Federal Register: August 12, 2009 (Volume 74, Number 154)
DOCID: fr12au09-16 FR Doc E9-19257
FEDERAL TRADE COMMISSION
U.S. Customs and Border Protection
CFR Citation: 16 CFR Part 317
RIN ID: RIN 3084-AB12
NOTICE: Part III
DOCID: fr12au09-16
DOCUMENT ACTION: Final Rule.
SUBJECT CATEGORY:
Prohibitions on Market Manipulation
EFFECTIVE DATES: November 4, 2009.
DOCUMENT SUMMARY:
In this document, the Federal Trade Commission (``Commission''
or ``FTC'') issues its Statement of Basis and Purpose (``SBP'') and
final Rule, pursuant to Section 811 of Subtitle B of Title VIII of The
Energy Independence and Security Act of 2007 (``EISA'').\1\ The final
Rule prohibits 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 is likely to distort market conditions for any such product.
\1\ Section 811 is part of Subtitle B of Title VIII of EISA,
which has been codified at 42 U.S.C. 1730117305.
SUMMARY:
Federal Trade Commission
SUPPLEMENTAL INFORMATION
Statement of Basis and Purpose
I. Background
EISA became law on December 19, 2007.\2\ 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.''\3\ \2\ 42 U.S.C. 1700117386.
\3\ 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.''\4\
\4\ 42 U.S.C. 17302.
Subtitle B also contains three additional sections that address,
respectively, enforcement of the Subtitle (Section 813),\5\ penalties
for violations of Section 812 or any FTC rule promulgated pursuant to
Section 811 (Section 814),\6\ and the interplay between Subtitle B and existing laws (Section 815).\7\
\5\ 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 Federal Trade
Commission Act [(``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.
\6\ 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.
\7\ 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.
After considering the rulemaking record in this proceeding, the
Commission adopts the final Rule pursuant to its authority under
Section 811. The final Rule prohibits any person, directly or
indirectly, in connection with the purchase or sale of crude oil,
gasoline, or petroleum distillates at wholesale, from (a) knowingly
engaging in any act, practice, or course of business including the
making of any untrue statement of material fact that operates or
would operate as a fraud or deceit upon any person, or (b)
intentionally failing to state a material fact that under the
circumstances renders a statement made by such person misleading,
provided that such omission distorts or is likely to distort market conditions for any such product.\8\
\8\ As the Commission stated in each of the prior Notices issued
in this proceeding, 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 obviously 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 FTC, Prohibitions On Market
Manipulation and False Information in Subtitle B of The Energy
Independence and Security Act of 2007, 73 FR 25614, 25621 n.59 (May
7, 2008); 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, 48320 n.40 (Aug. 19, 2008);
FTC, Prohibitions On Market Manipulation in Subtitle B of Title VIII
of The Energy Independence and Security Act of 2007, 74 FR 18304, 18305 n.11 (Apr. 22, 2009).
II. The Rulemaking Proceeding
The rulemaking proceeding\9\ began with the publication of an
Advance Notice of Proposed Rulemaking (``ANPR'') on May 7, 2008.\10\ In
the ANPR, the Commission solicited comments on whether it should
promulgate a rule under Section 811, and, if so, the appropriate scope
and content of such a rule.\11\ In response to the ANPR, the Commission received 155 comments from interested parties.\12\
[[Page 40687]]
Commenters expressed differing views regarding the desirability of and
the appropriate legal basis for any such rule.\13\ They also proposed a
variety of models upon which to base a market manipulation rule,
including those used by other federal agencies pursuant to each
agency's respective market manipulation authority,\14\ such as the
Securities and Exchange Commission (``SEC''),\15\ the Federal Energy
Regulatory Commission (``FERC''),\16\ and the Commodity Futures Trading Commission (``CFTC'').\17\
\9\ Rulemaking documents are available at: (http://www.ftc.gov/ ftc/oilgas/rules.htm).
\10\ 73 FR 25614.
\11\ 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/080519ampetrolinstreqeot.pdf); 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 32259 (June 6, 2008).
\12\ Attachment D contains a list of commenters who submitted
comments on the ANPR. Electronic versions of the comments are
available at: (http://www.ftc.gov/os/comments/marketmanipulation/
index.shtm). In calculating the number of comments submitted in
response to a Notice issued in this proceeding, the Commission
treated multiple filings by the same commenter, or a comment filed jointly by a group of commenters, as a single comment.
\13\ Section II.A. of the Notice of Proposed Rulemaking
(``NPRM'') discusses commenters' views and the Commission's response
to commenters on the propriety of a Section 811 rule. See 73 FR at 4832023.
\14\ Section III. of the ANPR provides an overview of the
antecedents of Section 811 and relevant legal precedent. See 73 FR
at 2561619. Section I.B. of the NPRM describes ANPR commenters'
views on the appropriate model for a Section 811 rule. See 73 FR at 48319 & nn.3132.
\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 a Notice of Proposed Rulemaking (``NPRM'')\18\
setting forth the text of a proposed Rule modeled on SEC Rule 10b5 and
inviting written comments on issues raised by the proposed Rule.\19\
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. In response to the
NPRM, the Commission received 34 comments from interested parties.\20\
On November 6, 2008, Commission staff held a oneday public workshop on
the proposed Rule.\21\ Commenters and workshop participants presented
views concerning several key issues relating to the proposed Rule,
particularly regarding the application of a SEC Rule 10b5 model to
wholesale petroleum markets and the relevance of securities law to the petroleum industry.\22\
\18\ 73 FR 48317.
\19\ 73 FR at 4833234. In response to a petition from a major
trade association, the Commission extended the deadline for
submission of comments on the NPRM from September 18, 2008, to
October 17, 2008. 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); 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).
\20\ Attachment B contains a list of commenters who responded to the NPRM.
