Federal Register: April 22, 2009 (Volume 74, Number 76)

DOCID: fr22ap09-11 FR Doc E9-9224

SUBJECT CATEGORY:

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

DATES: Written comments must be received by May 20, 2009. The Commission does not contemplate any extensions of this comment period.

DOCUMENT SUMMARY:

Pursuant to Section 811 of Subtitle B of Title VIII of The Energy Independence and Security Act of 2007 (``EISA''),\1\ the Federal Trade Commission (``Commission'' or ``FTC'') is issuing a Revised Notice of Proposed Rulemaking (``RNPRM''). The revised proposed Rule in this RNPRM would prohibit any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, from knowingly engaging in any act, practice, or course of businessincluding the making of any untrue statement of material factthat operates or would operate as a fraud or deceit upon any person, or intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or tends to distort market conditions for any such product. Violations of the revised proposed Rule, if such Rule is adopted, would require proof by a preponderance of the evidence. Anyone violating an FTC rule promulgated under Section 811 of EISA, such as this revised proposed Rule would be if adopted, may face civil penalties of up to $1 million per violation per day, in addition to any relief available to the Commission under the Federal Trade Commission Act (``FTC Act'').\2\ The Commission invites written comments on issues raised by the revised proposed Rule and seeks answers to the specific questions set forth in Section IV.I. of this RNPRM.
\1\ Section 811 is part of Subtitle B of Title VIII of EISA, which has been codified at 42 U.S.C. 1730117305.
\2\ 15 U.S.C. 4158.

SUMMARY:

Prohibitions on Market Manipulation

SUPPLEMENTAL INFORMATION

I. Background

EISA became law on December 19, 2007.\4\ Subtitle B of Title VIII of EISA targets market manipulation in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, and the reporting of false or misleading information related to the wholesale price of those products. Specifically, Section 811 prohibits ``any person'' from ``directly or indirectly'': (1) using or employing ``any manipulative or deceptive device or contrivance,'' (2) ``in connection with the purchase or sale of crude oil gasoline or petroleum distillates at wholesale,'' (3) that violates a rule or regulation that the FTC ``may prescribe as necessary or appropriate in the public interest or for the protection of United States citizens.''\5\ \4\ 42 U.S.C. 1700117386.

\5\ 42 U.S.C. 17301.

Section 812 prohibits ``any person'' from reporting information that is ``required by law to be reported''and that is ``related to the wholesale price of crude oil gasoline or petroleum distillates'' to a federal department or agency if the person: (1) ``knew, or reasonably should have known, [that] the information [was] false or misleading;'' and (2) intended such false or misleading information ``to affect data compiled by the department or agency for statistical or analytical purposes with respect to the market for crude oil, gasoline, or petroleum distillates.''\6\

\6\ 42 U.S.C. 17302.

Subtitle B also contains three additional sections that address, respectively, enforcement of the Subtitle (Section 813),\7\ penalties for violations of Section 812 or any FTC rule published pursuant to Section 811 (Section 814),\8\ and the interplay between Subtitle B and existing laws (Section 815).\9\
\7\ Section 813(a) provides that Subtitle B shall be enforced by the FTC ``in the same manner, by the same means, and with the same jurisdiction as though all applicable terms of the [FTC] Act (15 U.S.C. 41 et seq.) were incorporated into and made a part of [Subtitle B].'' Section 813(b) provides that a violation of any provision of Subtitle B ``shall be treated as an unfair or deceptive act or practice proscribed under a rule issued under [S]ection 18(a)(1)(B) of the [FTC] Act (15 U.S.C. 57a(a)(1)(B)).'' 42 U.S.C. 17303.
\8\ Section 814(a) of Subtitle B provides that``[i]n addition to any penalty applicable'' under the FTC Act``any supplier that violates [S]ection 811 or 812 shall be punishable by a civil penalty of not more than $1,000,000.'' Further, Section 814(c) provides that ``each day of a continuing violation shall be considered a separate violation.'' 42 U.S.C. 17304.
\9\ Section 815(a) provides that nothing in Subtitle B ``limits or affects'' Commission authority ``to bring an enforcement action or take any other measure'' under the FTC Act or ``any other provision of law.'' Section 815(b) provides that ``[n]othing in [Subtitle B] shall be construed to modify, impair, or supersede the operation'' of: (1) any of the antitrust laws (as defined in Section 1(a) of the Clayton Act, 15 U.S.C. 12(a)), or (2) Section 5 of the FTC Act ``to the extent that . . . [S]ection 5 applies to unfair methods of competition.'' Section 815(c) provides that nothing in Subtitle B ``preempts any State law.'' 42 U.S.C. 17305.

The revised proposed Rule in this RNPRM retains the antifraud approach of the initial proposed Rule published by the Commission in a Notice of Proposed Rulemaking (``NPRM'') on August 19, 2008.\10\ The revised proposed Rule would achieve the antimanipulation objectives of Section 811 by prohibiting any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, from (a) knowingly engaging in any act, practice, or course of businessincluding the making of any untrue statement of material factthat operates or would operate as a fraud or deceit upon any person, or (b) intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or tends to distort market conditions for any such product.\11\ \10\ FTC, Prohibitions On Market Manipulation and False Information in Subtitle B of Title VIII of The Energy Independence and Security Act of 2007, 73 FR 48317 (Aug. 19, 2008). The NPRM was preceded by the publication for comment of an Advance Notice of Proposed Rulemaking (``ANPR''). FTC, Prohibitions On Market Manipulation and False Information in Subtitle B of The Energy Independence and Security Act of 2007, 73 FR 25614 (May 7, 2008). \11\ As the Commission stated in the ANPR and the NPRM, the phrase ``crude oil gasoline or petroleum distillates'' is used without commas in Section 811 (as well as in the first clause of Section 812), while the phrase is used with commas in Section 812(3): ``crude oil, gasoline, or petroleum distillates.'' The absence of commas is presumably a nonsubstantive, typographical error; therefore, the Commission reads all parts of both sections to cover all three types of products: crude oil, gasoline, and petroleum distillates. See 73 FR at 25621 n.59; 73 FR at 48320 n.40. [[Page 18306]]

The Commission believes additional public comment on the revised proposed Rule will assist in evaluating the desirability and contours of any final rule. The Commission requests that comments focus on changes between the initially proposed Rule and the revised proposed Rule. The Commission also invites written responses to, and comments on, the questions and alternative rule language posed in Section IV.I. Because the public has already had the opportunity to comment on many of the concepts contained in this revised proposed Rulethrough both written comments and workshop presentations and participationthe Commission believes that a 30day comment period is appropriate, and requests for extension of the comment period are unlikely to be granted.

