[Federal Register Volume 73, Number 161 (Tuesday, August 19, 2008)]
[Proposed Rules]
[Pages 48317-48335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-19154]


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FEDERAL TRADE COMMISSION

16 CFR Part 317

[Project No. P082900]
RIN 3084-AB12


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

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking; request for public comment.

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SUMMARY: Pursuant to Title VIII, Subtitle B of the Energy Independence 
and Security Act of 2007 (``EISA''), the Federal Trade Commission 
(``Commission'' or ``FTC'') is proposing a rule to implement Section 
811 of Subtitle B prohibiting the use or employment of manipulative or 
deceptive devices or contrivances in wholesale petroleum markets.\1\ 
The Commission invites written comments on issues raised by the 
proposed Rule and seeks answers to the specific questions set forth in 
Section II.L of this Notice of Proposed Rulemaking (``NPRM'').
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    \1\ Section 811 is part of Subtitle B of Title VIII of EISA, 
which has been codified at 42 U.S.C. 17301-17305. Hereinafter, 
citations to EISA sections shall be made to the United States Code.

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DATES: Written comments must be received by September 18, 2008.

ADDRESSES: Interested parties are invited to submit written comments 
electronically or in paper form. Comments should refer to ``Market 
Manipulation Rulemaking, P082900'' to facilitate the organization of 
comments. Comments containing material for which confidential treatment 
is requested must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with Commission Rule 4.9(c).\2\ 
Comments should not include any sensitive personal information, such as 
an individual's Social Security Number; date of birth; driver's license 
number or other state identification number or foreign country 
equivalent; passport number; financial account number; or credit or 
debit card number. Comments also should not include any sensitive 
health information, such as medical records and other individually 
identifiable health information.
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    \2\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    Because paper mail in the Washington area, and specifically to the 
FTC, is subject to delay due to heightened security screening, please 
consider submitting your comments in electronic form. Comments filed in 
electronic form should be submitted by using the following weblink: 
(http://secure.commentworks.com/ftc-marketmanipulationNPRM/)(and 
following the instructions on the web-based form). To ensure that the 
Commission considers an electronic comment, you must file it on the 
web-based form at the weblink(http://secure.commentworks.com/ftc-marketmanipulationNPRM/). If this NPRM appears at (http://www.regulations.gov/search/index.jsp), you may also file an electronic 
comment through that website. The Commission will consider all comments 
that regulations.gov forwards to it. You may also visit the FTC website 
at (http://www.ftc.gov/os/2008/08/P082900nprm.pdf) to read the NPRM and 
the news release describing it.
    A comment filed in paper form should include the ``Market 
Manipulation Rulemaking, P082900'' reference both in the text and on 
the envelope, and should be mailed to the following address: Federal 
Trade Commission, Market Manipulation Rulemaking, P.O. Box 2846, 
Fairfax, VA 22031-0846. This address does not accept courier or 
overnight deliveries. Courier or overnight deliveries should be 
delivered to: Federal Trade Commission/Office of the Secretary, Room H-
135 (Annex G), 600 Pennsylvania Avenue, NW, Washington, DC 20580.
    The Federal Trade Commission Act (``FTC Act'') and other laws the 
Commission administers permit the collection of public comments to 
consider and use in this proceeding as appropriate. The Commission will 
consider all timely and responsive public comments that it receives, 
whether filed in paper or electronic form. Comments received will be 
available to the public on the FTC website, to the extent practicable, 
at (http://www.ftc.gov/os/publiccomments.shtm). As a matter of 
discretion, the Commission makes every effort to remove home contact 
information for individuals from the public comments it receives before 
placing those comments on the FTC website. More information, including 
routine uses permitted by the Privacy Act, may be found in the FTC's 
privacy policy, at (http://www.ftc.gov/ftc/privacy.shtm).

FOR FURTHER INFORMATION CONTACT: James Mongoven, Deputy Assistant 
Director of Policy and Coordination, Bureau of Competition, Federal 
Trade Commission, Market Manipulation Rulemaking, P.O. Box 2846, 
Fairfax, VA 22031-0846, (202) 326-3772.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Energy Independence and Security Act of 2007

    EISA became law on December 19, 2007.\3\ Subtitle B of Title VIII 
of the Act prohibits market manipulation in connection with the 
purchase or sale of crude oil, gasoline, or petroleum distillates at 
wholesale, and reporting 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.''\4\
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    \3\ Pub. L. No. 110-140, codified at 42 U.S.C. 17001-17386.
    \4\ 42 U.S.C. 17301.
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    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.''\5\
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    \5\ 42 U.S.C. 17302.
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    Subtitle B also contains three additional sections, which address, 
respectively, enforcement of the Subtitle (Section 813),\6\ penalties 
for violations

[[Page 48318]]

of Section 812 or any FTC rule promulgated pursuant to Section 811 
(Section 814),\7\ and the interplay between Subtitle B and existing 
laws (Section 815).\8\
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    \6\ Section 813 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 were 
incorporated into and made a part of Subtitle B.
    42 U.S.C. 17303.
    \7\ 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.
    \8\ 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.
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B. Advance Notice of Proposed Rulemaking