\21\ Attachment C contains a list of participants in the
workshop. 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, is available at: (http://
www.ftc.gov/bcp/workshops/marketmanipulation/index.shtml).
\22\ Section IV.A. of the Revised Notice of Proposed Rulemaking
(``RNPRM'') provides an overview of NPRM commenters' and workshop
participants' views regarding the proposed Rule. See 74 FR at 18308 10.
The Commission published a Revised Notice of Proposed Rulemaking
(``RNPRM'') setting forth a revised proposed Rule on April 22,
2009,\23\ and describing certain modifications to the initially
proposed Rule and the basis for the modifications. As with the
initially proposed Rule, the Commission based the revised proposed Rule
on the antifraud model of SEC Rule 10b5, but modified the revised
proposed Rule to accommodate differences between securities markets and
wholesale petroleum markets. The RNPRM also set forth questions and
alternative rule language designed to elicit further views from
interested parties. In response to the RNPRM, the Commission received
17 comments from interested parties, including a consumer advocacy
group, a United States Senator, an academic, a federal agency, industry
members, energy news and price reporting organizations, and trade and bar associations.\24\
\23\ 74 FR 18304.
\24\ Attachment A contains a list of commenters who submitted
comments on the RNPRM, together with the abbreviations used to
identify each commenter referenced in this SBP. All commenter
references are to those comments submitted in response to the RNPRM, unless otherwise noted.
The Commission has reviewed the entire record in this proceeding, including comments submitted in response to the RNPRM. Based on this review, as well as its extensive petroleum industry law enforcement experience, the Commission hereby adopts a final Rule that is virtually identical to the revised proposed Rule. The Commission's analysis of certain commenter proposals and its basis for adopting each of the final Rule's provisions are detailed below.
III. Legal Basis for the Rule
Section 811 of EISA provides the legal basis for the final 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.''\25\ In enacting Section 811, Congress specifically authorized the Commission to determine whether a rule prohibiting manipulative conduct in wholesale petroleum markets would be appropriate and in the public interest. As the Commission explained in the NPRM in this proceeding:
\25\ 42 U.S.C. 17301. Section 811 states:
It is unlawful for any person, directly or indirectly, to use or
employ, in connection with the purchase or sale of crude oil[,]
gasoline[,] or petroleum distillates at wholesale, any manipulative
or deceptive device or contrivance, in contravention of such rules
and regulations as the Federal Trade Commission may prescribe as
necessary or appropriate in the public interest or for the protection of United States citizens.
[T]he initial inquiry in determining whether it should promulgate a
rule requires understanding the phrase ``necessary or appropriate in
the public interest or for the protection of United States citizens.''
The use of the disjunctive ``or'' in the first clause of this phrase
indicates that the Commission would be within its [authority] to
promulgate a rule that is either: (1) ``necessary . . . in the public
interest or for the protection of United States citizens,''or (2)
``appropriate in the public interest or for the protection of United
States citizens.'' Similarly, the Commission need only show that a rule
would be either ``in the public interest'' or ``for the protection of
United States citizens.'' Thus, the Commission could proceed in its
rulemaking if, at a minimum, the endeavor is ``appropriate . . . in the public interest.''\26\
\26\ 73 FR at 4832021.
The Commission has determined that the final Rule which defines
for market participants the Section 811 statutory prohibition against
using or employing ``any manipulative or deceptive device or
contrivance'' is appropriate and in the public interest. The prices
of petroleum products significantly affect the daily lives of American
consumers and the daily operations of American businesses.\27\ [[Page 40688]]
Because fraudulent or deceptive conduct within wholesale petroleum
markets injects false information into the market process, it distorts
market data and thus undermines the ability of consumers and businesses
to make purchase and sales decisions congruent with their economic
objectives.\28\ As a consequence, decisionmaking risks and attendant
costs increase, and economic efficiency declines in the overall
economy. Fraudulent or deceptive conduct within wholesale petroleum
markets thus can have wide ranging ramifications throughout the United
States economy.\29\ For these reasons, the Commission has determined to issue the final Rule.\30\
\27\ ``Perhaps no other industry's performance is so visibly and
deeply felt.'' FTC Bureau of Economics, The Petroleum Industry:
Mergers, Structural Change, and Antitrust Enforcement, at 1 (Aug.
2004), available at (http://www.ftc.gov/os/2004/08/ 040813mergersinpetrolberpt.pdf).
\28\ Markets absorb all available information good or bad
and continually adjust price signals and other market data to any
new information. When economic actors can presume that market data
have not been artificially manipulated, they can rely on that data
to make decisions that they believe will advance their individual
economic objectives. Fraudulent or deceptive conduct taints the integrity of the market process.
\29\ Commenters recognized the negative effects of fraud and
deceit in wholesale petroleum markets. See, e.g., CAPP, ANPR, at 1
(``CAPP recognizes that fraud and manipulation pose a potential
threat to the successful and efficient functioning of petroleum
markets in North America.'' ); MFA, ANPR, at 1 (``Price manipulation
has a corrosive effect on the proper functioning of any market.'' );
API, ANPR, at 50 (``We agree that the provision of false or
misleading pricing information to private reporting entities could
be problematic.'' ); Sutherland, ANPR, at 3 (``[O]il marketers and
traders are the first victims of unfair business practices. They,
therefore, support efforts by Congress to deter manipulation and the
use of deceptive devices.'' ); see also MS AG, NPRM, 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.'' ).
\30\ See 73 FR at 48321 (noting that ``a rule that allows the
Commission to guard against conduct that undermines the integrity of the petroleum market would be in the public interest'').
Wellestablished statutory, judicial, and regulatory constructs and
principles and the language of Section 811 itself strongly support
the final Rule. As the Commission noted in the ANPR, the Section 811
prohibition of the use or employment of any ``manipulative or deceptive
device or contrivance'' is virtually identical to the prohibition in
Section 10(b) of the Securities Exchange Act of 1934 (``SEA'').\31\
Specifically, SEA Section 10(b) prohibits the use or employment of:
any manipulative or deceptive device or contrivance in contravention
of such rules as the [SEC] may prescribe as necessary or appropriate in
the public interest or for the protection of investors.\32\ \31\ 15 U.S.C. 78j(b).