II. The Rulemaking Proceeding

The rulemaking proceeding began with the publication of an ANPR on May 7, 2008.\12\ In the ANPR, the Commission solicited comments on whether it should publish a rule under Section 811, and, if so, the appropriate scope and content of such a rule.\13\ In response to the ANPR, the Commission received 155 comments from interested parties.\14\ Commenters expressed differing views regarding the desirability of, and appropriate legal basis for, any such rule. Commenters also proposed a variety of models upon which to base a market manipulation rule, including those used by other federal agencies, such as the Securities and Exchange Commission (``SEC''),\15\ the Federal Energy Regulatory Commission (``FERC''),\16\ and the Commodity Futures Trading Commission (``CFTC''),\17\ pursuant to each agency's respective market manipulation authority.
\12\ 73 FR 25614. Rulemaking documents can be found at (http:// www.ftc.gov/ftc/oilgas/rules.htm).
\13\ 73 FR at 2562024. The comment period for the ANPR closed on June 23, 2008, after the Commission granted an extension requested by a major industry trade association. Letter from the American Petroleum Institute to FTC Secretary Donald S. Clark, (May 19, 2008), available at (http://www.ftc.gov/os/comments/ marketmanipulation/index.shtm).
\14\ Attachment C contains a list of commenters who submitted comments on the ANPR, together with the abbreviations used to identify each commenter referenced in this RNPRM. Electronic versions of the comments can be found at (http://www.ftc.gov/os/ comments/marketmanipulation/index.shtm).
\15\ See Securities Exchange Act of 1934 (``SEA'') 10(b), 15 U.S.C. 78j(b); 17 CFR 240.10b5 (``Rule 10b5'').
\16\ See Natural Gas Act 4A, 15 U.S.C. 717c1; Federal Power Act 222, 16 U.S.C. 791a; Prohibition of Natural Gas Market Manipulation, 18 CFR 1c.1; Prohibition of Electric Energy Market Manipulation, 18 CFR 1c.2.
\17\ See Commodity Exchange Act (``CEA'') 9(a)(2), 7 U.S.C. 13(a)(2).

After reviewing the ANPR comments, on August 19, 2008, the Commission published an NPRM, setting forth the text of a proposed Rule and inviting written comments on issues raised by the proposed Rule.\18\ The NPRM described the basis for and scope of the proposed Rule; definitions of terms in the Rule; conduct prohibited by the Rule; and the elements of a cause of action under the Rule. The NPRM also set forth questions designed to elicit further information from interested parties. In response to a petition from a major trade association,\19\ the Commission extended the deadline for submission of comments on the NPRM from September 18, 2008 to October 17, 2008.\20\
\18\ 73 FR 48317.
\19\ Letter from the American Petroleum Institute to FTC Secretary Donald S. Clark, (Sept. 5, 2008), available at (http:// www.ftc.gov/os/comments/marketmanipulation2/53841600006.pdf). \20\ FTC, Prohibitions On Market Manipulation and False Information in Subtitle B of Title VIII of The Energy Independence and Security Act of 2007, 73 FR 53393 (Sept. 16, 2008).

In response to the NPRM, the Commission received 34 comments from interested parties, including consumers, a consumer advocacy group, academics, a federal agency, state government agencies, a Member of Congress, industry members, and trade and bar associations.\21\ On November 6, 2008, Commission staff held a oneday public workshop on the proposed Rule.\22\ Commenters and workshop participants provided valuable feedback on several key issues relating to the proposed Rule, particularly regarding the application of a rule based on SEC Rule 10b 5 and the relevance of legal precedent under securities law to the petroleum industry. An overview of the major issues reflected in the comments and at the workshop follows.
\21\ Attachment A contains a list of commenters who responded to the NPRM, together with the abbreviations used to identify each commenter. In calculating the number of comments submitted in response to the NPRM, the Commission treated the multiple filings from Argus, CFA, CFDR, ISDA, and NPRA as a single comment for each commenter.
\22\ Attachment B contains a list of participants in the workshop, together with the abbreviations used to identify each workshop participant. The discussion topics for the workshop included the use of SEC Rule 10b5 as a model for an FTC market manipulation rule; the proper scienter standard for a rule; the appropriate reach of a rule; the type of conduct that would violate a rule; and the desirability of including market or price effects as an element of a rule violation. Information relating to the workshop, including a program, transcript, and archived webcast, can be found at (http://www.ftc.gov/bcp/workshops/marketmanipulation/ index.shtml).

