive
conduct--without regard to the violator's intent to affect market
conditions or knowledge of the probable consequences of such conduct?
Why or why not? If not, how could the scienter language be revised to
limit the evidentiary burden to requiring only a showing that the
fraudulent or deceptive conduct was intentional?
m. What types of evidence might be sufficient to demonstrate the
proposed scienter standard in revised proposed Rule Section 317.3(b)?
Explain. What types of evidence might be sufficient to demonstrate the
proposed scienter standard in revised proposed Rule Section 317.3(a)?
Discuss with particular emphasis on how, if at all, the evidentiary
requirements to prove scienter differ between Section 317.3(b) and
Section 317.3(a).
n. Is it clear that the ``intentionally fail'' scienter standard in
revised proposed Rule Section 317.3(b) is neither a recklessness
standard nor a specific intent standard? If not, how could the scienter
language be revised to make that clear? Explain.
o. As explained in the discussion of revised proposed Rule Section
317.3(b), the prohibitions language of Section 811 of EISA is nearly
identical to Section 10(b) of the SEA from which Rule 10b-5 derives.
Notwithstanding this similarity, does the statutory language in Section
811--``as necessary or appropriate''--provide a sufficient basis for
tailoring the scienter requirement of a FTC market manipulation rule to
address wholesale petroleum markets? Explain.
p. Intent need not be demonstrated to prove that an act or practice
is deceptive or unfair in violation of Section 5 of the FTC Act. Does
the presence of explicit scienter requirements in revised proposed Rule
Section 317.3 create risk of judicial confusion regarding the differing
elements of proof for an FTC market manipulation rule and for Section 5
of the FTC Act respecting unfair or deceptive practices? Explain.
q. Does the Section 317.3(b) proviso that a misleading statement
distort or tend to distort market conditions for any covered product
sufficiently ensure that the Rule strikes an appropriate balance
between protecting consumers from petroleum market manipulation and
limiting the costs to industry attendant with achieving that
protection? Would adding the proviso to Section 317.3(a) achieve a
better balance between protecting consumers and attendant industry
costs in the enforcement of that provision of the Rule? Explain.
r. Does the Section 317.3(b) proviso that a misleading statement
distort or tend to distort market conditions for any covered product
unduly limit the Commission's ability to prohibit misleading statements
that threaten the integrity of wholesale petroleum markets? Why or why
not? If not, how could the provision be revised to achieve that goal?
Explain. Were the proviso added to Section 317.3(a), would the
Commission's ability to protect the integrity of wholesale petroleum
markets be impaired? Explain.
s. Is it clear that the Section 317.3(b) proviso that a misleading
statement distort or tend to distort market conditions for any covered
product is not intended to create a price or market effects element of
proof? I.e., is it clear from the language of Section 317.3(b) that in
order to establish a Rule violation, the Commission need not prove any
specific price or market effect? If not, how can the Rule be revised to
make that point clear? Discuss.
t. What types of evidence might be sufficient to demonstrate that a
misleading statement distorts or tends to
[[Page 18327]]
distort market conditions for any covered wholesale petroleum product?
For example, should it be sufficient simply to show that the
informative content of a misleading statement is of the type typically
absorbed by the market and incorporated into market prices? Explain.
u. Is it clear that a violation of revised proposed Rule Section
317.3 does not require that the violator possess market power--and need
not have reduced competition--in a relevant antitrust market, as these
concepts are defined by antitrust legal precedent? Why or why not? If
not, how could the language be revised to make clear that neither a
showing of market power nor a reduction in competition is an element of
proof?
v. Consider the following alternative rule language:
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, to engage in any act (including the
making of any untrue statement), practice, or course of conduct with
the intent* to defraud or deceive, provided that such act, practice, or
course of conduct distorts or tends to distort market conditions for
any such product.
* The phrase ``with the intent'' shall mean that the alleged
violator intended to mislead--regardless of whether he or she
specifically intended to affect market prices (e.g., specific intent),
or knew or must have known of the probable consequences of such
conduct--and regardless of whether the conduct was likely to succeed in
defrauding or deceiving the target.
Would this alternative language better achieve (or would it not
better achieve) the goals of Section 811 of EISA than the revised
proposed Rule discussed in this Notice. Explain. Discuss the merits or
flaws, if any, of this alternative language?
w. Hypothetical questions:
(1) Company ABC reports a trade to the XYZ Price Service, a service
that collects transactional data and uses the data to set a benchmark
price that the industry uses to negotiate spot purchases of refined
product. XYZ procedures, which are well known throughout the industry,
require reporting companies to identify transactions below a specified
volume to limit the impact of transactions with inconsequential volumes
on the benchmark price. The volume of ABC's trade is below the
specified volume, but:
(a) ABC inadvertently omits that information.