\32\ Id. (emphasis added). See generally Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976).
Relying upon SEA Section 10(b),\33\ the SEC promulgated its anti fraud rule, Rule 10b5, making it unlawful for any person:
\33\ The language from the Securities Act of 1933 also supported
issuance of SEC Rule 10b5. Section 17(a) of the Securities Act of 1933 originally prohibited:
any person in the sale of securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly (1) to employ any device, scheme or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission 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 (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
Through the promulgation of Rule 10b5, the SEC intended, inter
alia, to apply the same prohibitions contained in Section 17(a) of
the 1933 Act to purchasers as well as to sellers. Birnbaum v.
Newport Steel Corp., 193 F.2d 461, 463 (2d Cir. 1952). Amended
several times over the intervening years, the current text of Section 17(a) is codified at 15 U.S.C. 77q(a).
(a) To 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 which
operates or would operate as a fraud or deceit upon any person. . . .
in connection with the purchase or sale of any security.\34\ \34\ 17 CFR 240.10b5. In addition, the SEC's rules under SEA Section 10(b) prohibit a number of specific practices in specific circumstances. See 17 CFR 240.10b1 through 240.10b18.
In examining SEA Section 10(b) and SEC Rule 10b5, the Supreme
Court has stated that the statute, as enforced through the rule,
prohibits ``intentional or willful conduct designed to deceive or
defraud investors by controlling or artificially affecting the price of securities.''\35\
\35\ Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 6
(1985) (quoting Ernst & Ernst, 425 U.S. at 199)) (emphasis in
original). The Supreme Court has defined ``the term [manipulation to
refer] generally to practices, such as wash sales, matched orders,
or rigged prices, that are intended to mislead investors by
artificially affecting market activity.'' Santa Fe Indus., Inc. v.
Green, 430 U.S. 462, 476 (1977). ``A matched order is the entering
of a sell (or buy) order knowing that a corresponding buy (or sell)
order of substantially the same size, at substantially the same time
and at substantially the same price either has been or will be
entered. A wash trade [or wash sale] is a securities transaction
which involves no change in the beneficial ownership of the
security. Parking [another form of manipulation] is the sale of
securities subject to an agreement or understanding that the
securities will be repurchased by the seller at a later time and at
a price which leaves the economic risk on the seller.'' SEC v.
Farni, Exchange Act Release No. 39133 (Sept. 25, 1997), available at
(http://www.sec.gov/litigation/admin/3439133.txt).
The FERC relied upon a statutory framework similar to the
securities laws to promulgate largely identical rules prohibiting
natural gas market manipulation and electric energy market
manipulation.\36\ The Energy Policy Act of 2005 amended the Natural Gas
Act and the Federal Power Act to prohibit precisely the same type of
conduct as SEA Section 10(b); that is, the use or employment of ``any
manipulative or deceptive device or contrivance (as those terms are
used in [SEA Section 10(b)] . . .)'' in natural gas and electricity markets.\37\
\36\ See FERC, Prohibition of Energy Market Manipulation, 71 FR 4244, 4246 (Jan. 26, 2006) (final antimanipulation Rule).
\37\ Section 4A of the Natural Gas Act, 15 U.S.C. 717c1; Section 222 of the Federal Power Act, 16 U.S.C. 824v.
Similar statutory and regulatory frameworks prohibit the use of
manipulative practices in other parts of the economy. The Commodity
Exchange Act (``CEA'') is intended, among other things, ``to deter and
prevent price manipulation or any other disruptions to market integrity
. . . .''\38\ The CEA provides that the CFTC possesses jurisdiction for
``transactions involving contracts of sale of a commodity for future
delivery, traded or executed on a contract market . . . or derivatives
transaction execution facility . . . or any other board of trade,
exchange, or market . . . .''\39\ It further provides for CFTC anti
manipulation authority over cash and physical transactions, as well as
certain derivatives transactions relating to securities.\40\
\38\ 7 U.S.C. 5(b); accord Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 372 n.50 (1982).
\39\ 7 U.S.C. 2(a)(1)(A).
\40\ 7 U.S.C. 2(a)(1)(A), (C)(D).
The SEC, the FERC, and the CFTC all have taken action against
market manipulation pursuant to the authorities described above. For
example, the CFTC has initiated law enforcement actions against
defendants for submitting false statements to private reporting
services, government agencies, and the news media, and for engaging in
trading practices that give the false appearance of trading activity.\41\ The FERC similarly has found
[[Page 40689]]
evidence of practices such as false reporting to price index
publishers.\42\ In addition, the SEC has pursued law enforcement
actions against actors that have disseminated false information to the
market, and against actors that have engaged in conduct creating the false appearance of trading activity.\43\
\41\ See, e.g., In the Matter of CMS Mktg. Servs. & Trading Co.,
Comm. Fut. L. Rep. (CCH) [par] 29,634 (C.F.T.C. Nov. 25, 2003)
(finding liability for the submission of false information to
private reporting services); see also Wilson v. CFTC, 322 F.3d 555,
56061 (8th Cir. 2003) (affirming the CFTC's order finding defendant
engaged in wash sales and imposing sanctions); United States v.
Reliant Energy Servs., Inc., 420 F. Supp. 2d 1043, 105960 (N.D.
Cal. 2006) (finding allegations that defendant withheld supply from
the market while intentionally disseminating false and misleading
rumors and information to the California Independent System
Operator, brokers, and other traders regarding defendant's power
generation plants were sufficient to withstand a motion to dismiss for failure to state a claim of manipulation).