Many commenters expressed general support for an antifraud rule, noting that fraud provides a ``good demarcation'' for a market manipulation rule and would provide the necessary guidance to market participants.\23\ Although a few commenters affirmatively supported the Commission's proposed Rule, as articulated in the NPRM,\24\ the majority of commenters raised concerns about the scope and application of the proposed Rule. Many commenters thought that the proposed Rule, as drafted, created a substantial risk of reaching and chilling legitimate conduct undertaken in the ordinary course of business.\25\ \23\ CFDR (Mills), Tr. at 38; see, e.g., API at 89
(``[S]upport[ing] the Commission's initial determination that the scope of the rule should be `narrowly tailored to address fraudulent practices.''' (quoting 73 FR at 48320)); NPRA at 2 (stating that a rule should target fraudulent and deceptive practices); PMAA (Bassman), Tr. at 4647 (explaining that, in general, fraud is an appropriate basis for a Section 811 rule); ATAA at 11 (expressing support for the Commission's decision to propose an antifraud rule); see also ISDA (Velie), Tr. at 40 (expressing support for an antifraud rule if it is coupled with specific intent); ABA Energy (McDonald), Tr. at 246 (urging the Commission to focus a rule on deceptive conduct).
\24\ See, e.g., MS AG at 3 (``[T]he scope of the proposed Rule is well tailored to ensure that it will address . . . concerns without deterring desirable market practices that could ultimately benefit consumers.''); PMAA at 3 (``The proposed rule allows regulated entities to understand both its intent and how it will be applied . . . .''); CA AG at 2 (expressing support for the FTC's proposed Rule).
\25\ See, e.g., Flint Hills at 3 (``[T]he breadth of the proposed rule would create a significant amount of uncertainty as to what conduct may be captured by the Rule, and could apply to completely legitimate conduct . . . .''); API at 9 (arguing that the proposed Rule ``would create substantial legal uncertainty for market participants'' that will ``deter[] firms from engaging in legitimate activity''); Sutherland at 2 (stating that the proposed Rule ``is considerably more intrusive of legitimate business behavior than is necessary''); Plains at 3 (``Given the general nature of the proposed rule and the uncertainties that will exist with respect to its scope and applicability, the imposition of liability without any finding of an effect on the market . . . will restrict legitimate market activity . . . .''); NPRA at 3 (stating that ``the proposed Rule falls far short of the Commission's goal'' of prohibiting ```manipulative and deceptive conduct without discouraging procompetitive 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 10b5 as a model for an FTC rule,\26\ and (2) making other
[[Page 18307]]
changes in the text of the proposed Rule.\27\ Commenters also offered recommendations regarding the elements of proof the Commission should require in order to establish a rule violation. Specifically, the commenters discussed: (1) whether a showing of recklessness should be sufficient to establish the requisite level of scienter required by a rule;\28\ (2) whether a showing of price effects should be required in order to prove a rule violation;\29\ and (3) whether prohibiting statements that are misleading because they omit material facts is appropriate for a rule that applies to wholesale petroleum markets.\30\ \26\ See, e.g., Sutherland at 4 (``We believe that the Commission is mistaken in proposing to adopt the [SEC Rule] 10b5 antifraud model . . . .''); API at 11 (arguing against borrowing, without modification, the language and precedent of Rule 10b5); 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 SECbased rule is ``not an appropriate or workable model for an FTC market manipulation rule that applies to wholesale petroleum markets''); Plains at 2 (``The types of protective rules and doctrines that may be appropriate for the securities markets . . . cannot simply be applied without modification to the petroleum markets.'').
\27\ See, e.g., NPRA at 17, 31 (recommending modifications to the proposed Rule's text and also suggesting alternative rule language); Navajo Nation at 79 (urging that the Commission define the term ``manipulative'' in the proposed Rule); API at 11 (requesting that the Commission modify the text of the proposed Rule to account for differences between wholesale petroleum and securities markets).
\28\ Many commenters urged the Commission to require a showing of specific intent instead of recklessness to prove a violation of an FTC rule. See, e.g., CFDR at 4 (recommending that an FTC rule require a ``[specific] intent to cause a false, fictitious and artificial impact on market prices or market activity''); ISDA at 3 4 (urging the Commission to require proof of specific intent rather than recklessness); NPRA at 18 (stating that a recklessness standard is not appropriate for wholesale petroleum markets); Sutherland at 5 (encouraging the Commission to require specific intent rather than recklessness); Muris at 11 (recommending that the Commission require proof of specific intent); see also Argus at 2 (stating that ``a specific intent requirement would encourage those who already provide market data to index publishers to continue to do so''); API at 16 (stating that the proposed Rule's recklessness standard ``is not sufficient . . . to `ensure that the proposed Rule does not chill competitive behavior''' (citing 73 FR at 48328)). But see, e.g., SIGMA at 2 (stating that the association is content with the scienter requirement that the FTC has adopted in its proposed Rule); MS AG at 3 (stating that ``both intentional and reckless conduct should be covered by the scienter requirement''); CAPP at 1 (commending the Commission's proposed scienter requirement, which is designed to avoid chilling legitimate business behavior); ATAA at 12 (expressing support for the FTC's proposed scienter requirement); PMAA at 34 (stating that the Commission's proposed elements of proof provide ``needed clarity''); CA AG at 23 (supporting the scienter standard proposed in the NPRM).
\29\ Many commenters supported the showing of price effects as an element of a cause of action under an FTC market manipulation rule. See, e.g., Van Susteren at 2 (``The lack of a requirement of a showing of price effects to establish culpability leaves the rule overbroad and risks inconsistent or unwarranted enforcement efforts by the Commission.''); ISDA at 34 (asking that the Commission require proof of price effects); Muris at 2 (encouraging the Commission to adopt an effects requirement); see also Plains at 3 (urging the Commission to make clear that only conduct that has a ``manipulative effect on the relevant market'' will be actionable); API at 34 (recommending that the Commission require ``proof that a party's deceptive or fraudulent conduct caused market conditions to deviate materially from the conditions that would have existed but for that conduct''); Sutherland at 6 (urging the FTC to ``require that market manipulation actually impact the market''). But see, e.g., MS AG at 3 (asserting ``that proof of price effects should not be required to establish a violation''); ATAA at 12 (supporting the FTC's decision not to require proof of price effects); IPMA at 4 (``[A]gree[ing] that the proposed Rule should not require proof of an identifiable price effect.''); CA AG at 3 (expressing support for the Commission's decision not to include an effects requirement). \30\ Several commenters argued that, although the proposed Rule's omissions language may be appropriate in securities markets, differences exist between securities and wholesale petroleum markets that make such language inapplicable to the latter. See, e.g., API at 25 (stating that unlike wholesale petroleum markets, securities markets are ``are governed by detailed disclosure obligations designed to protect unsophisticated investors''); Muris at 2 (urging the FTC to ``avoid importing broad disclosure requirements from highly regulated markets that simply have no place in wholesale petroleum markets''); NPRA at 4 (arguing that the full disclosure rationale underlying SEC Rule 10b5 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.\31\ A few commenters believed that the proposed Rule should reach conduct other than fraud, and these commenters suggested that the Commission should modify the focus of the proposed Rule\32\ or amend it to reach specific types of conduct.\33\ Most argued that an FTC market manipulation rule should not reach activity in futures markets.\34\ Several offered views as to whether an FTC rule should reach pipelines\35\ or renewable fuels, including ethanol.\36\ The Commission has considered these comments and, where appropriate, has revised the initial proposed Rule to address these concerns.
\31\ See, e.g., Boxer at 1 (advocating for a rule to reach ``oil traded on the [NYMEX] and ICE exchanges''); API at 2223 (``[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 thirdparty reporting services, and to the public through corporate announcements,' at least absent concrete evidence that such statements or omissions were part of a broader scheme to manipulate a market.'' (citing 73 FR at 48326)); Platts at 8 (asking that the Commission adopt a safe harbor to alleviate concerns that the Commission could capture inadvertent errors under an FTC rule); see also Argus at 3 (``The FTC should also refrain from mandating any particular methodological approach for the assessment of spot markets in petroleum.''). \32\ See, e.g., Pirrong at 2 (asserting that the proposed Rule's focus on fraud and deceit is misguided and contending that market power is the biggest threat to efficiently functioning petroleum markets); CFA2 at 19 (urging the Commission to take ``vigorous action to reign in the speculative bubble'' in energy commodities markets); Consumer (urging the Commission to address excessive speculation in commodities markets); Navajo Nation at 3 (expressing concern that the proposed Rule may fall short in addressing manipulative conduct).
\33\ See, e.g., NPCA at 1; MPA at 2; IPMA at 34 (requesting that the Commission treat an oil company's decision to sell only gasoline preblended with ethanol at the terminal rack as a potentially manipulative practice); Murkowski at 1 (recommending that the Commission use its authority to address anticompetitive conduct in circumstances in which ``a single company gains exclusive control of energyrelated infrastructure . . . for moving domestic crude to a consuming market'').
\34\ See, e.g., CFTC (Arbit) at 1 (urging the Commission to ``incorporate an exception from its rule for commodity futures and options trading activity on regulated futures exchanges''); CFTC (Chilton) at 2; CFDR at 8 (asking that the Commission refrain from encroaching on the CFTC's exclusive jurisdiction over futures transactions); BrownHruska at 89 (``[I]t is my hope that the Commission will narrow the focus of the rule tightly upon
manipulative and deceptive conduct in the wholesale petroleum markets [to avoid overlap with the CFTC].''); ISDA at 14 (``[T]he Commission should clarify that it will refer to the CFTC any manipulative activity that it becomes aware of that does not directly involve a wholesale, physical petroleum products
transaction.''); MFA at 2 (recommending that the Commission adopt a safe harbor for futures markets activities); Sutherland at 2 (urging the Commission to reconsider its decision to reach futures markets activities under any Section 811 rule). But see, e.g., Pirrong at 8 (noting that objections that ``FTC actions against manipulation will interfere with the [CFTC's] jurisdiction over commodity market manipulation . . . are moot, because Congress has decided
otherwise''); CA AG at 3 (``EISA . . . provide[s] the FTC with the power to monitor for and prevent fraud and deceit in the commodity futures market, insofar as it affects oil and gas futures.''); CFA2 at 19 (urging the Commission to take ``vigorous action to reign in the speculative bubble and return the futures markets to their proper role to improve the functioning of physical commodity markets'').
\35\ ATAA at 45 (asserting that the FTC properly concluded that oil pipelines are subject to the proposed Rule); IPMA at 4 (``We agree that Commission jurisdiction should extend to pipelines.''). But see AOPL at 1 (urging the Commission to revise its proposed Rule ``to clarify that it does not apply to interstate common carrier oil pipelines regulated by the [FERC] under the Interstate Commerce Act (`ICA')'').
\36\ See, e.g., ATA at 3 (urging the Commission to ``expand the scope of [the proposed Rule] to include alternative and renewable energy markets''); IPMA at 4 (agreeing that ``manipulation of non petroleum based commodities such as ethanol'' that affect the price of gasoline should be ``subject to Commission enforcement''); NPRA (Drevna), Tr. at 22122 (agreeing that the Commission should reach blending components that are inputs to gasoline or diesel); SIGMA (Columbus), Tr. at 22223 (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
[[Page 18308]]
prohibits ``any person'' from ``directly or indirectly'' using or employing ``any manipulative or deceptive device or contrivance''in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesalethat violates a rule or regulation that the Commission ``may prescribe'' ``as necessary or appropriate in the public interest or for the protection of United States citizens.''\37\