    On May 1, 2008, the Commission issued an Advance Notice of Proposed 
Rulemaking (``ANPR'') that solicited comments on whether it should 
promulgate a rule under Section 811, and, if so, the appropriate scope 
and content of such a rule.\9\ In particular, the ANPR requested 
comment on the interplay between any proposed FTC rule and other 
existing federal rules prohibiting market manipulation; the scope of 
certain definitions; the level of scienter necessary to establish a 
violation of any proposed rule; the efficacy of the civil penalty 
authority provided to the Commission in EISA; the inclusion or 
exclusion of certain conduct from the scope of any proposed rule; and 
the potential costs and benefits of any proposed rule.\10\ The ANPR set 
a deadline of June 6, 2008, by which to submit comments.\11\ In 
response to a petition from a major trade association,\12\ the 
Commission extended the comment period until June 23, 2008.\13\
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    \9\ 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). The ANPR was announced in a 
press release and made available to the public on May 1, 2008, 
available at (http://www.ftc.gov/opa/2008/05/anpr.shtm).
    \10\ Id. at 25620-25624.
    \11\ Id. at 25614.
    \12\ 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).
    \13\ FTC, Extension of Period to Submit Comments in Response to 
the ANPR, 73 FR 32259 (June 6, 2008). The extension was announced in 
a press release and made available to the public on May 30, 2008, 
available at (http://www.ftc.gov/opa/2008/05/anprfyi.shtm).
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    In response to the ANPR, the Commission received 155 comments from 
interested parties, including other federal agencies, state government 
agencies, industry members, trade and bar associations, academics, and 
individual members of the public.\14\ The comments respond to questions 
posed in the ANPR and highlight several issues of particular concern to 
commenters. An overview of the major themes reflected in the comments 
follows.
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    \14\ Attachment A contains a list of commenters who responded to 
the ANPR, together with the acronyms used to identify each commenter 
in this NPRM. The full rulemaking record can be found at (http://www.ftc.gov/ftc/oilgas/index.html), and electronic versions of the 
comments can be accessed at (http://www.ftc.gov/os/comments/marketmanipulation/index.shtm).
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    The overwhelming majority of the comments submitted in response to 
the ANPR were from consumers. These consumers voice concern about the 
rising cost of gasoline, attributing the increase to many variables, 
including: (1) OPEC control over prices;\15\ (2) price manipulation by 
oil companies;\16\ (3) speculation by investors;\17\ (4) corporate 
greed;\18\ (5) the decreasing value of the U.S. dollar;\19\ and (6) 
increased demand from China and India.\20\ Although many of these 
consumers urge the United States government, as a whole, to take action 
to address gasoline prices,\21\ few expressly support a FTC market 
manipulation rule.\22\ Some of the consumer commenters, although not 
addressing the need for a specific market manipulation rule, 
nonetheless urge the FTC to investigate the petroleum industry for 
various types of alleged misconduct or to take other action to control 
increasing prices.\23\
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    \15\ See, e.g., Bergkamp (``The biggest problem is that the 
major OPEC countries are not only determining the price by 
controlling out put, they have also figured out that they can inject 
millions of dollars into the futures market and manipulate the price 
of oil in that capacity.''); Noga (``Since we are an exporter of 
food products, the price of our exported food to OPEC members should 
be tied to their oil production and prices.''); Pereira (``I feel 
that prices are being manipulated by OPEC.''); A. Stark (``Why are 
we allowing OPEC to get away with $125.00 per barrel of oil?'').
    \16\ See, e.g., Bremer (``The big oil companies need to be 
investigated for price gouging and manipulation.''); McGill (``Oil 
companies should not be allowed to ship oil overseas, store it until 
the price rises, and then return it to the United States. That is 
manipulation.''); Phillips (``[S]ince all of the major oil companies 
have made, and continue to make record profits (definition: the 
monetary surplus left to a producer or employer after deducting 
wages, rent, cost of raw materials, etc.) It is highly likely that 
they are, together, manipulating the cost of a gallon of 
gasoline.''); Love (``BIG OIL controls gasoline prices thru the 
refineries which stand BETWEEN primary fuel supplies [including 
biofuel] and consumers.''); Reinecke (``Here in Wichita Ks when gas 
prices go up over night all stations go up in price over night, and 
they say they don't talk to each other,''); Theisen (``I believe the 
oil companies should be severely punished for manipulating the sale 
and purchase of oil to boost the price of oil.'').
    \17\ See, e.g., Barton (``There is no reason gas should be his 
high, get rid of the traders and it will drop $ 3.00/ Dth.''); Gould 
(``It seems like the real manipulation in fuel cost is happening in 
the futures markets and not at the oil companies.''); Nichols 
(``[T]he price is now purely speculative and [completely] out of 
line with supply and demand. The problem will be if the price does 
collapse will the government bail out the speculators and what will 
it cost.''); Noga (``This like the tech stocks, housing market 
bubble, is a market driven by the greed of speculators and hedge 
markets.''); Parker (``OIL/GAS SPECULATION ON WALL STREET IS OUT OF 
CONTROL, BECAUSE THE HIGHER THE PRICE THE MORE COMMISSION THEY 
GET.''); Patel (``What has change in the last year to make the price 
almost double? SPECULATION BY ANALYSTS.''); D. Smith (``As much as 
60% of today's crude oil price is pure speculation driven by large 
trader banks and hedge funds.''); Van Hecke (``I also feel there 
needs to be regulations put in place to have some sort of control on 
the way the stock traders are able to continually drive up the costs 
through speculation.''). See also Greenberger (arguing that 
excessive speculation, fraud, and illegal manipulation are causing 
higher gasoline prices).
    \18\ See, e.g., Brownstein (``The oil companies have used their 
profits to line their pockets instead of putting it back into 
increasing refinery & exploration.''); Nenortas (``While I am for 
companies making a profit I am NOT for gluttony which the oil 
companies seem to be guilty. Their costs do not justify the 
outrageous prices they are demanding.'').
    \19\ See, e.g., Rubinstein (``Gas/fuel prices are high because 
the value of the dollar has fallen. . . .'').
    \20\ See, e.g., Tanner (``Oil price rises caused from importing 
from China and India. Most oil demand caused by these two countries 
having 40 percent of the world's population.'').
    \21\ See, e.g., Bergkamp (``[I]f any other business 
[construction companies, farmers, etc.] were working in collusion in 
a form of bid rigging [and fundamentally that is what is happening 
with the price of oil] the Justice Department would have them in a 
court so fast it would boggle the mind. But we allow the market to 
be exploited with no legal recourse what so ever.''); Berman 
(``[President Bush] must call in the executives of the large oil 
companies who are making billions and billions in profits in the 
current crisis and make them lower their prices.''); Love (``Our 
government seems to be able to create a BUBBLE for just about every 
economic good . . . except fuel. It can be done for fuel as well and 
this will bring BIG OIL back to a levelled playing field.''); Loucks 
(``Set some laws and make the oil companies abide by them. This hike 
of gasoline costs is outrageous! Someone needs to be held 
accountable. Please hurry!''); Noga (``Something needs to be done, 
the profits are obscene, the terrorists are the oil companies.''); 
A. Stark (``We need regulation and protection from the Oil Industry 
. . . .'').
    \22\ See, e.g., Bradley (``Put in place a new ban on market 
manipulation and giving false information to the FTC or the 
Department of Justice. Give the FTC the authority to levy fines up 
to $1 million for each violation of market manipulation.''); 
Nenortas (``IF making federal regulations that will do this on a 
permanent basis and NOT be a band-aid or quick fix to this problem, 
then I am all for it.'').
    \23\ See, e.g., Bremer (``The big oil companies need to be 
investigated for price gouging and manipulation.''); Hudecek 
(``[T]he FTC should be able to regulate the price of crude oil 
prices to stop all price gauging that is going on in America and in 
Europe at this time. The FTC should bring the price of crude oil 
back down to a reasonable price per barrel, that is under $60 a 
barrel, and set a reasonable gas price for all gas stations in every 
State in America . . . .''); Kas (``I want to see real action taken 
against those who are stealing from the rest of us.''); Morris-Ramos 
(``This is clearly price gouging by private companies and our 
government needs to protect us. This is the clear mission of the FTC 
and Congress.''); A. Stark (``Why hasn't the FTC investigated this 
in earnest?''); Strickland (``I believe the FTC should investigate 
market manipulation.''); Warner (``ENOUGH of would of, should of, 
could of. Our Government NEEDS to do something NOW about these gas 
prices. Don't say it can't be done because it CAN! The government 
can do anything it wants to do.'').

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[[Page 48319]]