\42\ See, e.g., FERC, Final Report on Price Manipulation in
Western Markets, Dkt. No. PA022000 (Mar. 2003), available at
(http://www.ferc.gov/industries/electric/indusact/wec.asp). The
FERC issued a Policy Statement and promulgated regulations to
address price formation concerns that resulted from the reporting of
false information to price index publishers. See FERC, Transparency
Provisions of Section 23 of the Natural Gas Act, 73 FR 1014 (Jan. 4,
2008); FERC, Report on Natural Gas and Electricity Price Indices,
Dkt. No. PL033004, AD037004 (May 5, 2004), available at (http:// www.ferc.gov/EventCalendar/Files/20040505135203ReportPrice
Indices.pdf); FERC, Policy Statement on Natural Gas and Electric Price Indices, 104 F.E.R.C. ? 61,121 (July 24, 2003).
\43\ See, e.g., SEC v. Rana Research, Inc., 8 F.3d 1358, 1361,
1364 (9th Cir. 1993) (finding that the 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 10b5 when defendant disseminated false
information to the market through press releases and SEC filings).
When Congress authorized the FTC to prohibit the use or employment
of manipulative or deceptive devices or contrivances, it empowered the
Commission to rely upon the foregoing statutory, judicial, and
regulatory principles to promulgate its Rule.\44\ The final Rule, based
at least in part on SEC Rule 10b5, will prohibit practices that inject
false information into transactions. The final Rule thereby helps to
protect the integrity of the price discovery process in wholesale
petroleum markets. Moreover, the final Rule will prevent the same types
of fraudulent or deceptive practices that the SEC, the CFTC, and the
FERC have pursued in the markets they respectively regulate and will
strike at the core of what EISA explicitly proscribes market manipulation.\45\
\44\ The Commission believes that 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 (1992) (```[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. United States, 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 Nat'l Treasury Employees
Union v. Chertoff, 452 F.3d 839, 857 (D.C. Cir. 2006) (stating that
``[t]here is a presumption that Congress uses the same term consistently in different statutes.'' ).
\45\ 73 FR at 48322.
This conclusion finds support in the rulemaking record. Throughout
the proceeding, most commenters supported the FTC's proposal to
promulgate a market manipulation rule,\46\ and most RNPRM commenters
that addressed the issue opined that the revised proposed Rule would be
appropriate and in the public interest.\47\ The Commission has
determined, therefore, that the final Rule which at its most
fundamental level prohibits fraudulent or deceptive conduct is appropriate and in the public interest.
\46\ Most NPRM commenters who addressed the initially proposed
Rule opined that it would be appropriate. See, e.g., ATA, NPRM, at 2
(supporting the proposed Rule ``as an additional tool to help
preserve the integrity of vital energy markets''); IPMA, NPRM, 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 MFA, ANPR, at
45 (``We believe the Commission should adopt appropriate rules
prohibiting manipulation in the purchase and sale of crude oil,
gasoline and petroleum distillates at wholesale . . . .'' ).
\47\ As with prior comments submitted in this proceeding, most
RNPRM commenters directed their statements to the application of a
Section 811 rule, rather than to whether the revised proposed Rule
met Section 811's rulemaking standard. See also 74 FR at 18308 n.40
(noting that most NPRM commenters focused their comments on the
application of the proposed Rule). See, e.g., CAPP at 12 (opining
that the modifications to the revised proposed Rule including, in
particular, the adoption of an express scienter standard and the
inclusion of market conditions language in the omissions section
ensured that the Rule ``would serve the public interest''); CFA at 4
(stating that the revised proposed Rule ``promotes the public interest and is perfectly consistent with the legislative
language''); PMAA at 3 (noting that the revisions to the revised proposed Rule are ``appropriate''); see also ATAA at 23
(``applaud[ing] the Commission's decision to exercise its rulemaking
authority,'' arguing that ``[m]arket manipulation, fraud, and
deceptive practices distort the market, inflate prices, and inure to
the detriment of the entire economy''). But see API at 2, 45
(disagreeing that a Section 811 rule would be appropriate because,
in its view, a weighing of ``likely benefits and costs supports a decision not to promulgate any rule at this time'').
IV. Discussion of the Final Rule
A. Overview
After reviewing the full rulemaking record developed in this
proceeding, the Commission has concluded that promulgating a final Rule
that is virtually identical to the revised proposed Rule best reflects
congressional intent while accommodating the specific characteristics
of wholesale petroleum markets. The final Rule therefore differs from
the revised proposed Rule only as a consequence of two clarifying
changes.\48\ In the RNPRM, the Commission tentatively determined to
modify the proscriptions of the initially proposed Rule which were
nearly identical to SEC Rule 10b5 in order to account for
differences between wholesale petroleum markets and securities
markets.\49\ The Commission has now concluded that the revised proposed
Rule, promulgated as the final Rule, would prevent manipulative conduct
in wholesale petroleum markets while limiting attendant costs, a primary concern for many industry commenters.
\48\ In final Rule Section 317.3(b), the Commission has
substituted the phrase ``is likely'' for the word ``tends'' in
revised proposed Rule Section 317.3(b). See Section IV.D.3.b. below
for further discussion. The Commission also has modified the
definition of ``knowingly.'' See Section IV.C.3. below for further discussion.
\49\ See 74 FR at 18310.
In tailoring the final Rule, the Commission has accounted for
Section 811's direction that the final Rule be an antifraud rule
guided by the principles of SEC Rule 10b5 and relevant precedent.
These principles focus on the protection of market integrity.\50\ The
rulemaking record reflects support for an antifraud standard.\51\
Although the conduct prohibition in Section 811 is identical to
language found in SEA Section 10(b),\52\ the inclusion of the [[Page 40690]]
language ``as necessary or appropriate'' in Section 811 provides the
Commission with flexibility within the framework of an antifraud
model to use its expertise to tailor the Rule to the characteristics of wholesale petroleum markets.