\37\ 42 U.S.C. 17301; see also 73 FR at 48320.

The Commission has carefully considered concerns raised by commenters about the propriety of a rule.\38\ Most of the commenters who addressed the rulemaking standard agreed generally that a Section 811 rule would be necessary or appropriate, and that it would be in the public interest to combat fraud in wholesale petroleum markets.\39\ A few commenters, however, specifically questioned the necessity or appropriateness of the proposed Rule.\40\ Sutherland, for example, argued that the proposed Rule failed to ``balance the Congressional directive for regulatory oversight with the goal of allowing economic efficiency,'' and was ``more intrusive of legitimate business behavior than is necessary.''\41\ NPRA stated that the proposed Rule's reliance on SEC Rule 10b5 and related legal precedent as a model would create confusion and potentially discourage procompetitive activity, and, thus, would be neither necessary nor appropriate in the public interest.\42\
\38\ Some commenters opined on the meaning of the language ``in the public interest or for the protection of United States citizens'' in the ANPR. See, e.g., CFDR, ANPR, at 45 (``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 1718 (stating that the statutory language``in the public interest''reflects Congress' intention that the Commission draw upon its long experience in articulating ``the public interest'' under its other statutes).
\39\ See, e.g., ATAA at 3 (noting that the proposed Rule is necessary to guard against conduct that undermines the integrity of petroleum markets); MS AG at 2 (``The proposed Rule will benefit consumers significantly because market manipulation can artificially inflate prices of petroleum products and cause consumers to pay more for essential goods, such as gasoline.''); IPMA at 4 (``The proposed Rule does meet the rulemaking standard that it is `necessary or appropriate in the public interest or for the protection of United States[] citizens.'''); see also PMAA at 2 (stating that the proposed Rule fulfilled ``the Commission's intention to, `prohibit manipulative and deceptive conduct without discouraging pro competitive or otherwise desirable market practices''' (quoting 73 FR at 48323)); ATA at 2 (supporting the proposed Rule ``as an additional tool to help preserve the integrity of vital energy markets'').
\40\ Most commenters directed their comments to the application of the Rule, rather than to whether the proposed Rule met the rulemaking standard articulated in Section 811.
\41\ Sutherland at 2.
\42\ NPRA at 1516; 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.''\43\ Like the initially proposed Rule, the revised proposed Rule would prohibit conduct that injects false information into market transactions. However, the revised proposed Rule more precisely identifies the conduct prohibited, and thus achieves a more appropriate balance between consumer protection interests and compliance burdens.\44\ Consequently, the Commission believes that it is both appropriate and in the public interest to publish the revised proposed Rule.
\43\ 42 U.S.C. 17301.
\44\ Several commenters expressed concern that a lack of clarity about the type of conduct covered by the proposed Rule could chill legitimate conduct, owing to potentially significant monetary penalties that might be imposed for any violation. See, e.g., API at 910 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 costefficient functioning of wholesale petroleum markets'').
IV. Discussion of the Revised Proposed Rule

