Prohibitions on Market Manipulation in Subtitle B of Title VIII of The Energy Independence and Security Act of 2007

Federal RegisterApr 22, 2009

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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.

SUMMARY:

Pursuant to Section 811 of Subtitle B of Title VIII of The Energy Independence and Security Act of 2007 (“EISA”),

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”).

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.

Section 811 is part of Subtitle B of Title VIII of EISA, which has been codified at 42 U.S.C. 17301-17305.

15 U.S.C. 41-58.

DATES:

Written comments must be received by May 20, 2009. The 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).

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).

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).

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).

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).

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,

and (2) making other

changes in the text of the proposed Rule.

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;

(2) whether a showing of price effects should be required in order to prove a rule violation;

and (3) whether prohibiting statements that are misleading because they omit material facts is appropriate for a rule that applies to wholesale petroleum markets.

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.”).

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).

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).

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).

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”).

Commenters also presented varying views regarding the proper reach of an FTC market manipulation rule.

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

or amend it to reach specific types of conduct.

Most argued that an FTC market manipulation rule should not reach activity in futures markets.

Several offered views as to whether an FTC rule should reach pipelines

or renewable fuels, including ethanol.

The Commission has considered these comments and, where appropriate, has revised the initial proposed Rule to address these concerns.

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.”).

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).

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”).

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”).

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’)”).

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”).

III. Basis for the Rule

Section 811 of EISA provides the legal basis for any petroleum market manipulation rule. Section 811

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.”

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.

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.

A few commenters, however, specifically questioned the necessity or appropriateness of the proposed Rule.

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.”

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.

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).

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”).

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.

Sutherland at 2.

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]”).

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.”

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.

Consequently, the Commission believes that it is both appropriate and in the public interest to publish the revised proposed Rule.

42 U.S.C. 17301.

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”).

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.

The Commission further stated that it intended to rely on only relevant SEC precedent in applying its rule.

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.

73 FR at 48322.

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.

A few commenters specifically endorsed the proposed Rule as articulated in the NPRM, without modification.

Some commenters also

agreed with the Commission’s decision to model the proposed Rule after SEC Rule 10b-5.

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.”

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.

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.”).

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).

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 . . . .”).

SIGMA at 2.

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.

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.

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.

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.

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.

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).

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”).

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”).

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.”).

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.

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

—and a showing of price effects.

Some commenters recommended that the Commission draw instead upon legal precedent construing the CEA.

Others argued that an anti-fraud manipulation rule would not go far enough, or that it should reach different types of conduct.

One commenter, for example, suggested that the rule should target the exercise of market power intended to benefit a derivatives

position.

Other commenters specifically urged the Commission to prohibit refiners and suppliers from refusing to sell unblended gasoline to distributors.

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).

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”).

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”).

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.”).

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”).

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”).

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.”

The Commission believes that this language directs the agency to be guided by SEC Rule 10b-5,

a broad anti-fraud rule.

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.

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.

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”).

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).

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).

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

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.

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.

AOPL

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.”

In support of this position, AOPL argued that the FERC already regulates pipelines extensively

and that the potential for manipulation of commodities prices by oil pipelines is small.

Another commenter, ATAA, opposed any safe harbors or exemptions for pipelines in order to give full effect to the purpose of EISA.

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.

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).

AOPL at 14.

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.

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).

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.”).

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).

In response, the Commission notes that not all pipelines necessarily fall outside the coverage of the FTC Act.

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.

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,

and that the Commission should therefore grant a safe harbor for futures markets activities.

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.

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.

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.

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).

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).

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”).

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”).

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.”

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.

7 U.S.C. 2(a)(1)(A).

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).

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.

Commenters urged the Commission to clarify that any final rule would not create or imply a private right of action.

In response, the Commission notes that EISA does not expressly create a private right of action.

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.

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).

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.”).

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.

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.

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.”

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.”

73 FR at 48325.

Two commenters, PMAA and Navajo Nation, supported the proposed definition of “crude oil,”

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.

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.”

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).

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.”

Three commenters generally supported the proposed definition.

73 FR at 48325.

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.

One commenter specifically opposed including ethanol in the definition of “gasoline.”

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.”).

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.

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

standard under SEC Rule 10b-5.

The Commission discusses in further detail the intended application of the term “knowingly” in Section IV.D.2.b.1. below.

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.”

PMAA and Navajo Nation were the only commenters to address this definition, and both agreed that the definition is appropriate.

The Commission believes that this definition is consistent with the jurisdictional reach of the FTC Act,

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.

73 FR at 48325.

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).

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

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.”

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

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

including general, rather than specific, conduct prohibitions in the proposed Rule.

129

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).

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

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.

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

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).

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

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

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”).

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

This provision of the revised proposed Rule, therefore, sets forth conduct that would be manipulative or deceptive, pursuant to Section 811.

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.

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.

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.

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.

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

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

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.

. This argument is addressed above in Section IV.B.

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.

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

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.

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

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”).

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

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.

The Commission intends to reach products—such as renewable fuels (

e.g.

, ethanol or biodiesel) or blending components (

e.g.

, alkylate or

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.

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

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

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).

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

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).

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

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.

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.

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).

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.

(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

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)).

(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

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);