    Twenty-nine industry members, associations, and other organizations 
responded to the ANPR. Most organizational commenters express concern 
about the prospect of a FTC rule.\24\ In support of their position, 
these commenters advance a variety of arguments, including: (1) a rule 
is unnecessary because there is no empirical evidence that market 
manipulation is occurring;\25\ (2) a rule would be duplicative of 
existing laws, including the Commodity Exchange Act (``CEA''), existing 
antitrust laws, and the FTC Act;\26\ and (3) a rule could harm the 
efficient functioning of petroleum markets to the detriment of 
consumers.\27\ Many of the organizational commenters who express 
concern about FTC rulemaking in this area advance the view that if the 
Commission promulgates a rule, it should be narrowly tailored to reach 
only fraudulent conduct in the marketplace.\28\ Only a few 
organizational commenters affirmatively favor a FTC market manipulation 
rule.\29\ A few commenters recommend specific conduct that a FTC rule 
should prohibit.\30\
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    \24\ Three commenters specifically argue that the FTC should not 
promulgate a rule. See API at 12-16 (arguing that the Commission 
should refrain from promulgating a rule); Flint Hills at 1-2, 8-11 
(asserting that a rule is unnecessary in the absence of any evidence 
of inefficiencies or anticompetitive behavior in the U.S. oil 
refining industry); IER at 1 (arguing that existing statutes provide 
FTC and other agencies ``with adequate powers to deal with 
legitimately anti-competitive and/or fraudulent practices in the 
petroleum and financial markets''). Many commenters, without 
expressly stating whether they support a rule, urge the Commission 
to consider a variety of concerns in drafting a Section 811 rule. 
See, e.g., ICE at 1-2 (recommending that the Commission draft a rule 
with a ``well defined jurisdictional boundary'' to avoid duplicative 
enforcement); Plains at 1, 3 (recommending that the Commission craft 
a rule that will ``avoid any overlap with other regulatory 
regimes''); Sutherland at 8 (urging the Commission to adopt a rule 
that avoids any overlap with futures trading which is the exclusive 
jurisdiction of the Commodity Futures Trading Commission 
(``CFTC'')); AOPL at 1 (seeking clarification from the Commission 
that a Section 811 rule will not apply to crude oil and petroleum 
products pipelines); CFDR at 2 (encouraging the FTC to draft a rule 
that is clear and easily understood, ``advances the development of 
one universal definition of price manipulation'' in the markets for 
petroleum products, and does not create or alter existing 
obligations among market participants); Hess at 12 (urging the 
Commission to ``consider the entire spectrum of possible 
consequences stemming from the contemplated rulemaking''); 
Sutherland at 2, 4 (urging the Commission to avoid adopting 
regulations that will have a chilling effect on legitimate market 
activities). Cf. Platts at 2 (supporting a FTC rule that encourages 
the voluntary reporting of data, such as price, inventory volumes, 
and import/export volumes); CAPP at 2-3 (raising a concern about the 
FTC's ability to construct a market manipulation rule appropriately 
in the face of little empirical evidence of market manipulation).
    \25\ See, e.g., API at 12-13 (stating that a Section 811 rule is 
unnecessary because there is no evidence that market manipulation is 
occurring or has occurred); CAPP at 2-3 (arguing that little 
empirical evidence exists of market manipulation or any adverse 
effects on crude oil markets); Sutherland at 3 (asserting that the 
FTC has found U.S. oil markets to be generally free of manipulation 
in its past investigations). See also Flint Hills at 1-2, 8-11.
    \26\ See, e.g., Flint Hills at 3-4 (arguing that Section 811 
``overlaps and arguably duplicates authority conferred by [Section 5 
of the FTC Act]''); AOPL at 1-2 (stating that a FTC rule will 
overlap with and be duplicative of other agencies' regulations). See 
also ISDA at 2-3; API at 14-16.
    \27\ See, e.g., IER at 1-2 (arguing that a rule could interfere 
with healthy market operations, leading to higher volatility in oil 
and gas prices and less efficiency in distribution); Flint Hills at 
2-3 (stating that a rule would likely be harmful to the industry and 
consumers); API at 16 (stating that a Section 811 rule could deter 
beneficial market activity); Sutherland at 3-4 (stating that the FTC 
needs to take great care not to chill legitimate market activities 
by adopting rules that substitute governmentally created norms for 
the rules of the marketplace); CAPP at 5 (stating that it could be 
damaging to the petroleum industry to enact rules to prohibit 
conduct described in the ANPR).
    \28\ See, e.g., API at 2, 16-17 (recommending that any FTC rule 
be drafted narrowly to avoid duplication with other laws and to 
avoid deterring pro-competitive conduct); Flint Hills at 5, 8-9, 15 
(stating that a rule should cover ``only conduct that contains an 
element of fraud or dishonesty''); ISDA at 2-3 (urging the 
Commission to adopt a rule under Section 811 that is tailored to 
target manipulative schemes involving wholesale, physical petroleum 
products); Muris at 13 (advocating that any rule be limited to 
fraudulent and deceptive conduct). ContraNPGA at 5 (urging the FTC 
to ``view its mandate broadly'' and focus ``on practices that are 
not a reaction to market forces'').
    \29\ See, e.g., Greenberger at 21-25 (urging the Commission to 
move quickly to adopt a rule); Gregoire at 1 (recommending that the 
FTC promulgate an interim rule so it can commence an investigation 
into the oil and gas markets). See also NPGA at 2 (``[R]apid 
increase in price levels and volatility recently . . . raise 
concerns regarding potential manipulation and the need for stronger 
regulatory oversight.''). See also MFA at 4-5.
    \30\ See, e.g., IPMA at 3-4; TOMA at 2-3 (recommending that the 
FTC treat an oil company's decision to sell only gasoline blended 
with ethanol instead of unblended gasoline at the terminal rack as a 
potentially manipulative practice); Navajo Nation at 3-5 (asking the 
FTC to treat the denial of access by terminals and common carrier 
pipelines to other suppliers as a manipulative practice); ILMA at 1 
(requesting that the FTC consider as potentially manipulative a 
refiner's decision to increase the price of base oils sold to others 
(non-refiner blenders/marketers) at wholesale faster than the 
refiner increases the retail price for its own branded finished 
oils).
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    Organizational commenters express differing views regarding the 
appropriate legal basis for, and form of, any such rule. For example, 
some commenters argue that the Commission should model its rule after 
market manipulation authority under which other federal agencies, such 
as the Securities and Exchange Commission (``SEC''), the CFTC, and the 
Federal Energy Regulatory Commission (``FERC''), currently police 
market manipulation.\31\ Other commenters disagree, questioning whether 
it is appropriate to apply approaches designed for regulated industries 
to the comparatively unregulated petroleum industry.\32\
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    \31\ See, e.g., CFDR (advising that the FTC model its rule after 
SEC, FERC, and CFTC market manipulation standards to varying 
degrees); Gregoire (recommending that the FTC model a rule after 
FERC and SEC market manipulation rules); Greenberger at 23 (urging 
the FTC to use FERC's market manipulation rule as a template for 
drafting a Section 811 rule); ISDA at 7 (encouraging the FTC to 
``propose a rule that draws on the most analogous aspects of those 
anti-manipulation standards already applicable to the commodities 
markets, in particular those existing under the [CEA]''); MFA at 5-
6, 21-23 (arguing for the adoption of a CFTC-style anti-manipulation 
regulation in the wholesale energy market because of its relevance 
to the FTC's mission); CAPP at 3-4 (urging the Commission to adopt 
CEA's specific intent standard); Sutherland at 7 (urging the 
Commission to draw on precedent developed under the CEA). But see 
ISDA at 12-14 (urging the FTC not to use FERC and SEC market 
manipulation standards as models in determining what constitutes 
manipulative behavior); MFA at 5-6, 19-21 (stating that ``the 
absence of a securities law disclosure foundation . . . argues 
against the adopting of an SEC-style anti-manipulation formulation . 
. . .''). See also Flint Hills at 10 n.25, 13-14, 22-23.
    \32\ See, e.g., Muris at 2 (``[T]he Commission should follow its 
own clear precedents regarding when a failure to disclose is 
deceptive, and avoid importing broad disclosure requirements from 
highly regulated markets that simply have no place in wholesale 
petroleum markets.''); PMAA at 3 (``Given the very wide gap between 
regulated and unregulated behavior, existing precedents should be 
looked to as informational only and not as having any binding effect 
upon interpretation of rules promulgated under Section 811.''); 
Flint Hills at 10 n.25, 13-14, 22-23 (stating that FERC and SEC 
market manipulation statutes were promulgated in a different 
regulatory context than EISA). Cf. API at 18-19, 30 (recognizing the 
value of FERC and SEC approaches to an extent).
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    Organizational commenters also advance several significant 
suggestions regarding the elements of a cause of action that they 
believe the Commission should employ in enforcing the proposed Rule. In 
particular, commenters express strong views about the appropriate level 
of scienter\33\ and

[[Page 48320]]