A. The Revised Proposed Rule is an AntiFraud Rule

The Commission stated in the NPRM that its proposed Rule was modeled on the SEC's broad, antifraud Rule 10b5.\45\ The Commission further stated that it intended to rely on only relevant SEC precedent in applying its rule.\46\ Although some commenters supported this approach, others raised concerns about basing a rule on SEC Rule 10b5. The revised proposed Rule retains the antifraud concept of SEC Rule 10b5, but it is further tailored to wholesale petroleum markets. The following discussion addresses the use of SEC Rule 10b5 as a model, and provides Commission responses to commenter concerns about this approach. The Commission invites written comments on the revised proposed Rule, particularly regarding the modifications made to the initially proposed Rule, and responses to the questions in Section IV.I.
\45\ 73 FR at 48322.
\46\ 73 FR at 48322 (stating that the Commission ``[was] not invoking the entire body of SEC law in this rulemaking, but rather the antifraud provisions of SEC Rule 10b5'').

Many commenters expressed general support for an antifraud rule, contending that a fraud standard would provide necessary guidance to market participants.\47\ A few commenters specifically endorsed the proposed Rule as articulated in the NPRM, without modification.\48\ Some commenters also
[[Page 18309]]
agreed with the Commission's decision to model the proposed Rule after SEC Rule 10b5.\49\ For example, SIGMA argued that a SEC Rule 10b5 model would ``ensure[] consumer protection while affording business owners a wealth of certainty with respect to their market
practices.''\50\ A few commenters expressly embraced the Commission's decision to use the legal precedent under SEC Rule 10b5 for guidance in interpreting a Section 811 rule.\51\
\47\ See, e.g., CFDR (Mills), Tr. at 3839 (``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 antifraud provision''); ABA Energy (McDonald), Tr. at 246 (urging the Commission to ``focus on deceptive conduct that hinders the operations of markets by misleading participants''); see also ISDA (Velie), Tr. at 40 (``[W]e think fraud is a good standard, as long as it's coupled with specific intent to manipulate a market.''); Flint Hills (Hallock), Tr. at 46 (``I think it's important to keep a focus, though, on the aim of the fraud, and the aim of the fraud that I believe that the agency has been looking for is fraud upon a market . . . .''); NPRA at 2 (``NPRA endorses the FTC's determination that implementation of the EISA should be accomplished through a rule against fraud and deception that harms the competitive functioning of wholesale petroleum markets and, ultimately, consumers.'').
\48\ See, e.g., MS AG at 2 (``The proposed Rule will benefit consumers significantly because market manipulation can artificially inflate prices of petroleum products and cause consumers to pay more for essential goods, such as gasoline.''); PMAA at 2 (stating that the proposed Rule prohibits manipulative and deceptive conduct without chilling procompetitive behavior); CA AG at 2 (expressing support for the FTC's proposed Rule).
\49\ See, e.g., SIGMA at 2 (expressing support for the Commission's decision to base its proposed Rule on Rule 10b5); ATAA at 11 (``[ATAA] supports the proposed rule's use of SEC Rule 10b5 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 10b5 model); Boxer at 1 (``I think it's [great] to have Rule 10b5 essentially extended to the oil traded on the [NYMEX] and ICE exchanges . . . .''). \50\ SIGMA at 2.
\51\ See, e.g., CFDR at 2 (``The Commission . . . rightly looks to securities law precedents for guidance in shaping the legal standards and jurisprudence under EISA.''); ATAA at 11 (``[Rule 10b 5] provides the FTC with a welldeveloped framework to follow.'').

Other commenters expressed concern about the Commission's reliance on SEC Rule 10b5 language and its legal precedent.\52\ Generally, these commenters argued that the legal precedent developed under SEC Rule 10b5 cannot be divorced from the language of Rule 10b5 itself.\53\ They contended that securities markets are characterized by legal relationships of trust and an emphasis on full disclosure which do not exist in wholesale petroleum markets.\54\ These commenters argued that relying upon SEC Rule 10b5 legal precedent therefore would create confusion and uncertainty as to what conduct would violate the proposed Rule.\55\ Some commenters asserted that, as a result, the proposed Rule potentially would chill legitimate business conduct, and that its uncertain scope would make it difficult for companies to create effective programs for compliance with the Rule.\56\ \52\ As a threshold matter, some of these commenters disagreed with the Commission's tentative determination in the NPRM that the language of Section 811 indicated that the FTC should model a Section 811 rule after Rule 10b5, 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 antimanipulation authority. See 15 U.S.C. 717c1; 16 U.S.C. 824v; FERC, Prohibition of Energy Market Manipulation, 71 FR 4244, 4246 (Jan. 26, 2006). See, e.g., NPRA at 1516 (stating that the language of Section 811 does not require that the Commission model an FTC rule after SEC Rule 10b5); API at 12 (``The language of Section 811 thus authorizes the Commission to take a different approach than the [FERC] . . . .''); ISDA at 6 (stating that, unlike the FERC's market manipulation statute, Section 811 does not contain express language directing it to rely on securities precedent).
\53\ See, e.g., API at 15 (``The Rule 10b5 regulatory regime is deeply intertwined with the disclosure obligations imposed by Section 10(b) and other provisions of the SEA, the scope of which, in turn, are highly dependent on the fiduciary duties and
obligations that exist between various market participants.''); see also ISDA at 7 (stating that disclosure requirements are
``[i]nterwoven and inextricably part of securities regulation''). \54\ See, e.g., NPRA at 4, 7 (arguing that due to the absence of fiduciary and other duties and disclosure obligations in wholesale petroleum markets, it would be ``bad public policy to apply [Rule 10b5] 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 10b5 principles are applicable to wholesale petroleum markets); Pirrong Tr. at 36 (stating that a Rule 10b5 case raises ``issues related to fiduciary duty that are inherent in the securities laws, but which are not really appropriate or really that relevant in a commodities context''); API at 25 (arguing that unlike wholesale petroleum markets, the securities marketplace is a regulated industry ``governed by detailed disclosure obligations designed to protect unsophisticated investors''); Plains at 3 (stating that in crude oil markets, unlike securities markets, ``there is no presumption that one market participant owes any duties to its counterparties that would require disclosure of any information'').
\55\ See, e.g., API at 9 (applying Rule 10b5 precedent ``without any modification . . . would create confusion and chill procompetitive behavior''); NPRA at 16 (``[A] blanket transfer of the language and precedent of Rule 10b5 from securities markets to wholesale petroleum markets would likely create significant confusion and discourage procompetitive activity.'').
\56\ See, e.g., Flint Hills at 5 (stating that the proposed Rule does not ``provide practical, clear, articulate guidance to its staff, traders and others dealing on [its] behalf'' as to prohibited conduct); API at 8 (stating that the benefits of an FTC rule are outweighed by ``potentially significant compliance costs'' and the risk of ``interfer[ing] with the efficient functioning of petroleum markets and deter[ring] procompetitive, welfareenhancing
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 costefficient functioning of wholesale petroleum markets.''); see also ISDA at 9 (``Under the proposed Rule, market participants are likely to be concerned that their competitive trading strategies or inadvertent miscalculations may later be misconstrued by regulators . . . .'').