\50\ See United States 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].'' (quoting
In re Ames Dep't Stores, Inc. Stock Litig., 991 F.2d 953, 966 (2d
Cir. 1993))) (citation omitted); see also 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 Section 10(b) (quoting Superintendent of Ins. of N.Y. v.
Bankers Life & Cas. Co., 430 F.2d 355, 261 (2d Cir. 1970))).
\51\ See, e.g., API at 29 (``The proper objective of any rule
issued under Section 811 is to cover deceptive conduct . . . .'' ); CAPP at 2 (``Manipulative conduct that makes use of false
information in market transactions does not constitute routine or
acceptable commercial behavior, and is reasonably within the scope
of prohibited conduct.'' ); 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.'' ); 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.'' ); NPRA, NPRM, 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.'' ).
\52\ See 15 U.S.C. 78j(b). As noted above, 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.
The Commission therefore has promulgated an antifraud Rule that,
although modeled on SEC Rule 10b5, is tailored to account for
significant differences between wholesale petroleum markets and
securities markets.\53\ In this regard, the Commission has determined
that the level of needed protection against fraud or deceit in
wholesale petroleum market transactions should take into account that
market participants typically are sophisticated and experienced
commercial actors who are able to engage in a substantial amount of
self protection, including filling in relevant information gaps. By
contrast, small individual retail securities investors often possess
less complete information than counterparties such as securities
brokers and may also be significantly less sophisticated in
discerning relevant information gaps. Additionally, the regulatory
system overlaying securities markets, of which SEC Rule 10b5 is a
part, prescribes more comprehensive requirements including in
particular more comprehensive disclosure requirements than the
regulatory system applicable to wholesale petroleum markets.\54\
Accounting for these contextual differences in crafting the final Rule,
the Commission has sought to achieve the appropriate balance between
the flexibility needed to prohibit fraudbased market manipulation
without burdening legitimate business activity. To achieve this result,
the final Rule differs from the initially proposed Rule in three significant ways.
\53\ Some commenters argued that the final Rule should extend to
conduct such as speculative activity or the unilateral exercise of
market power, because in their view such conduct is inherently
manipulative. See, e.g., CFA at 8 (arguing that the Commission
``could have considered the exercise of market power and excessive
speculation as manipulation'' because they ``have no economic
justification''); Greenberger at 1 (opining that the proposed Rule
could offer a tough enforcement mechanism against speculative
activity); Senator Cantwell at 23 (asserting that Congress intended
for the FTC's rule to reach a broad range of conduct, including the
withholding of supply); Pirrong, NPRM, at 2 (arguing that the
proposed Rule should not focus on fraud or deceit, but rather on the
exercise of market power). However, the rulemaking record does not
support extending the final Rule to cover such conduct, except to
the extent that the practices used are part of a course of conduct that otherwise violates the final Rule.
\54\ Many commenters, in this regard, urged the Commission to be
cognizant of the realities of normal business practice within
wholesale petroleum markets so as to avoid crafting a rule that
unduly chills legitimate business conduct. See ISDA at 56; API at
32; Sutherland at 3. For example, commenters asserted that
discerning an unlawful material omission in the context of complex
wholesale petroleum market transactions would be far more difficult than in securities markets. See CFDR at 4; API at 15.
First, the final Rule, like the revised proposed Rule, comprises a
twopart conduct prohibition in contrast to the threepart conduct
prohibition in the initially proposed Rule. The consolidation of parts
``more clearly and precisely denote[s] the unlawful conduct [that the
Rule] prohibits.''\55\ Second, each paragraph of the conduct
prohibition in the final Rule contains an explicit and tailored
scienter standard.\56\ The Commission has adopted differing scienter
standards in order to address commenters' concerns that the initially
proposed Rule which used only a single, ``knowingly'' scienter
standard would have chilled some legitimate business conduct,
especially with respect to the prohibition on misleading omissions of
material facts from affirmative statements. Third, the final Rule
prohibits only those omissions of material facts that distort or are
likely to distort market conditions for a covered product. This
limitation too addresses concerns about unintended interference with legitimate business activity.
\55\ 74 FR at 18316.
\56\ See 74 FR at 18316.
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.\57\ 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'' engaged in any activity subject to Commission jurisdiction under the FTC Act is covered by the final Rule. Conversely, any ``person'' engaged in any activity not subject to Commission jurisdiction under the FTC Act is not subject to Commission jurisdiction under the final Rule. \57\ 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).
The only comments received in response to the RNPRM with respect to
the scope of a final rule concerned pipelines and futures markets, and
contained essentially the same arguments the commenters had made in
previous comments.\58\ The Commission rejects the latest arguments, and
reiterates that the scope of the final Rule is coextensive with the reach of the FTC Act.
\58\ In response to the RNPRM, AOPL continued to urge the
Commission to ``state explicitly that oil pipelines regulated by
FERC under the [Interstate Commerce Act] are outside the coverage''
of any FTC rule. AOPL at 12. ATAA, on the other hand, continued to
oppose any safe harbors or exemptions for pipelines in order to give
full effect to the purpose of EISA. ATAA at 34 (``[N]othing in
either Section 811 or Subtitle B suggests the FTC should consider
limiting or competing concerns in its implementing regulations.'' );
see also PMAA at 2 (agreeing with the Commission's decision not to
adopt a safe harbor for pipelines); cf. Greenberger at 3 (contending
that the Commission should ``not offer[] an overly broad safe harbor from the FTC's statutorily mandated jurisdiction'').