whether a price effect should be a prerequisite to a finding of 
liability.\34\
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    \33\ Many commenters urge the Commission to require specific 
intent as a prerequisite for finding liability under Section 811. 
See, e.g., ISDA at 7 (urging the FTC to require a specific intent to 
manipulate prices); Muris at 11 (``In any manipulation rule, the 
Commission should require specific intent, rather than relying 
solely on the knowledge standard in the FTC Act.''); CFDR at 4, 13 
(asserting that the FTC should require a specific intent to affect 
market prices); MFA at 6, 23-25 (arguing that the Commission should 
include a ``specific intent to create an artificial price'' standard 
to ensure protection of legitimate commercial conduct); CAPP at 3 
(recommending that the FTC adopt the intent standard set out in the 
CEA); API at 28-29 (arguing that the legislative history of EISA 
supports inclusion of a scienter standard); Sutherland at 7 
(encouraging the Commission to follow CEA by requiring proof of 
specific intent). Cf. PMAA at 4-5 (```[T]he focus is on practices 
that intentionally, willfully or recklessly cause distortion in the 
market.'''). But see, e.g., Flint Hills at 16 (asserting that the 
Commission should apply the same standard of intent under the FTC's 
existing authority to address fraud and deception). One commenter 
counsels the Commission against adopting an intent requirement. NPGA 
at 5 (arguing that proof of intent creates an ``impossible burden of 
proof,'' which will ``ultimately waste the Commission's resources 
and contribute little to the efficiency of the markets or the 
wellbeing of consumers'').
    \34\ Several commenters support, as an element of a Section 811 
rule violation, a showing of a price effect. See, e.g., API at 23, 
31-32 (stating that, as a prerequisite to finding liability, the FTC 
should require a showing that manipulative conduct caused the market 
price to deviate materially from the price that would have existed 
but for the deception or fraud). See also ISDA at 15; Muris at 9; 
CFDR at 4; Sutherland at 7. But see USDOJ (``Certainly, there should 
be no requirement that one succeed in moving prices . . . the only 
requirement should be an attempt to do so . . . whether successful 
or not.''); NPGA at 5 (arguing that the FTC should focus ``on 
practices that are not a reaction to market forces'').
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    Several commenters also respond to questions and hypotheticals 
presented in the ANPR about the types of conduct that might violate 
EISA and any proposed market manipulation rule.\35\ Other topics that 
the comments address include: possible definitions,\36\ costs and 
benefits of a market manipulation rule,\37\ and appropriate penalties 
for violations of EISA or any FTC rule.\38\
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    \35\ See generally ABA at 6-9 (stating that the antitrust laws 
should be the guide for determining when unilateral supply decisions 
should be lawful or when firms may be required to provide 
competitors with access to facilities); API at 46-47 (arguing that 
the Commission should not draft a rule that imposes an affirmative 
obligation to release inventory during a price spike); Plains at 2-5 
(arguing that the decision to release inventory is complicated, and 
the FTC should not substitute its judgment for others); Hess at 8-10 
(arguing against imposing an affirmative obligation to release 
inventory during price spikes because such an obligation would have 
a negative impact on long term supply); PMAA at 6-10 (arguing 
against restricting common carrier pipelines' announcements 
concerning future capacity constraints); Sutherland at 6 (``To 
mandate inventory releases would distort the U.S. oil markets and is 
contrary to the healthy structure of the markets.''). See also AOPL 
at 20-33; CAPP at 4-6; IER at 4-8; ISDA at 17-18; CFDR at 15-16.
    \36\ See generally ISDA at 19 (seeking clarification of the 
FTC's proposed definition of wholesale distillates products under 
Section 811); CAPP at 3 (stating that the definition of market 
manipulation is appropriate because it reflects the language 
contained in EISA); Flint Hills at 15 (stating that the FTC's 
proposed definition of market manipulation ``makes no sense''); PMAA 
at 2; Sutherland at 7.
    \37\ See generally API at 16 (``Without evidence of significant 
`manipulative' conduct in the petroleum industry, the costs of 
additional enforcement and their impact on competitive market 
activity outweigh any benefit to be gained from the FTC applying 
Section 811 to conduct that is already addressed by other rules.''); 
Muris at 7 (``In addressing market manipulation, the potential costs 
of mistakenly regulating are likely to be high because these are 
well-functioning, highly competitive markets crucial to the 
operation of our economy.'').
    \38\ See generally API at 38 (urging the FTC to adopt Section 
5(m)(1)(C) of the FTC Act as the standard for determining the amount 
of civil penalties under Section 811); PMAA at 6 (``The very large 
penalty should only be applied, if at all, to the very largest 
entities (refiners, trading companies) who participate in the 
upstream portion of crude and finished product, manufacture and 
sales.'').
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C. Notice of Proposed Rulemaking Pursuant to EISA

    Based on the ANPR comments and the Commission's extensive 
experience studying, analyzing, and investigating the petroleum 
industry, the Commission has determined to propose a rule to prevent 
manipulative and deceptive conduct in the petroleum markets.\39\ The 
Commission invites written comments on the proposed Rule and answers to 
the questions in Section II.L, to assist it in determining whether the 
proposed Rule provisions strike an appropriate balance to maximize 
protections for consumers from market manipulation while avoiding the 
imposition of unnecessary compliance burdens on law-abiding industry 
members.
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    \39\ In the ANPR, the Commission stated that this rulemaking 
proceeding is governed by the Administrative Procedure Act 
(``APA''), 5 U.S.C. 553, and Part 1, Subpart C, of the Commission 
Rules of Practice concerning the adoption of non-Section 18 rules, 
16 CFR 1.21-1.26. 73 FR 25614, 25615 n.4. One commenter, however, 
asserts that this proceeding should be commenced as a rulemaking 
under Section 18 of the FTC Act, 15 U.S.C. 57a, requiring, among 
other things, more lengthy and detailed notice and comment 
procedures. See API at 58-59. The Commission disagrees. Nothing in 
the plain language of EISA requires Section 18 rulemaking, and the 
use of APA rulemaking procedures is consistent with Congressional 
expectations that this proceeding be conducted expeditiously.
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II. Discussion of the Proposed Rule

A. Determination to Promulgate a Rule to Proscribe Market Manipulation

    In considering whether to exercise its discretionary rulemaking 
authority pursuant to Section 811, the Commission relies upon several 
sources of information in addition to the statute, including its 
extensive background knowledge of the petroleum industry, the ANPR 
comments, independent research, and consultation with sister agencies 
charged with administering similar market manipulation rules. Based on 
its findings, the Commission tentatively concludes that promulgating a 
rule to address market manipulation in connection with the wholesale 
purchase or sale of crude oil, gasoline, or petroleum distillates is 
appropriate and in the public interest.\40\ This Section of the NPRM 
sets forth the Commission's reasoning for the proposed Rule. The 
Commission invites comment on the issues raised in this Section.
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    \40\ As the Commission stated in the ANPR, the phrase ``crude 
oil gasoline or petroleum distillates,'' without commas, is used in 
Section 811 (as well as in the first clause of Section 812), while 
the phrase ``crude oil, gasoline, or petroleum distillates'' (with 
commas) is used in Section 812(3). This drafting is presumably a 
non-substantive typographical error; therefore, all parts of both 
sections should be read to cover all three types of products (that 
is, crude oil, gasoline, and petroleum distillates). See 73 FR at 
25621 n.59.
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1. The proposed Rule must meet Section 811's ``necessary or 
appropriate'' standard
    Section 811 states that the Commission ``may prescribe'' a rule 
``as necessary or appropriate in the public interest or for the 
protection of United States citizens.''\41\ Thus, the Commission may 
only promulgate a rule to prohibit manipulation in the petroleum 
industry if, in its discretion, it finds that a rule under EISA is 
``necessary or appropriate'' and ``in the public interest or for the 
protection of United States citizens.'' The Commission has tentatively 
determined that promulgating a market manipulation rule narrowly 
tailored to address fraudulent practices would be appropriate to ensure 
that the objective of EISA is carried out, and therefore would be in 
the public interest.
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    \41\ 42 U.S.C. 17301.
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    The Commission believes that the 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.''\42\ The use of the disjunctive ``or'' in 
the first clause of this phrase indicates that the Commission would be 
within its mandate to promulgate a rule

[[Page 48321]]