Many commenters offered modifications to the proposed Rule intended to adapt it to wholesale petroleum markets.\57\ Commenters who urged the Commission to diverge from SEC Rule 10b5 legal precedent suggested revising the proposed Rule to include express language requiring both a showing of specific intentto satisfy the scienter requirement\58\ and a showing of price effects.\59\ Some commenters recommended that the Commission draw instead upon legal precedent construing the CEA.\60\ Others argued that an antifraud manipulation rule would not go far enough, or that it should reach different types of conduct.\61\ One commenter, for example, suggested that the rule should target the exercise of market power intended to benefit a derivatives
[[Page 18310]]
position.\62\ Other commenters specifically urged the Commission to prohibit refiners and suppliers from refusing to sell unblended gasoline to distributors.\63\
\57\ API and NPRA suggested that the Commission retain the elements of a violation but not the language of the proposed Rule, or at least modify the language of the proposed Rule to clarify its application. API at 1516; NPRA at 1617 (stating that the elements of SEC Rule 10b5 detached from securities precedent and with modifications are a ``better starting point'' for a rule rather than the specific language of Rule 10b5); see also API at 12 (``The language of Section 811 thus authorizes the Commission . . . to modify the Rule 10b5 regime in light of its extensive experience with the petroleum industry.''); ISDA at 6 (stating that, unlike the FERC's market manipulation statute, Section 811 does not contain express language directing it to rely on securities precedent). \58\ Some commenters recommended that the Commission adopt the CEA's specific intent standard. See, e.g., ISDA at 1011 (stating that the CEA's intent requirement is better suited for commodities markets than the FTC's proposed scienter requirement); API at 2122 (advocating for a specific intent standard similar to that of the CEA); see also NPRA at 32 (stating that the proposed Rule should require specific intent in order to harmonize the proposed Rule with the CFTC's market manipulation authority); CFDR at 7 (stating that a specific intent standard ``would substantially help to harmonize the legal standard between the Commission's rule and the CFTC's interpretation of the CEA'').
\59\ See, e.g., ISDA at 34 (asking that the Commission require proof of price effects); Plains at 3 (urging the Commission to make clear that only conduct that has a ``manipulative effect on the relevant market'' will be actionable); API at 34 (recommending that the Commission require ``proof that a party's deceptive or fraudulent conduct caused market conditions to deviate materially from the conditions that would have existed but for that conduct''). \60\ A few commenters asserted that the standards applied to commodities markets, including futures commodities markets, under the CEA are more applicable to petroleum markets than is securities legal precedent. See, e.g., ISDA at 11 (stating that CEA ``precedent is much more analogous to the markets the EISA seeks to protect''); API at 15 (urging the Commission to ``draw on relevant commodities law precedents in addition to elements of Rule 10b5''); see also BrownHruska at 4 (``[T]he mission of the Commission is more analogous to that of the commodities market regulator, the CFTC, which has the responsibility to ensure that the prices derived from and used by futures markets are fair and free from fraud and manipulation.''). See generally Pirrong at 5 (recommending that the Commission follow a modified CEA price manipulation model). But see NPRA (DeSanti), Tr. at 251 (``I want to be explicit that the NPRA does not support using [a] CEA model here.'').
\61\ See, e.g., Navajo Nation (Piccone), Tr. at 3738 (arguing that a rule should address nonfraudulent, manipulative acts such as a refiner denying producers access to other markets); Navajo Nation at 3 (seeking confirmation that an FTC rule ``will be applied to prohibit all manipulative conduct that artificially distorts wholesale petroleum markets or undermines incentives to find and develop reserves of domestic crude oil''); see also CFA (Cooper), Tr. at 160 (stating that fraud is too narrow a focus and the proposed Rule also should cover market power issues); CFA2 at 8 (urging the FTC to ``identify and attack the broad range of practices and structural conditions that can and have been moving prices in the markets'').
\62\ Pirrong at 25 & n.2 (defining ``derivatives'' to include ``exchangetraded futures contracts, and options on futures, and forward and options contracts traded in the overthecounter . . . market'').
\63\ MPA at 2 & n.1 (noting that MPA's members share the experiences described by IPMA and TOMA in their ANPR comments and IPMA in its NPRM comment, and that distributors and retailers can often obtain more competitive prices if they buy unblended gas separately from ethanol, which they then add to the gasoline before selling it at retail); see also NPCA at 1; IPMA at 23. MPA also recommended that the Commission reach the aforementioned conduct, which has ``an adverse effect on competition'' under an FTC rule. MPA at 2. The Commission does not intend to focus on anti
competitive conduct in its application of the final Rule, which remains the province of antitrust law. The approach is consistent with Section 815 of EISA. See 42 U.S.C. 17305(b); see also ABA Energy (McDonald), Tr. at 244 (arguing that the final Rule should not reach conduct that is already covered by the antitrust laws, such as the unilateral exercise of market power).