Other commenters renewed their request for the Commission to recognize what they believed to be the CFTC's ``exclusive
jurisdiction'' over futures markets by making clear that its rule
would not extend to futures trading activity. See CFTC at 2 (``There
is no language in EISA that supersedes or limits the CFTC's exercise
of [the CEA's] exclusive jurisdiction over futures trading.'' ); MFA
at 2 (asking ``the Commission to adopt a safe harbor from its
proposed Part 317 rules for futures markets activities'' and that
``the safe harbor . . . apply even if the market participant's
futures trading allegedly had an impact on cash or other nonfutures
market oil or gasoline prices''); see also Sutherland at 4 (stating
that ``to prosecute conduct already regulated by the CFTC . . . will
waste sparse resources and increase the costs to all market
participants''). But see, e.g., Senator Cantwell at 2 (``Congress,
however, specifically intended for the Commission to exercise this
new authority by working cooperatively and in tandem with the CFTC
to prevent and deter any manipulative activity, including in the
futures markets, which would affect wholesale petroleum markets.''
); Greenberger at 2 (``Congress clearly intended the FTC to have
power in this area that would not be blocked by the CFTC . . . .''
); CFA at 8 (stating that Congress did not preclude the Commission
from extending its rule to futures markets). See generally Section
IV.B. of the RNPRM for a discussion of the arguments previously
raised by commenters regarding the jurisdictional scope of any
Section 811 rule with respect to pipelines and futures markets. 74 FR at 1831011.
With respect to pipelines, as the Commission stated in the RNPRM,
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
often are 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. The
Commission has therefore determined that it must assess on a caseby
case basis whether any particular person or any conduct at issue falls outside the scope of the final Rule, and/
[[Page 40691]]
or whether the conduct at issue falls under the ``in connection with''
language in the final Rule, which is discussed below in Section IV.D.1.b.
For similar reasons, although the Commission recognizes the CFTC's
jurisdiction ``with respect to accounts, agreements . . . and
transactions involving contracts of sale of a commodity for future
delivery,''\59\ the Commission declines to adopt a blanket safe harbor
for futures markets activities. Nonetheless, 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 as stated in the NPRM and
the RNPRM the Commission intends to work cooperatively with the CFTC
to execute the Commission's objective to prevent fraud or deceit in wholesale petroleum markets.\60\
\59\ 7 U.S.C. 2(a)(1)(A).
\60\ 74 FR at 1831012; 73 FR at 4832325. Several commenters
supported the Commission's intention to work cooperatively with
other agencies in exercising its Section 811 authority. CFTC at 2; MFA at 4; ISDA at 3; see also 74 FR at 18311 n.82.
C. Section 317.2: Definitions
The final Rule defines six terms: ``crude oil,'' ``gasoline,'' ``knowingly,'' ``person,'' ``petroleum distillates,'' and
``wholesale.'' The only change to the definitions set forth in the
revised proposed Rule is a nonsubstantive change to the definition of
``knowingly.'' These definitions establish the scope of the final
Rule's coverage and provide guidance as to how the Commission intends
to enforce the Rule. Only a few commenters addressed the definitions
proposed in the RNPRM, and most of them focused on the definition of
``knowingly.'' These comments, together with the Commission's analysis
of the definitions included in the final Rule, are discussed below. 1. Section 317.2(a): ``Crude Oil''
Section 317.2(a) of the revised proposed Rule defined ``crude oil'' as ``the 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.''\61\ No commenters addressed this definition in response to the RNPRM.
\61\ 74 FR at 18312.
Thus, Section 317.2(a) of the final Rule retains, without
modification, the definition of ``crude oil'' in the revised proposed
Rule. Consistent with its position in the NPRM and RNPRM, the
Commission intends for 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 noncrude refinery feedstocks.\62\
\62\ 74 FR at 18312; 73 FR at 48325.
2. Section 317.2(b): ``Gasoline''
Section 317.2(b) of the revised 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.''\63\ Only
one commenter, IPMA, addressed this definition, arguing for the
inclusion of renewable fuels such as ethanol and other oxygenates.\64\
\63\ 74 FR at 18312 (adopting the initially proposed Rule's definition of ``gasoline'').
\64\ See IPMA at 4 (arguing that the final Rule should include nonpetroleum based commodities, such as ethanol and other
oxygenates, in its definition of ``gasoline'').
Section 317.2(b) of the final Rule retains, without modification,
the definition of ``gasoline'' in the revised proposed Rule. As the
Commission stated in the RNPRM, it ``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.''\65\ The Commission declines to extend the
definition of ``gasoline'' to include products that are not listed in
Section 811 such as renewable fuels (e.g., ethanol) and blending
components (e.g., alkylate and reformate). Nonetheless, the Commission
concludes that it may apply the final Rule to conduct implicating those
noncovered products if appropriate under the ``in connection with''
language of the final Rule, as discussed below in Section IV.D.1.b. As
the Commission noted in the RNPRM, using the ``in connection with''
language provides the Commission ``with sufficient flexibility to
protect wholesale petroleum markets from manipulation without expanding
the reach of a Section 811 rule to cover products not identified in the statute.''\66\
\65\ 74 FR at 18312.
\66\ 74 FR at 18312.
3. Section 317.2(c): ``Knowingly''
Section 317.2(c) of the revised proposed Rule defined ``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.''\67\ The revised proposed Rule thus expressly provided that
a person must engage in the proscribed conduct ``knowingly'' in order
to violate Section 317.3(a); that is, that a person must ``knowingly'' engage in fraudulent or deceptive conduct.\68\
\67\ 74 FR at 18312.
\68\ See 74 FR at 18305, 18312.
Although one commenter noted that the proposed definition clarified
that ``inadvertent mistakes caused perhaps by the disorderly nature
of markets would not be actionable as manipulation,''\69\ other
commenters addressed a different point. These commenters urged the
Commission to delete the phrase ``with actual or constructive
knowledge'' from the definition, in order to avoid confusion about its interpretation.\70\
\69\ Argus at 2.
