FTC Seeks Comments on Proposed Rule Prohibiting Market Manipulation in the Petroleum Industry
On December 20, 2007, President Bush signed into law the Energy Independence and Security Act of 2007 (the “Act”). Section 811 of the Act made it illegal to directly or indirectly use or employ “any manipulative or deceptive device or contrivance” in connection with the wholesale purchase or sale of crude oil, gasoline, or petroleum distillates in violation of rules to be promulgated by the Federal Trade Commission (“FTC”)1. Pursuant to the Act, the FTC recently issued a Notice of Proposed Rulemaking (the “Notice”) seeking public comments on a proposed rule implementing § 8112. The proposed rule provides:
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:
(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 businessthat operates or would operate as a fraud or deceit uponany person.
The proposed rule also clarifies the scope of § 811, defining “petroleum distillates” as jet fuels, diesel fuels and fuel oils. While non-petroleum based commodities such as ethanol are not listed as covered products, manipulative conduct involving these commodities that impacts the price of covered products may fall under the proposed rule. The proposed rule also defines “wholesale” as purchases or sales at the terminal rack level or upstream of the terminal rack level. Retail gasoline sales to consumers are thus not covered by the proposed rule.
The FTC modeled the proposed rule on Rule 10b-5 of the Securities and Exchange Commission (“SEC”) because the statutory language mirrors that of § 10(b) of the Securities Exchange Act of 1934. In addition, the FTC believed that using Rule 10b-5 as a model for the proposed rule should reduce regulatory uncertainty, thereby ensuring greater compliance, because of the significant body of law interpreting Rule 10b-5.
In the Notice, the FTC explained that while banks are not within its jurisdiction, entities that contract with or are affiliated with banks but are not themselves banks are subject to the proposed rule. The Notice also indicates that oil and gas pipelines are subject to the proposed rule, though neither natural gas nor natural gas liquids are listed as covered products3. This creates a possible ambiguity as to under what circumstances gas pipelines would fall under the proposed rule.
The FTC also explained that it would not likely bring an enforcement action under the proposed rule except where a person: (1) uses a fraudulent device, scheme or artifice, or makes a material misrepresentation or a material omission, or engages in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity; (2) with scienter; and (3) in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale. Thus, the FTC will not voluntarily undertake an enforcement action unless it believes that a person acted with a mental state to deceive, manipulate or defraud. The FTC believes that a showing of recklessness would satisfy this scienter requirement. An effect on prices, however, is not an element of a violation, as harm to the market is inferred. The Act does not create a private cause of action for a violation of the proposed rule.
In drafting the proposed rule, the FTC considered comments received in response to an earlier Advance Notice of Proposed Rulemaking, which sought comments on whether to promulgate a rule under § 811 and, if so, its scope and content. The FTC rejected comments arguing that in the absence of specific evidence of market manipulation, no rule was necessary. The FTC also rejected calls for a safe harbor provision exempting futures markets from the proposed rule to avoid overlapping jurisdiction with the Commodity Futures Trading Commission’s authority under the Commodities Exchange Act (the “CEA”). In the Notice, the FTC expressly acknowledged the possibility of parallel enforcement under the CEA and Act, and possibly other applicable laws, but noted the FTC’s history of coordinating its enforcement efforts with other agencies to “ensure fairness...conserve enforcement resources and maximize agency efficiency,” a practice it expects to continue. Thus, under the proposed rule, parties to wholesale transactions involving oil, gasoline, or petroleum distillate will face the risk of parallel enforcement actions by agencies with concurrent jurisdiction. The FTC declined to impose affirmative duties or obligations, such as a duty to supply, provide access to terminals or pipelines, or disclose information. Nevertheless, the FTC noted that under certain circumstances, withholding supply or access might violate the proposed rule.
The FTC will accept written comments on the proposed rule through September 18, 2008. To avoid mailing delays, the FTC encourages submitting comments in electronic form. Comments may be submitted by clicking here and following the instructions. The Notice may be found by clicking here.
1 A detailed summary of the Act is available in a January 2, 2008, Energy Update from Baker Botts L.L.P., which may be accessed by clicking here.
2 The proposed rule does not relate to § 812 of the Act, which makes it illegal to submit false reports to the federal government regarding the wholesale price of crude oil, gasoline, or petroleum distillates.
3 The FTC explained, at page 27 of the Notice, that “oil and gas pipelines enjoy no exemption from the FTC Act and would be subject to the proposed Rule.”
|