Based on the rulemaking record developed thus far, as well as its extensive experience with the petroleum industry, the Commission believes that modifying the proscriptions of the initially proposed Rule will better focus it on wholesale petroleum markets, which differ significantly from securities markets. As explained in the ANPR and the NPRM, the conduct prohibition in Section 811 is identical to language found in SEA Section 10(b), which prohibits the use of any ``manipulative or deceptive device or contrivance.''\64\ The Commission believes that this language directs the agency to be guided by SEC Rule 10b5,\65\ a broad antifraud rule.\66\ However, the inclusion of the language ``as necessary or appropriate'' in Section 811 further directs the Commission to use its expertise to tailor the rule in a manner appropriate for wholesale petroleum markets.\67\
\64\ See 73 FR at 25619; 73 FR at 48322. The antimanipulation 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. 717c1; 16 U.S.C. 824v.
\65\ The language of Section 811 reflects congressional intent that the Commission look to SEC Rule 10b5 in crafting a market manipulation rule. See Evans v. United States, 504 U.S. 255, 260 n.3 (```[I]f a word is obviously transplanted from another legal source, whether the common law or legislation, it brings the old soil with it.''') (quoting Felix Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum. L. Rev. 527, 537 (1947)); Morissette v. U.S., 342 U.S. 246, 263 (1952) (noting where Congress borrows terms of art it ``presumably knows and adopts the cluster of ideas that were attached to each borrowed word''); see also National Treasury Employees Union, et al. v. Chertoff, 452 F.3d 839, 858 (D.C. Cir. 2006) (stating that ``there is a presumption that Congress uses the same term consistently in different statutes'').
\66\ Superintendent of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971) (stating that preserving the integrity of securities markets is one of the purposes of Rule 10b5); 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 10b5].'') (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 10b5).
\67\ To do otherwise would violate a canon of statutory construction. See TRW, Inc. v. Andrews, 534 U.S. 19, 31 (2001) (``It is `a cardinal principle of statutory construction' that `a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.''') (citations omitted).

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 antifraud 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 conductincluding making any untrue statement of material factthat operates or would operate as a fraud or deceit on any person. Revised proposed Section 317.3(a) would not prohibit omissions of material facts. Such omissions would instead be covered by revised proposed Section 317.3(b), which would prohibit any person from intentionally failing to state a material fact which both makes a given statement misleading under the circumstances and distorts or tends to distort market conditions for a covered product. These modifications are intended to eliminate redundancy and more precisely define the conduct that revised proposed Rule Section 317.3 would prohibit; that is, fraudulent or deceptive conduct that injects false information into wholesale petroleum market transactions.

The Commission believes that this framework best reflects both congressional intent and the nature of the markets covered by the revised proposed Rule. The Commission recognizes, however, that this approach may be too narrow to prevent all manipulative conduct. The Commission therefore does not foreclose the possibility of extending the scope of any final rule in the future if new information or enforcement experience warrant such modifications.

B. Section 317.1: Scope

Section 813 provides the Commission with the same jurisdiction and power under Subtitle B of EISA as does the FTC Act, 15 U.S.C. 41 et seq.\68\ With certain exceptions, the FTC Act provides the agency with jurisdiction over nearly every economic sector. Because EISA does not expand or contract coverage under the FTC Act, any ``person'' currently subject to the Commission's jurisdictionthat is, any individual, group, unincorporated association, limited or general partnership, corporation, or other business entitywould be covered by the revised proposed Rule. Conversely, any ``person'' not subject to Commission jurisdiction under the FTC Act would also not be subject to Commission jurisdiction under the revised proposed Rule.
\68\ Section 813(a) of EISA provides that Subtitle B shall be enforced by the FTC ``in the same manner, by the same means, and with the same jurisdiction as though all applicable terms of the [FTC] Act (15 U.S.C. 41 et seq.) were incorporated into and made a part of [Subtitle B].'' 42 U.S.C. 17303 (emphasis added).

In response to the NPRM, some commenters asked the Commission to clarify the jurisdictional scope of any final rule. With respect to pipelines, one commenter, AOPL, asserted that ``interstate common carrier oil pipelines regulated by the FERC under the ICA are exempt from Commission jurisdiction'' and should be excluded from the coverage of any FTC rule.\69\ AOPL
[[Page 18311]]
further suggested that the Commission provide a ``safe harbor protecting oil pipelines against any culpability under the rule so long as they are acting in accordance with the ICA and FERC regulation of oil pipelines pursuant to the ICA.''\70\ In support of this position, AOPL argued that the FERC already regulates pipelines extensively\71\ and that the potential for manipulation of commodities prices by oil pipelines is small.\72\ Another commenter, ATAA, opposed any safe harbors or exemptions for pipelines in order to give full effect to the purpose of EISA.\73\ According to ATAA, it is important for the Commission to police this area because ``it is far from clear that FERC's jurisdiction extends to price manipulation,'' and because the ``FERC has never pursued `price manipulation' claims'' against oil pipelines.\74\
\69\ AOPL at 1 & n.3 (urging the Commission to clarify that it will not apply a Section 811 rule to reach common carrier oil pipelines, defining ``oil pipelines'' to include crude oil and petroleum products pipelines).
\70\ AOPL at 14.
\71\ AOPL asserted that comprehensive regulation of oil pipelines by the FERC makes regulation by the FTC under any final rule ``neither necessary nor appropriate in the public interest or for the protection of U.S. citizens.'' AOPL at 11.
\72\ AOPL at 1112 (contending that ``there is little or no potential for manipulation of oil commodities prices on the part of oil pipelines'' because regulations and competition limit pipeline companies' ability to engage in anticompetitive conduct).
\73\ ATAA at 4 (arguing that the Commission should reach manipulative conduct relating to oil pipelines in order to give full effect to EISA); see also Navajo Nation (Piccone), Tr. at 3738 (arguing that Congress gave the FTC new authority to combat anti competitive practices, including practices by pipelines); IPMA at 4 (``We agree that Commission jurisdiction should extend to
pipelines.'').
\74\ ATAA at 5 (asserting that the FERC ``exercises what at best can be described as `lighthanded' 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.\75\ Certain pipeline companies or their activities may fall outside the coverage of the FTC Act to the extent that they are acting as ``common carriers.'' However, pipeline companies and their owners or affiliates are often involved in multiple aspects of the petroleum industryincluding the purchase or sale of petroleum products, and the provision of transportation servicesand they may engage in conduct in connection with wholesale petroleum markets covered by EISA.
\75\ Under the Clayton Act, the Commission has the power and authority to regulate mergers and acquisitions of pipelines. See Clayton Act, Sections 7 and 11, 15 U.S.C. 18, 21.