(b) ABC establishes procedures to ensure that persons reporting
transactions know to identify transactions below the specified amount
but the individual reporting this transaction fails to follow those
procedures.
(c) ABC intentionally omits the information identifying the trade.
(2) Trader A receives a request from RST Refinery for crude oil of
a particular grade, specifying that it prefers not to buy crude from
the country of Cepo for political reasons. Trader A is unable to find
the kind of crude RST requires except in Cepo. Trader A:
(a) Sells the crude from Cepo to RST without disclosing that it is
from Cepo.
(b) Sells the crude to RST and represents that it is from the
country of West Friendly, knowing that it is from Cepo.
(c) Does not know and does not ask where the crude is from and
sells it to RST without representing its origin.
Applying (1) the revised proposed rule language appearing in this
Notice and (2) the alternative rule language appearing above in
Question 2v. to the facts provided in these hypothetical examples,
discuss differences, if any, in the outcome of an enforcement action.
Which result would be more desirable and why? Also speak to the
effectiveness and ability of each rule version to reach any harmful
manipulative conduct contained in the fact pattern, the relative
burdens on the Commission to enforce the rule successfully, and the
relative risks of enforcement error.
3. Regulatory Flexibility Act
The Commission requests that commenters provide information about
the potential scope and economic impact of the revised proposed Rule so
that the Commission may better assess the economic impact of the
language of any final rule if it determines to publish such rule.
Specifically, the Commission requests comments on:
a. the number and type of small entities affected by the revised
proposed Rule;
b. any or all of the provisions in the revised 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 provisions), 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 revised proposed Rule on small entities;
c. ways in which the revised 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 revised proposed Rule for small
entities;
d. any information quantifying the economic costs and benefits of
the revised 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 revised proposed Rule.
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 to add a new part 317 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 any mixture of hydrocarbons that exists:
(1) In liquid phase in natural underground reservoirs and that
remains 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) Knowingly means with actual or constructive knowledge such that
the
[[Page 18328]]
person knew or must have known that his or her conduct was fraudulent
or deceptive.
(d) Person means any individual, group, unincorporated association,
limited or general partnership, corporation, or other business entity.
(e) 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.
(f) Wholesale means:
(1) All purchases or sales of crude oil or jet fuel; and
(2) All purchases or sales of gasoline or petroleum distillates
(other than jet fuel) at the terminal rack or upstream of the terminal
rack level.
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, to:
(a) Knowingly engage in any act, practice, or course of business--
including the making of any untrue statement of material fact--that
operates or would operate as a fraud or deceit upon any person; or
(b) Intentionally fail to state a material fact that under the
circumstances renders a statement made by such person misleading,
provided that such omission distorts or tends to distort market
conditions for any such product.
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 prohibited practices set forth in Sec.
317.3.
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.
Federal Register
Attachment A
NPRM Commenters
Association of Oil Pipe Lines (``AOPL'')
American Petroleum Institute (``API'')
Argus Media Inc. (``Argus'')
American Trucking Associations, Inc. (``ATA'')
Air Transport Association of America, Inc. (``ATAA'')
Andrew Boxer, Ellis Boxer & Blake (``Boxer'')
Sharon Brown-Hruska, National Economic Research Associates, Inc.