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.''\43\ 
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.'' The Commission has determined that a rule that achieves 
EISA's plainly stated purpose -- that is, the prohibition of market 
manipulation in the petroleum industry -- would be appropriate.
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    \42\ Some commenters address the phrase ``necessary or 
appropriate'' in their comments; however, none attempt to define the 
phrase. See, e.g., API at 36 (``[T]here are solid grounds to 
conclude that adoption of a market manipulation rule for petroleum 
wholesale markets is neither necessary nor appropriate.''); CAPP at 
4 (``In order to ensure that rules are . . . necessary or 
appropriate in the public interest . . . the Commission must set 
objective standards as to what these concepts are and how they will 
manifest themselves in reality.''). See alsoAOPL at 11-12 
(``Regulation of oil [pipelines] . . . would not be `necessary or 
appropriate in the public interest or for the protection of the 
United States citizens.''').
    \43\ 42 U.S.C. 17301 (emphasis added). The use of a disjunctive 
indicates alternatives and requires that each be treated separately 
unless there is clear legislative intent that indicates otherwise. 
Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979) (``Canons of 
construction ordinarily suggest that terms connected by a 
disjunctive be given separate meanings, unless the context dictates 
otherwise . . . .''). See also FCC v. Pacifica Foundation, 438 U.S. 
726, 739-740 (1978); Azure v. Morton, 514 F.2d 897, 900 (9th Cir. 
1975) (``As a general rule, the use of a disjunctive in a statute 
indicates alternatives and requires that they be treated 
separately.''); Norman J. Singer, Statutes and Statutory 
Construction 21.14, at 180-182 (6th ed. rev. vol. 2002) 
(``Generally, courts presume that `or' is used in a statute 
disjunctively . . . .'').
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    The Commission carefully considered concerns raised by 
organizational commenters about the necessity or appropriateness of a 
rule in determining whether to move forward in the rulemaking process. 
Some of these commenters argue, for example, that petroleum markets are 
competitive, and, in the absence of specific evidence of market 
manipulation, the Commission should refrain from promulgating a 
rule.\44\ Some point to FTC and CFTC authority to argue that any rule 
would be duplicative of existing laws and lead to uncertainty and 
confusion among market participants about compliance.\45\ Many 
commenters also express concerns about the scope and contours of a rule 
and whether any rule that the Commission promulgates would be 
appropriate for petroleum markets.\46\
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    \44\ See, e.g., AOPL at 18 (noting that the Commission has found 
little evidence of price manipulation in previous investigations); 
API at 12-14, 36; Flint Hills at 10 (``[T]he Commission lacks 
evidence of `manipulation' in wholesale petroleum markets that 
warrants the kind of extensive regulatory intervention that a 
proposed rule could engender.''); Hess at 10-11; Muris at 2 
(asserting that the petroleum industry is highly competitive). See 
also Sutherland at 3 (stating that the Commission should not ``adopt 
rules that substitute governmentally created norms for the rules of 
the marketplace.'').
    \45\ Commenters express the view that a FTC rule is unnecessary 
because it would duplicate existing laws and regulations. See, e.g., 
API at 40-41 (arguing against a FTC rule that would duplicate the 
existing CEA enforcement scheme and antitrust laws); Flint Hills at 
8-9 (asserting that existing Commission authority under Section 5 of 
the FTC Act is sufficient to protect against ``[d]isingenuous 
business practices''); MFA at 17 (``FTC Rules that purport to 
overlap with CFTC exclusive jurisdiction would not serve the public 
interest.''). Although it is true that other agencies have market 
manipulation regulations in place already, this fact was well-known 
to Congress when it enacted EISA. Therefore, the Commission 
disagrees with commenters that argue that a Commission rule is 
unnecessary because it may be redundant with other regulatory 
authority.
    \46\ For a general discussion of organizational commenters' 
concerns about a FTC rule, see Section I.B above.
---------------------------------------------------------------------------

    EISA targets manipulative and deceptive conduct in the petroleum 
markets, thereby seeking to eliminate conduct which serves no 
legitimate purpose and may in fact harm the market to the detriment of 
market participants and consumers.\47\ In the view of the Commission, a 
rule that allows the Commission to guard against conduct that 
undermines the integrity of the petroleum market would be in the public 
interest.\48\ The Commission notes that fraud and deception may occur 
in competitive marketplaces. Further, the Commission notes that 
Congress specifically authorized it to determine whether a rule would 
be appropriate and in the public interest despite the existence of 
other laws that potentially cover fraud or deceit.\49\ Therefore, as 
the agency charged with protecting consumers and preserving the 
competitiveness of markets (such as petroleum markets), the Commission 
believes that it would be appropriate for it to propose a rule 
targeting fraudulent or deceptive conduct in wholesale petroleum 
markets under this new authority.
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    \47\ Commenters recognize the negative effects of fraud and 
deceit. See, e.g., Greenberger at 1 (arguing that excessive 
speculation, fraud, and illegal manipulation are causing higher 
gasoline prices); MFA at 1 (``Price manipulation has a corrosive 
effect on the proper functioning of any market.''); API at 50 (``We 
agree that the provision of false or misleading pricing information 
to private reporting entities could be problematic.''); ISDA at 19 
(``ISDA . . . both supports and encourages the development of 
dynamic markets undistorted by manipulative trading activity.''); 
Sutherland at 3 (``[O]il marketers and traders often are the first 
victims of unfair business practices. They, therefore, support 
efforts by Congress to deter manipulation and the use of deceptive 
devices.''); Flint Hills at 18 (``[R]estrictions on disclosures that 
`leave customers in the dark' may be inimical to the smooth 
operations of the relevant markets. Of course, false or deceptive 
reports can also raise familiar [sic] problems.''); CAPP at 1 
(``CAPP recognizes that fraud and manipulation pose a potential 
threat to the successful and efficient functioning of petroleum 
markets in North America.'').
    \48\ Some commenters opine on the meaning of the language: ``in 
the public interest or for the protection of United States 
citizens.'' See, e.g., CFDR at 4-5 (``The public interest and the 
protection of U.S. citizens . . . are best served by the adoption of 
a clear legal standard for market manipulation.'' CFDR goes on to 
say that a clear legal standard ``will allow market participants to 
conduct their business with a clear understanding of the relevant 
legal boundaries.''); MFA at 17 (``FTC rules that purport to overlap 
with CFTC exclusive jurisdiction would not serve the public 
interest.''). Noting the absence of the phrase ``public interest'' 
from other laws the Commission enforces, Flint Hills states that 
Congress must have intended that the Commission rely upon its 
experience in promoting the public interest through enforcement of 
the consumer protection and antitrust principles governed by Section 
5 of the FTC Act. See Flint Hills at 17-18.
    \49\ 42 U.S.C. 17301.
---------------------------------------------------------------------------

2. SEC Rule 10b-5 provides an appropriate regulatory model on which to 
base the FTC's proposed Rule
    By its plain language, Section 811 declares unlawful the use of 
manipulative or deceptive devices or contrivances -- in connection with 
the purchase or sale of crude oil, gasoline, or petroleum distillates 
at wholesale -- that violates any FTC rule prohibiting their use.\50\ 
As one commenter observes, ``Section 811 is not discussed in any 
Senate, House, or Conference Report, nor is there any reported 
Congressional debate on this provision.''\51\ Nevertheless, the 
statutory language -- especially the use of the phrase ``manipulative 
or deceptive device or contrivance'' -- reveals its legislative 
antecedents.\52\
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    \50\ 42 U.S.C. 17301. The statute itself does not describe the 
manipulative or deceptive devices or contrivances that are illegal. 
Rather, it vests in the FTC discretionary rulemaking authority to 
identify such conduct.
    \51\ ABA at 3.
    \52\ As the ANPR discusses in detail, the Commission studied 
SEC, FERC, and CFTC enabling statutes, and their respective 
implementing regulations, and asked questions in the ANPR about 
whether these existing regulatory schemes should serve as a model 
for a FTC Rule. 73 FR at 25616-25618.
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    In particular, it is instructive that the language that Congress 
chose to frame the conduct prohibition in Section 811 is identical to 
language found in Section 10(b) of the Securities Exchange Act of 1934 
(``SEA''),\53\ which prohibits the use of any ``manipulative or 
deceptive device or contrivance'' in contravention of such rules as the 
SEC may prescribe.\54\ Congress used identical