FERC regulation of pipelines would be an insufficient basis upon which to exempt pipeline companies if they engage in prohibited conduct in connection with the wholesale purchase or sale of crude oil, gasoline, or petroleum distillates. The Commission therefore must assess on a casebycase basis whether any particular ``person'' as defined in the revised proposed Ruleor any conduct at issuemay fall outside the scope of the revised proposed Rule, and/or whether the conduct at issue falls under the ``in connection with'' language in the revised proposed Rule, which is discussed below.

Some commenters argued that any final rule should not extend to fraud in futures markets, as the Commission had proposed. Many of these commenters observed that the CFTC has exclusive jurisdiction pursuant to Section 2(a)(1)(A) of the CEA,\76\ and that the Commission should therefore grant a safe harbor for futures markets activities.\77\ These commenters argued in particular that Congress granted the CFTC exclusive jurisdiction over futures markets in order to create uniform rules and to avoid applying inconsistent legal standards to futures markets.\78\ They further argued that if an FTC rule applied to futures trading, market participants could face duplicative and possibly inconsistent enforcement by multiple agencies based on the same conduct.\79\ One commenter maintained that if the Commission declined to adopt a safe harbor, the Commission should harmonize any final rule with the elements of a cause of action for price manipulation under the CEA, which are not part of the statutory provision.\80\
\76\ Section 2 of the CEA states that ``[t]he [CFTC] shall have exclusive jurisdiction . . . with respect to accounts, agreements . . . and transactions involving contracts of sale of a commodity for future delivery . . . traded or executed on a contract market designated . . . pursuant to [S]ection 7 or 7a of this title'' of the CEA. 7 U.S.C. 2(a)(1)(A).
\77\ See, e.g., CFTC (Arbit) at 1 (``We again urge the FTC to incorporate an exception from its rule for commodity futures and options trading activity on regulated futures exchanges, which is subject to the CFTC's exclusive jurisdiction granted by the [CEA].''); CFTC (Chilton) at 2 (``I urge the FTC to incorporate an exception for futures trading subject to the exclusive jurisdiction of the CEA.''); MFA at 2 (urging the Commission on behalf of futures associations and exchanges to grant a safe harbor for futures and options trading). But see CA AG at 34 (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 1920 (urging the Commission to reach conduct in futures markets). \78\ See, e.g., MFA at 3 (``Congress designed the CFTC's exclusive jurisdiction to make absolutely certain that the provisions of the CEA . . . would be the sole legal standards applicable to futures trading.''); CFTC (Arbit) at 3 (stating that Congress granted the CFTC exclusive jurisdiction over futures trading to avoid applying inconsistent standards to futures markets); see also CFDR at 9 (stating that it seems illogical to apply a rule specifically intended to govern activities in the commodities markets to futures markets); CFTC (Chilton) at 1 (stating that applying a Section 811 rule to futures markets ``would seriously undermine the Congressional grant of exclusive
jurisdiction in the CEA, and impair the CFTC's ability to
effectively oversee futures activity''); see also Sutherland at 2 (asserting that the proposed Rule ``impinges upon the [CFTC's] exclusive jurisdiction with respect to the futures and other purely financial markets'').
\79\ See, e.g., Sutherland at 2 (``The proposed rule creates a duplicative and potentially highly burdensome enforcement
regime.''); CME (Dow), Tr. at 29 (explaining that application of an FTC rule to futures markets is a ``recipe for disaster . . . because it results in overlapping regulatory regimes by multiple
regulators''); MFA at 3 (arguing that the legislative history and the language of CEA's exclusive jurisdiction provision demonstrates that Congress believed that applying conflicting or duplicative regulations to futures markets would ``impair the operations of U.S. futures markets''); BrownHruska at 89 (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 overthecounter derivative markets'').
\80\ MFA at 3 (urging the Commission ``to avoid having [the Rule's] provisions contradict and conflict with CEA legal
requirements'' by requiring specific intent and a showing of price effects as elements of an offense).

At this time, the Commission does not intend to adopt a blanket safe harbor for futures market activities. Nonetheless, the Commission recognizes the CFTC's jurisdiction ``with respect to accounts, agreements . . . and transactions involving contracts of sale of a commodity for future delivery.''\81\ Consistent with its longstanding practice of coordinating its enforcement efforts with other federal or state law enforcement agencies where it has overlapping or complementary jurisdiction, the Commission intends to work cooperatively with the CFTC in furtherance of the Commission's duty to prevent fraud in wholesale petroleum markets.\82\
\81\ 7 U.S.C. 2(a)(1)(A).
\82\ This position is consistent with the views of commenters who urged the FTC to work with the CFTC where appropriate, including the CFTC itself. See, e.g., CFTC (Arbit) at 3 (``[T]he CFTC looks forward to working in close cooperation with the FTC to efficiently prosecute illegal activity in the petroleum industry where our agencies share jurisdiction.''); Sutherland at 4 (``[C]ooperative arrangements in place between the FTC and CFTC . . . can be tailored to allow each agency to pursue the compliance matters within its greatest competencethe 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).

[[Page 18312]]

Finally, some commenters voiced the concern that if the Commission relies upon the text and judicial construction of SEC Rule 10b5 language and securities law precedent, courts would be more inclined to find an implied private right of action under any final rule.\83\ Commenters urged the Commission to clarify that any final rule would not create or imply a private right of action.\84\ In response, the Commission notes that EISA does not expressly create a private right of action.\85\ Whether a private right of action might be implied, however, is a question of legislative intent for Congress or the courts, not the Commissi

FOR FURTHER INFORMATION CONTACT

Patricia V. Galvan, Deputy Assistant Director, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Avenue, N.W., Washington, DC 20580, (202) 3263772.

Top Searches

Popular Sites

Common CFR Searches