\70\ ISDA contended that ``[t]he commonly understood meaning of
`knew or must have known' is to have actual or constructive
knowledge,'' and that ``[i]ncluding duplicative language in the
definition could have unintended effects.'' ISDA at 11. CFDR also
supported deleting the phrase, but for a different reason; CFDR
argued that the legal concept of ``constructive knowledge'' is
inconsistent with a ```knew or must have known' scienter standard''
because ```[c]onstructive knowledge' . . . often is applied to hold
a person accountable for information that he or she `should have known,' even if he or she did not.'' CFDR at 3.
The Commission has determined to adopt this recommendation. Thus, final Rule Section 317.2(c) defines ``knowingly'' to mean ``that the person knew or must have known that his or her conduct was fraudulent or deceptive.'' The Commission emphasizes, however, that this modification in the definition of ``knowingly'' does not change its meaning.
For purposes of enforcement of final Rule Section 317.3(a), the
Commission has determined that a showing of extreme recklessness is, at
a minimum, necessary to prove the scienter element. In this regard, the
Commission adopts, in part, the ``extreme recklessness'' standard
established by the United States Court of Appeals for the Seventh
Circuit.\71\ Though the Circuits may differ on the application of extreme recklessness,\72\ almost all of them have
[[Page 40692]]
now adopted this standard.\73\ Similarly, the Commission has concluded
that the standard should apply to the final Rule, and the Commission
believes that it is appropriate because it provides for both effective rule enforcement and clarity to market participants.
\71\ In an opinion by Judge Posner, the Court of Appeals for the
Seventh Circuit recently reaffirmed the Sundstrand extreme
recklessness standard. SEC v. Lyttle, 538 F.3d 601, 603 (7th Cir. 2008).
\72\ See 73 FR at 48329; 74 FR at 18318. As the Supreme Court
has noted, ``[e]very Court of Appeals that has considered the issue
[of civil liability under SEA Section 10(b) and Rule 10b5] has held
that a plaintiff may meet the scienter requirement by showing that
the defendant acted intentionally or recklessly, though the Circuits
differ on the precise formulation of recklessness.'' Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 n.3 (2007) (citing
Ernst & Ernst, 425 U.S. at 194 n.12); Ottmann v. Hunger Orthopedic
Group, Inc., 353 F.3d 338, 343 (4th Cir. 2003) (collecting Court of
Appeals cases). The Supreme Court, however, has reserved the
question whether extreme reckless behavior is, in fact, sufficient
to establish civil liability under SEA Section 10(b) and Rule 10b5. See Tellabs, Inc., 551 U.S. at 319 n.3.
\73\ Phillips v. LCI Int'l, Inc., 190 F.3d 609, 621 (4th Cir.
1999); SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992);
Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.
1990) (en banc); Hackbert v. Holmes, 675 F.2d 1114, 1118 (10th Cir.
1982); Broad v. Rockwell, 642 F.2d 929, 961 (5th Cir. 1981) (en
banc); McLean v. Alexander, 599 F.2d 1190, 1197 (3d. Cir. 1979);
Mansbach v. Prescott, Ball, & Turben, 598 F.2d 1017, 1025 (6th Cir.
1979); see also Greebel v. FTP Software, 194 F.3d 185, 198 (1st Cir. 1999); Camp v. Dema, 948 F.2d 455, 461 (8th Cir. 1991).
The ``extreme recklessness'' standard articulated by the Seventh
Circuit requires a showing that an actor knew or must have known that
his conduct created a danger of misleading buyers or sellers.\74\ The
Seventh Circuit has stated that this showing can be made with respect
to securities fraud by establishing that the actor's conduct
constitutes ``an extreme departure from the standards of ordinary care
. . . to the extent that the danger [of misleading buyers or sellers]
was either known to the defendant or so obvious that the defendant must
have been aware of it.''\75\ However, whereas standards of ordinary
care are well developed in the context of securities markets, they are
less well defined in the context of wholesale petroleum markets. For
this reason, the Commission has concluded that a showing of a departure
from ``ordinary care'' is not required to establish scienter under
final Rule Section 317.3(a). The Commission therefore has determined
that, for purposes of final Rule Section 317.3(a), proving scienter
will require showing only that a person either knew or must have known
that his or her conduct created a danger of misleading buyers or sellers.
\74\ Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045
(7th Cir.), cert. denied, 434 U.S. 875 (1977) (quoting Franke v.
Midwestern Okla. Dev. Auth., 428 F. Supp. 719, 725 (W.D. Okla.
1976)). The Court of Appeals for the District of Columbia Circuit
relied upon Sundstrand to establish the ``extreme recklessness''
scienter standard applicable to SEC Rule 10b5. See SEC v. Steadman,
967 F.2d 636, 64142 (D.C. Cir. 1992) (adopting Sundstrand's extreme recklessness standard).
\75\ SEC v. Lyttle, 538 F.3d at 60304, quoting Makor Issues &
Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 704 (7th Cir. 2008).
This definition of ``knowingly'' gives petroleum industry participants the appropriate guidance as to the level of scienter required to establish a final Rule Section 317.3(a) violation. The Commission further discusses the application of the ``knowingly'' standard in Section IV.D.2.a. below.
4. Section 317.2(d): ``Person''
Section 317.2(d) of the revised proposed Rule defined the term
``person'' to mean: ``any individual, group, unincorporated
association, limited or general partnership, corporation, or other
business entity.''\76\ No commenters addressed this definition in
response to the RNPRM. As stated in the RNPRM, 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.''\77\
Therefore, Section 317.2(d) of the final Rule retains the revised proposed definition of ``person'' without modification.
\76\ 74 FR at 18313 (adopting the initially proposed Rule's definition of ``person'').
\77\ 74 FR at 18313; 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(e) of the revised 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.''\78\ No commenters addressed this definition in response to the RNPRM. \78\ 74 FR at 18313 (adopting the initially proposed Rule's definition of ``petroleum distillates'').