(``Brown-Hruska'')
California Attorney General, Edmund G. Brown Jr. (``CA AG'')
Canadian Association of Petroleum Producers (``CAPP'')
Consumer Federation of America, Mark Cooper, Director of Research
(``CFA1''; ``CFA2'')
New York City Bar Association, Committee on Futures & Derivatives
Regulation (``CFDR'')
U.S. Commodity Futures Trading Commission, Terry S. Arbit, General
Counsel (``CFTC (Arbit)'')
U.S. Commodity Futures Trading Commission, Bart Chilton,
Commissioner (``CFTC (Chilton)'')
John Q. Public (``Consumer'')
Flint Hills Resources, LP (``Flint Hills'')
Winfried Fruehauf, National Bank Financial (``Fruehauf'')
James D. Hamilton, University of California, San Diego
(``Hamilton'')
Illinois Petroleum Marketers Association (``IPMA'')
International Swaps and Derivatives Association, Inc. (``ISDA'')
Futures Industry Association, CME Group, Managed Funds Association,
Intercontinental Exchange, Inc., National Futures Association
(``MFA'')
Michigan Petroleum Association/Michigan Association of Convenience
Stores (``MPA'')
Mississippi Attorney General, Jim Hood (``MS AG'')
Lisa Murkowski, United State Senator, State of Alaska
(``Murkowski'')
Timothy J. Muris and J. Howard Beales, III (``Muris'')
Navajo Nation, Resolute Natural Resources Company, and Navajo
Nation Oil and Gas Company (``Navajo Nation'')
Nebraska Petroleum Marketers & Convenience Store Association
(``NPCA'')
National Petrochemical and Refiners Association (``NPRA'')
Craig Pirrong, The University of Houston: Bauer College of Business
(``Pirrong'')
Plains All American Pipeline, L.P. (``Plains'')
Platts (``Platts'')
Petroleum Marketers Association of America (``PMAA'')
Society of Independent Gasoline Marketers of America (``SIGMA'')
Sutherland Asbill & Brennan LLP (``Sutherland'')
David J. Van Susteren, Fulbright & Jaworski LLP (``Van Susteren'')
Federal Register
Attachment B
Workshop Participants
American Bar Association Section of Antitrust Law's Fuel & Energy
Industry Committee (``ABA Energy''): Bruce McDonald, Jones Day LLP
Association of Oil Pipe Lines (``AOPL''): Linda G. Stuntz, Stuntz,
Davis & Staffier, PC
American Petroleum Institute (``API''): Jonathan Gimblett,
Covington & Burling LLP
American Petroleum Institute (``API''): Robert A. Long, Jr.,
Covington & Burling LLP
Argus Media Inc. (``Argus''): Dan Massey
Consumer Federation of America (``CFA''): Mark Cooper
New York City Bar Association, Committee on Futures & Derivatives
Regulation (``CFDR''): Charles R. Mills, K&L Gates
CME Group (``CME''): De'Ana Dow
Flint Hills Resources, LP (``Flint Hills''): Alan Hallock
International Swaps and Derivatives Association, Inc. (``ISDA''):
Athena Y. Velie, McDermott, Will & Emery LLP
Futures Industry Association, CME Group, Managed Funds Association,
Intercontinental Exchange, Inc., National Futures Association
(``MFA''):
Mark D. Young, Kirkland & Ellis LLP
Resolute Natural Resources Company (``Navajo Nation''): James
Piccone
Navajo Nation Oil and Gas Corporation (``Navajo Nation''): Perry
Shirley
National Petrochemical and Refiners Asssociation (``NPRA''):
Susan S. DeSanti, Sonnenschein Nath & Rosenthal LLP
National Petrochemical and Refiners Association (``NPRA''): Charles
T. Drevna
Craig Pirrong, The University of Houston: Bauer College of Business
(``Pirrong'')
Platts (``Platts''): John Kingston
Petroleum Marketers Association of America (``PMAA''):
Robert Bassman, Bassman, Mitchell & Alfano, Chtd.
Society of Independent Gasoline Marketers of America (``SIGMA''):
James D. Barnette,
[[Page 18329]]
Steptoe & Johnson LLP
Society of Independent Gasoline Marketers of America (``SIGMA''):
R. Timothy Columbus, Steptoe & Johnson LLP
David J. Van Susteren, Fulbright & Jaworski LLP (``Van Susteren'')
Federal Register
Attachment C
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, Association 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'')
Deep River Group, Inc. (``DRG'')
Harold Ducote (``Ducote'')
Mary Dunaway (``Dunaway'')
Econ One Research, Inc. (``Econ One'')
Terri Edelson (``Edelson'')
Kevin Egan (``Egan'')
DJ Ericson (``Ericson'')
Mark Fish (``Fish'')
Flint Hills Resources, LP (``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'')
Toni Hagan (``Toni'')
Charles Hamel (``Hamel'')
Chris Harris (``Harris'')
Thomas Herndon (``Herndon'')
Johnny Herring (``Herring'')
Hess Corporation (``Hess'')
David Hill (``Hill'')
Hopper (``Hopper'')
Sharon Hudecek (``Hudecek'')
IntercontinentalExchange, Inc. (``ICE'')
Institute for Energy Research (``IER'')
Independent Lubricant Manufacturers Association (``ILMA'')
Illinois Petroleum Marketers Association (``IPMA'')
International Swaps and Derivatives Association, Inc. (``ISDA'')
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'')
Futures Industry Association, CME Group, Managed Funds Association,
IntercontinentalExchange, National Futures Association (``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'')
Vaughn Weming (``Weming'')
Douglas Willis (``Willis'')
[FR Doc. E9-9224 Filed 4-21-09: 8:45 am]
BILLING CODE 6750-01-S