[[Page 48322]]

language -- ``manipulative or deceptive device or contrivance'' -- when 
it gave FERC anti-manipulation authority over electricity and natural 
gas under the Energy Policy Act of 2005 (``EPAct 2005''). In doing so, 
Congress specifically instructed FERC to define the terms ``any 
manipulative or deceptive device or contrivance'' ``as those terms are 
used in [SEA Section 10(b)].''\55\ The use of this language suggests 
that any proposed FTC Rule should follow the contours of SEC Rule 10b-
5, promulgated by the SEC pursuant to that agency's market manipulation 
authority.\56\
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    \53\ 15 U.S.C. 78j(b).
    \54\ See, e.g., ABA at 2 (asserting that ``Section 811 is 
modeled on FERC and SEC authority to challenge deceptive conduct''); 
Greenberger at 27 (``Congress modeled the FTC's new 2007 anti-
manipulation provision on 10(b) of the [SEA] and Rule 10b-5 to once 
again make it clear . . . that the FTC must use the extensive 
securities precedent to guide its manipulation investigations in the 
petroleum markets.''); CFDR at 3 (recognizing that the language of 
Section 811 is ``effectively identical to the anti-manipulation 
proscriptions found in Section 10(b) . . . of the [SEA], as 
amended''); Sutherland at 4 (``Congress, in fashioning Section 811, 
used language similar to that used in the Energy Policy Act of 2005 
. . . which in turn drew upon the securities laws . . . .''); 
Gregoire at 1 (arguing that the Commission's ``authority is very 
similar to the authority Congress previously gave the [FERC] . . . 
which in turn was based on the statutory authority of the [SEC]''). 
See also Muris at 2 (arguing that ``the statutory language and the 
legislative history point to the SEC, FERC, and CFTC as relevant 
regulatory models''); MFA at 19-20 (acknowledging that the 
provisions of Section 811 were modeled after Section 10(b) of the 
SEA, but also taking the position that the Commission should not 
follow its statutory precedent). Cf. API at 18 (arguing that EISA 
does not require the Commission to follow the SEC model in every 
respect, despite an acknowledgment that Section 811 was modeled 
after the SEA).
    \55\ See 15 U.S.C. 717c-1; 16 U.S.C. 824v; FERC, Prohibition of 
Energy Market Manipulation, 71 FR 4244, 4246 (Jan. 19, 2006).
    \56\ 17 CFR 240.10b-5.
---------------------------------------------------------------------------

    Floor statements made in connection with a predecessor bill to 
Subtitle B of EISA\57\ and correspondence from Congress regarding 
EISA\58\ support the Commission's decision to model its proposed Rule 
on SEC Rule 10b-5. Thus, 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 SEC Rule 
10b-5.
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    \57\ Energy Emergency Consumer Protection Act of 2005, S.1735, 
109th Cong. (2005). In these remarks, Senator Maria Cantwell stated 
that the market manipulation provisions in that bill would ensure 
``the same kind of anti-manipulation and transparency rules as those 
with which electricity and natural gas industries must comply [under 
the EPAct 2005].'' The FERC rules, to which the Senator refers, 
similarly derive from the SEA, and target fraudulent marketplace 
conduct. 151 Cong. Rec. S10238 (daily ed. Sept. 20, 2005).
    \58\ An April 2008 letter to the Commission from Senators Maria 
Cantwell, Olympia Snowe, Byron Dorgan, Daniel Inouye, and Gordon 
Smith also supports the interpretation that EISA is designed to 
provide the FTC with anti-fraud market manipulation authority 
similar to that already vested in the SEC and recently given to FERC 
in the EPAct 2005. Letter from Senators Cantwell, Snowe, Dorgan, 
Inouye, and Smith to FTC Chairman Kovacic and Commissioners Harbour, 
Leibowitz, and Rosch (Apr. 8, 2008), available at (http://www.ftc.gov/os/comments/marketmanipulation/congress/080414cantwell.pdf).
    See EPAct 2005, 42 U.S.C. 15801-16503.
---------------------------------------------------------------------------

    The Commission believes that, in addition to adhering to the 
mandate implied by the statutory language, there are several advantages 
to modeling its proposed Rule on SEC Rule 10b-5. The Commission 
believes that using an existing anti-fraud market manipulation 
regulatory scheme as a model for the proposed Rule is beneficial for 
market participants because it leverages the significant body of legal 
precedent interpreting that scheme.\59\ This determination is 
consistent with the views of some commenters who assert that SEC Rule 
10b-5 provides a well-developed framework for the FTC to follow.\60\ 
Moreover, using an established regulatory scheme as the basis for the 
proposed Rule should reduce regulatory uncertainty and thereby assure 
greater compliance.
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    \59\ See, e.g., Greenberger at 23, 25, 27; Gregoire at 1; CFDR 
at 11, 13; SIGMA at 6.
    \60\ See, e.g., Gregoire at 1; Greenberger at 23-25, 27; CFDR at 
11, 13. But see CAPP at 2 (arguing that EISA was enacted in 
anticipation of market abuses, not in response to them, and thus is 
not analogous to SEC rules); Sutherland at 4 (arguing that SEC rules 
operate in a highly regulated environment and that modeling a rule 
that is aimed at the comparatively unregulated petroleum industry 
after SEC rules would be inappropriate).
---------------------------------------------------------------------------

    The structure and scope of SEC Rule 10b-5 also provide a useful 
model for the substantive prohibitions of the proposed Rule. EISA 
contemplates the FTC using a new authority -- separate and apart from 
antitrust law and FTC Act Section 5 authority -- to target manipulation 
and deception based on the SEC anti-fraud model.\61\ By mirroring the 
established SEC Rule 10b-5, the Commission believes it strikes at the 
core of what EISA explicitly proscribes -- market manipulation.\62\
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    \61\ As the Commission noted in the ANPR, ``nothing in 
connection with this Section 811 Rulemaking, any subsequently 
enacted rules, or related efforts should be construed to alter the 
standards associated with establishing a deceptive practice or an 
unfair practice in a case brought by the Commission.'' 73 FR at 
25619 n.55.
    \62\ The Commission believes this careful tailoring addresses 
concerns that a new rule prohibiting market manipulation in the 
petroleum industry might interfere with legitimate, pro-consumer 
business behavior. See generally API at 16 (``New rules have the 
potential to over-deter, discouraging beneficial market 
activity.''); Sutherland at 2 (stating that the FTC must not ``deter 
important and economically efficient business activities that are 
fundamental to the energy markets'').
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3. The provisions of the proposed Rule appropriately prohibit 
fraudulent conduct in wholesale petroleum markets
    The Commission believes that an appropriate means to achieve this 
objective would be to adopt largely the language and structure of SEC 
Rule 10b-5 in promulgating the proposed Rule.\63\ Accordingly, the 
proposed Rule contains the following conduct prohibitions. First, 
Section 317.3(a) prohibits the use or employment of any ``device, 
scheme, or artifice to defraud.'' Second, proposed Rule Section 
317.3(b) states that it is a violation of the rule for any person 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.'' Finally, proposed Rule Section 317.3(c) makes it illegal 
for any person ``[t]o engage in any act, practice, or course of 
business that operates or would operate as a fraud or deceit upon any 
person.''\64\ The Commission believes that adopting the general conduct 
prohibitions embodied in SEC Rule 10b-5 provides the necessary 
flexibility for the Commission to adapt to changing market conditions 
in enforcing its proposed Rule.\65\
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    \63\ Several commenters, while not necessarily advocating a FTC 
rule, appear to support a rule based on SEC Rule 10b-5. See, e.g., 
Gregoire at 1 (``The FTC should be similarly informed by the FERC 
and SEC rules and model its rules on theirs.''); Greenberger at 22 
(urging the FTC to model its rule after FERC's rule because FERC 
resolved its ``major interpretative issues'' by ``adopting the anti-
manipulation definitions within Section 10(b) of the [SEA]''); API 
at 17 (recognizing the value of FERC and SEC approaches to an 
extent). See also CFDR at 3. The determination to prohibit 
manipulative and deceptive conduct under the proposed Rule does not 
preclude the Commission from finding that other conduct violates 
EISA and any other applicable laws or rules that the Commission 
enforces.
    \64\ Proposed Rule 317.3(a)-(c).
    \65\ Any ``laundry list'' of specifically proscribed conduct 
could quickly become out of date, requiring that the Commission 
frequently revisit the rulemaking process. See also Muris at 11 
(``Because defining the specific deceptions that might manipulate 
wholesale markets is virtually impossible, any manipulation rule 
will of necessity be more general.'').
---------------------------------------------------------------------------

