Thursday, August 14, 2008

FTC Releases Proposed Market Manipulation Prohibitions for Petroleum Industry

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The Federal Trade Commission (FTC) has proposed a rule prohibiting market manipulation in the petroleum industry. The agency said that the proposed rule is “intend[ed] to prohibit manipulative and deceptive conduct without discouraging pro-competitive or otherwise desirable market practices.”

The Commission is authorized to establish the rule under the Energy Independence and Security Act of 2007 (EISA). Sec. 811 of the Act states that the Commission “may prescribe” a rule “as necessary or appropriate in the public interest or for the protection of United States citizens.” The Commission tentatively determined that a narrowly tailored rule would in the public interest.

Prohibited Practices

Under the EISA, it is unlawful for any person, in connection with the wholesale purchase or sale of certain petroleum commodities to use 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.” Thus, the FTC has the role of identifying the prohibited conduct.

The Commission states that the proposed rule focuses on fraudulent or deceptive conduct that threatens the integrity of wholesale petroleum markets. The rule is succinct. It begins by outlining its scope and defining key terms, such as Crude oil, Gasoline, and Petroleum distillates. Sec. 317.3 states the prohibited practices.

Under Sec. 317.3 of the proposed rule, it would be unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale:

(a) To use or employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person.

Advance Notice of Proposed Rulemaking

The rulemaking process began with the publication of an Advance Notice of Proposed Rulemaking (ANPR) announced in May. The ANPR set a deadline of June 6 for comments. The deadline was extended until June 23. In response to the ANPR, the Commission received 155 comments, most of which were submitted by consumers, with the rest coming from industry members, trade and bar associations, academics, and other federal and state government agencies.

According to the FTC, although many consumers urged government action to address gasoline prices, few expressly supported an FTC market manipulation rule. Twenty-nine industry members, associations, and other organizations responded to the ANPR, and most of these commenters expressed concern about the prospect of an FTC rule, the Commission noted. Some commenters argued that a rule was unnecessary and would be duplicative of existing laws. Only a few organizational commenters affirmatively favored an FTC market manipulation rule, it was noted.

SEC Rule 10b-5 as Model

The Commission decided to model its proposed rule on Securities and Exchange Commission (SEC) Rule 10b-5, promulgated by the SEC pursuant to that agency’s market manipulation authority. While there was no legislative history on Sec. 811 of the EISA, the FTC explained that “the language of the statute, taken together with other indicators of Congressional expectations, suggests that any proposed FTC market manipulation rule should be modeled” on the SEC rule. Sec. 811 was identical to language found in Sec.10(b) of the Securities Exchange Act of 1934, which prohibited the use of any “manipulative or deceptive device or contrivance” in contravention of such rules as the SEC may prescribe.”

Request for Public Comments

The FTC is seeking comments on the proposal, including comments on the use of SEC 10b-5 Rule as a model for the conduct prohibitions, until September 18, 2008. The agency said that the Notice of Proposed Rulemaking will likely be officially published in the Federal Register on August 19, 2008. The notice was posted to the FTC’s Web site on August 13.

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