The Commission has determined to include in final Rule Section
317.2(e), without modification, the definition of ``petroleum
distillates'' in revised proposed Rule Section 317.2(e). As stated in
the NPRM and the RNPRM, this definition includes ``finished fuel
products, other than `gasoline,' produced at a refinery or blended in
tank at a terminal.''\79\ As the Commission explained in the RNPRM, the
definition of ``petroleum distillates'' also includes middle distillate
refinery fuel streams, and thus encompasses all product streams above
heavy fuel oils up to and including lighter products such as onroad
diesel, heating oil, and kerosenebased jet fuels but does not extend
to heavy fuel oils.\80\ Consistent with the RNPRM, the Commission has
also determined that the definition of ``petroleum distillates'' does
not extend to renewable fuels such as biodiesel.\81\ The Commission
addresses the intended application of the final Rule to conduct
implicating noncovered products, such as renewable fuels, in its
discussion of the ``in connection with'' language in Section IV.D.1.b. below.
\79\ 74 FR at 18313; 73 FR at 48325.
\80\ 74 FR at 18313.
\81\ See 74 FR at 18313.
6. Section 317.2(f): ``Wholesale''
Section 317.2(f) of the revised proposed Rule defined the term
``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.''\82\ As stated in the RNPRM, the
Commission intended the definition of ``wholesale'' to include all bulk
sales of crude oil and jet fuel (even when not for resale) and all
terminal rack sales,\83\ but not to extend to retail sales of gasoline, diesel fuels, or fuel oils to consumers.\84\
\82\ 74 FR at 18314.
\83\ 74 FR at 18314.
\84\ 74 FR at 18314; see also 73 FR at 48326.
Two commenters, PMAA and Greenberger, supported the inclusion of
sales at the terminal rack level in the definition.\85\ SIGMA, by
contrast, renewed its opposition to including such transactions,
arguing in part that rack prices are ``unlikely to alter overall price
levels in the markets served out of a terminal or terminal cluster''
and that ``there are no reported instances of price manipulation practices at the rack terminal level.''\86\
\85\ PMAA at 2 (agreeing with the Commission's position on rack
sales); Greenberger at 3 (supporting the RNPRM's definition of ``wholesale'' that includes rack transactions).
\86\ SIGMA at 2 (``[Rack] prices are set by the supplier's view
of the market and are not normally fixed by reference to other suppliers' prices.'' ).
The Commission is not persuaded that there is little or no
potential for market manipulation at or below the terminal rack level.
As the Commission stated in the RNPRM, ``prohibited conduct may in fact
occur at the terminal rack level'' and ``[s]uch a determination
requires analysis on a casebycase basis.''\87\ Moreover, terminal
rack sales are ``wholesale'' transactions as that term is commonly
defined, and excluding them from the definition of ``wholesale'' would
therefore place the final Rule at odds with the express language of
EISA, which addresses manipulative conduct in wholesale markets. The
Commission has consequently determined to retain in final Rule Section 317.2(f), without modification, the definition of
[[Page 40693]]
``wholesale'' in revised proposed Rule Section 317.2(f).
\87\ 74 FR at 1831314.
D. Section 317.3: Prohibited Practices
Section 317.3 sets forth the conduct prohibited by the final 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 mislead by failing to state a material fact that
under the circumstances renders a statement made by such person
misleading, provided that such omission distorts or is likely to distort market conditions for any such product.
The final Rule thus prohibits fraudulent or deceptive conduct, including statements made misleading as a result of an omission of material fact, within or in connection with wholesale petroleum markets.
Final Rule Section 317.3 is virtually identical to Section 317.3 in
the revised proposed rule.\88\ As the Commission detailed in the RNPRM
in discussing the proposed scope and application of the two paragraphs
of Section 317.3, the final Rule therefore broadly prohibits fraudulent
or deceptive conduct, which may take various forms, including
statements that are misleading as the result of an omission of material
information. As articulated in the RNPRM, the Commission has altered
the initially proposed Rule and its conduct prohibitions to clarify the
type of conduct covered by the final Rule.\89\ First, the Commission
has consolidated the conduct prohibition in Section 317.3 of the
initially proposed Rule from three paragraphs into two paragraphs. The
first paragraph applies to overt conduct that is fraudulent or
deceptive; the second paragraph applies only to material omissions. The
Commission has determined that this consolidation defines the unlawful
conduct that the Rule prohibits more precisely than the three
paragraphs in the initially proposed Rule did. Second, the Commission
has adopted separate scienter standards for each of the two paragraphs
to address concerns that the initially proposed Rule would chill
legitimate business activity, and, in so doing, has established a
higher scienter standard for the second paragraph than for the
first.\90\ Third, the Commission has addressed concerns that
specifically prohibiting material omissions would create an undue risk
of deterring voluntary disclosures of information. It has addressed
this concern by requiring a showing that the omission at issue distorts
or is likely to distort market conditions for a covered product.\91\ By
tailoring the final Rule in this fashion, the Commission believes it
achieves an appropriate balance between the needs of effective
enforcement and unduly burdening legitimate business practices.
\88\ In addition to the revised proposed rule, the RNPRM invited
commenters to consider a single, unified conduct provision
prohibiting all fraudulent or deceptive conduct, including material
omissions (and deleting the separate prohibition of such omissions).
In particular, the alternative provision would have made it unlawful
for ``any person, directly or indirectly, in connection with the
purchase or sale of crude oil, gasoline, or petroleum distillates at
wholesale, to engage in any act (including the making of any untrue
statement), practice, or course of conduct with the intent* to
defraud or deceive, provided that such act, practice, or course of
conduct distorts or tends to distort market conditions for any such
product.'' 74 FR at 18327. The phrase ``with the intent'' would have
been defined to mean that the alleged violator intended to mislead
regardless of whether he or she specifically intended to affect
market prices (that is, possessed specific intent), or knew or must
have known of the probable consequences of such conduct and
regardless of whether the conduct was likely to defraud or deceive the target successfully. Id.
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.