    Moreover, the Commission is not invoking the entire body of SEC law 
in this rulemaking, but rather the anti-fraud provisions of SEC Rule 
10b-5. Thus, the proposed Rule does not impose affirmative disclosure 
or record-keeping obligations, and does not regulate supply decisions 
or require that market participants provide access to terminals or 
pipelines.\66\ In making this determination, the Commission considered 
arguments raised by commenters who oppose the promulgation of an SEC-
style rule on the grounds that securities markets are qualitatively 
different from petroleum product markets because securities markets are 
subject to a significant degree of regulation.\67\ The Commission

[[Page 48323]]

believes that excluding these affirmative duties should alleviate 
commenter concerns and make clear that the Commission is using only the 
relevant portions of the SEC regulatory model in crafting the proposed 
Rule.\68\
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    \66\ See Chiarella v. United States, 445 U.S. 222, 235 (1980) 
(stating that SEC Rule 10b-5 did not create a duty of disclosure; 
rather, the duty to disclose was created by a fiduciary relationship 
between traders).
    \67\ See, e.g., PMAA at 3 (arguing that given the differences 
between regulated and unregulated markets, ``existing precedents 
should be looked to as informational only''); Sutherland at 4 
(stating that ``as a rule'' SEC market manipulation standards are 
not useful precedents for a Section 811 rule); ISDA at 12 
(``Securities precedent is not illuminating with respect to how to 
develop a rule to prosecute manipulation in wholesale, physical 
Petroleum Products markets because there are substantial differences 
between the market frameworks.''). See also API at 19-20, 30; CAPP 
at 2-3.
    \68\ Many commenters raise concerns about a FTC rule that would 
impose affirmative duties or obligations on persons covered by the 
rule. For a discussion of any potential duties or obligations 
imposed by the proposed Rule, see Section II.B.4 below.
---------------------------------------------------------------------------

    In crafting the proposed Rule, the Commission intends to prohibit 
manipulative and deceptive conduct without discouraging pro-competitive 
or otherwise desirable market practices. Following the example of SEC 
Rule 10b-5, the Commission believes that its proposed Rule would 
contribute to well-functioning marketplaces. Markets function best when 
market participants can presume that the best available information 
relevant to their decision-making is not distorted.\69\ Manipulative or 
deceptive conduct distorts the marketplace signals that guide resource 
allocation.\70\ When market participants react to distorted market 
price signals, short-term purchase and sale decisions may be altered 
and long-term capital investments may be adversely influenced. Finally, 
if manipulative or deceptive conduct recurs, it may increase the cost 
of doing business if market participants are required to invest in 
defensive measures.\71\ The Commission believes eliminating or reducing 
these effects is in the public interest.
---------------------------------------------------------------------------

    \69\ Several commenters discuss the consequences of manipulative 
or deceptive conduct on the overall health of the marketplace and 
note the importance of ensuring a legitimate price discovery 
process. See, e.g., Muris at 6 (``Fraudulent and deceptive conduct 
undermine the market's competitive process because they impair 
efficient price discovery, which is the process of incorporating 
information in the market price.''); Platts at 2 (``Confidence in 
price discovery processes is vital for market participants, 
regulators and the public alike . . . .''); MFA at 1 (``Price 
manipulation has a corrosive effect on the proper functioning of any 
market.'').
    \70\ In a market economy, resources are allocated to productive 
activities on the basis of impersonal price signals that reflect 
both consumer preferences and profit opportunities. When resources 
flow to their highest valued use, social wealth is maximized. 
Intentional manipulative or deceptive conduct impedes this process. 
See also Milton Friedman & Rose Friedman, Free to Choose, 14-18 
(Harcourt 1980); Friedrich Hayek, The Use of Knowledge in Society, 
35(4) Am. Econ. Rev. 519 (1945). For example, disseminating 
misinformation that is relied on by market participants may prevent 
wealth-generating exchanges from taking place. If so, an opportunity 
cost is imposed on society at large.
    \71\ Such investments, although perceived as necessary by the 
investor, are socially wasteful because they utilize resources that 
otherwise might have been allocated to wealth-generating activities.
---------------------------------------------------------------------------

    The Commission addresses the elements of a cause of action under 
the proposed Rule in Section II.E. This discussion should provide 
guidance to the industry on how the Commission would enforce the 
proposed Rule. The Commission would not likely act except in cases 
where an entity: (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; (3) in 
connection with the purchase or sale of crude oil, gasoline, or 
petroleum distillates at wholesale.\72\ For example, false reporting to 
private data reporting services or misleading announcements by 
refineries, pipelines, or investment banks done with the requisite 
scienter, in connection with the purchase or sale of a covered product 
at wholesale, would be covered by the proposed Rule. Similarly, trading 
practices in physical or futures markets would also be covered if the 
conduct met all the elements of a cause of action.
---------------------------------------------------------------------------

    \72\ Section II.E of this NPRM also addresses whether actual 
price effects should be a required element of proof.
---------------------------------------------------------------------------

    In sum, the Commission has paid careful attention to maximizing the 
proposed Rule's benefits while minimizing its costs from both a legal 
and an economic perspective. The Commission believes that the proposed 
Rule, by specifically targeting manipulative or deceptive conduct, not 
only achieves the goals of Section 811, but also complements the 
Commission's antitrust and consumer protection missions. The Commission 
seeks comments on the specific formulation of the proposed Rule, and in 
particular on whether using SEC Rule 10b-5 as a model is appropriate.

B. Section 317.1 - Scope

    Section 813 makes clear that the Commission possesses the same 
jurisdiction and power under Subtitle B as it possesses under the FTC 
Act.\73\ Because EISA does not expand or contract Commission 
jurisdiction or the scope of any rule's coverage, any person to which 
Commission jurisdiction under the FTC Act does not extend would also 
lie outside Commission jurisdiction under the proposed Rule. 
Conversely, any person currently subject to Commission jurisdiction 
under the FTC Act would be covered by the proposed Rule.\74\
---------------------------------------------------------------------------

    \73\ ``This subtitle shall be enforced by the Federal Trade 
Commission 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 this 
subtitle.'' 42 U.S.C. 17303 (emphasis added).
    \74\ Moreover, any person subject to Commission jurisdiction 
must comply with Section 812 and with any rule promulgated under 
Section 811. Several commenters asked the FTC to clarify its 
proposed definition of ``person.'' See e.g., ISDA at 4 n.5; AOPL at 
1.
---------------------------------------------------------------------------

    In response to the ANPR, the Commission received some comments 
requesting that the Commission clarify the scope of the application of 
any proposed rule. One commenter, AOPL, expresses the belief that 
Commission jurisdiction does not extend to pipelines.\75\ Another 
opines that any rule could not and should not reach any non-profits or 
banks.\76\ Several suggest that any proposed rule should not, by its 
terms or construction, reach futures trading activities regulated by 
the CFTC, including any futures market manipulation.\77\
---------------------------------------------------------------------------

    \75\ AOPL at 1 (``Common carrier oil pipelines subject to the 
Interstate Commerce Act (``ICA'') are exempt from the Commission's 
jurisdiction under the [FTC Act] and thus are also exempt from the 
Commission's jurisdiction under the EISA.''). Conversely, Navajo 
Nation asserts that FERC's regulations are not directly applicable 
to the crude oil market. Therefore the Commission should tailor a 
rule to ``eliminate anticompetitive practices that [FERC] may have 
determined are beyond its jurisdiction . . . .'' Navajo Nation at 4.
    \76\ DRG at 3-4. Cf. Greenberger at 28-29 (arguing that the 
Commission has authority to investigate banks for manipulation in 
the crude oil markets).
    \77\ See, e.g., CFTC at 2 (``[W]e urge the FTC to avoid 
proposing regulatory measures that could lead to futures-market 
manipulation charges based solely on the downstream effects of 
futures exchange prices on off-exchange prices in physical or cash-
market transactions, and that may be inconsistent or duplicative of 
CEA provisions.''); MFA at 13-14 (``But futures market manipulation 
claims do involve both actual futures transactions and the core 
price discovery operations of the futures markets and should be 
outside the limits of Section 811 due to the CEA's exclusive 
jurisdiction provision.''). See also Flint Hills at 12; Sutherland 
at 8; Hess at 12 n.10; CFDR at 6 n.4.
---------------------------------------------------------------------------

    As to pipelines in particular, Commission jurisdiction under 
Section 5 of the FTC Act does not extend to common carriers that are 
subject to the ICA and its amendments,\78\ including the ICC 
Termination Act of 1994. Those acts apply to interstate rail, trucking 
and busing; domestic offshore water carriage; and pipelines carrying 
commodities other than water, gas, or oil.\79\ Accordingly, oil and gas 
pipelines enjoy no exemption from the FTC Act and would be subject to 
the proposed Rule.\80\
---------------------------------------------------------------------------

    \78\ 49 U.S.C. 10101-16106. Section 4 of the FTC Act defines the 
```Acts to regulate commerce''' to mean, inter alia, ``subtitle IV 
of title 49 . . . and all Acts amendatory thereof and supplementary 
thereto.'' 15 U.S.C. 44.
    \79\ 49 U.S.C. 4(c) (emphasis added).
    \80\ 15 U.S.C. 45(a)(2).

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[[Page 48324]]

    With respect to banks, Commission jurisdiction under Section 5 of 
the FTC Act does not extend to ``banks, savings and loan institutions 
described in section 57a(f)(3) of this title, [and] Federal credit 
unions described in section 57a(f)(4) of this title.''\81\ 
Nevertheless, the Commission does have jurisdiction over entities 
affiliated with or contracting with banks that are not themselves 
banks.\82\ Whether any particular person would be exempt from the FTC 
Act or the proposed Rule as a ``bank'' must be assessed on a case-by-
case basis.\83\
---------------------------------------------------------------------------

    \81\ Id.
    \82\ See Minnesota v. Fleet Mortg. Corp., 181 F. Supp. 2d 995, 
1000 (D. Minn. 2001).
    \83\ Investment banks (e.g., Goldman Sachs and Morgan Stanley), 
many of which are voluntarily regulated by the SEC, are not 
necessarily ``banks'' as that term is typically defined under 
traditional banking law. See 12 U.S.C. 1813(a)(1). Therefore, 
whether an investment bank would be covered by the proposed FTC Rule 
must be determined on a case-by-case basis.
---------------------------------------------------------------------------

    As to non-profit organizations, although Commission jurisdiction 
under Section 5 of the FTC Act extends to ``corporations,'' that term 
does not cover any organization that does not carry on business for its 
own profit or that of its members.\84\ The form of a corporation as a 
``non-profit'' is not necessarily determinative, however. Organizations 
with both non-profit and for-profit activities may be subject to the 
FTC Act. For example, in California Dental Ass'n v. FTC,\85\ the 
Supreme Court held that the FTC Act applies to anti-competitive 
practices used by non-profit associations whose activities provide 
substantial economic benefits to the businesses of their for-profit 
members. Moreover, the Commission has asserted that its jurisdiction 
over ``persons'' under Section 5 of the FTC Act extends to nonprofit 
municipal corporations such as the City of New Orleans and the City of 
Minneapolis.\86\ Whether any particular person would be exempt from the 
FTC Act or the proposed Rule as a non-profit must be assessed on a 
case-by-case basis.
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 44 (defining ``corporation'').
    \85\ 526 U.S. 756 (1999).
    \86\ See In the Matter of The City of New Orleans, 105 F.T.C. 1, 
1-2 (1985); In the Matter of The City of Minneapolis, 105 F.T.C 304, 
305 (1985). In each complaint, the Commission alleged that the 
respondent was a ``municipal corporation'' and ``a person or 
corporation within the meaning of the [FTC Act], as amended (15 
U.S.C. 45).'' (emphasis added). See 105 F.T.C. at 5-6; 105 F.T.C. at 
308-309. The Commission subsequently issued orders dismissing the 
complaints on other grounds.
---------------------------------------------------------------------------

    Commenters argue that a safe harbor provision or other explicit 
exemption for the futures markets is necessary to avoid an overlap with 
the CFTC's exclusive jurisdiction under Section 2 of the CEA.\87\ 
According to commenters, including the CFTC, such an overlap 
potentially would create duplicative or inconsistent regulatory 
requirements and thus undermine a uniform regulatory scheme that 
Congress sought to establish for the futures markets under the CEA.\88\ 
Several other commenters express concern that even if the Commission 
could avoid inconsistent regulatory requirements, market participants 
would still be unfairly burdened by duplicative enforcement.\89\
---------------------------------------------------------------------------

    \87\ Section 2 of the CEA states that ``[t]he Commission 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 section 7 or 7a of this title'' 
of the CEA. See CEA 2(a)(1)(A); 7 U.S.C. 2(a)(1)(A). See e.g., MFA 
at 5 (``[Requesting] that the Commission propose and adopt a safe 
harbor provision or other appropriate exception from its rules 
confirming that nothing in its Section 811 rules would govern or 
apply . . . `with respect to accounts, agreements . . . and 
transactions involving' futures and options markets and other 
trading instruments which are subject to CFTC exclusive 
jurisdiction.''); CFTC at 2 (``[T]he FTC might also consider 
specifically excluding from a new rule the trading of futures on 
registered entities under the CEA, which are within the CFTC's 
exclusive purview under that statute.'').
    \88\ See, e.g., MFA at 3-4 (arguing that Congress enacted the 
CEA's ``exclusive jurisdiction'' provision to ensure that CFTC 
regulations and the CEA would be the sole legal standards applied to 
U.S. futures trading); CFTC at 1 (``The CFTC's exclusive 
jurisdiction over trading in futures is based upon the concern that 
futures markets remain subject to a single, federal regulatory 
standard.''). See also Flint Hills at 12 (arguing that a rule 
overlapping with the CFTC's broad oversight over futures trading 
markets could subject market participants to ``differing standards 
of conduct and multiple levels of liability''); API at 14 (``It is 
unnecessary and undesirable to overlay a parallel system of FTC 
regulation to address the same conduct and markets already subject 
to oversight by the CFTC.'').
    \89\ See, e.g., Sutherland at 8 (arguing that private parties 
would be unfairly burdened by ``multiple enforcement actions by 
federal agencies examining identical facts or suffer double jeopardy 
in terms of fines and disgorgement orders''); ICE at 2 
(``Duplicative enforcement and regulation is unduly burdensome and 
could possibly deprive market participants of due process.''); NPGA 
at 2 (``A flawed regulatory scheme may result in . . . penalties 
being cumulative and ultimately excessive.'').
---------------------------------------------------------------------------

    The Commission does not believe a safe harbor provision or 
exemption from the proposed Rule is warranted. CFTC authority over 
manipulation relating to commodities futures markets is not exclusive 
and, moreover, is separate from CFTC's exclusive authority under CEA 
Section 2(a)(1)(A).\90\ The Commission believes the proper approach, 
and the one courts favor, is to give full effect to all statutory 
schemes that may address the conduct at issue here.\91\ Nothing in EISA 
itself indicates that Congress intended to exempt conduct in the 
futures markets from the reach of any rule that the Commission might 
promulgate under Section 811. Accordingly, the Commission believes that 
its proposed Rule proscribes manipulative or deceptive conduct in 
wholesale futures markets and it would not improperly intrude upon the 
jurisdiction of the CFTC or any other agency whose authority may 
overlap in whole or in part with respect to such activities.\92\
---------------------------------------------------------------------------

    \90\ See CEA 2(a)(1)(A) (CFTC exclusive jurisdiction is not 
intended to remove jurisdiction conferred to other agencies under 
other laws); FTC v. Ken Roberts Co., 276 F.3d 583, 593 (D.C. Cir. 
2001) (holding that the Commission's authority under the FTC Act to 
investigate deceptive marketing of commodities trading courses did 
not conflict with the CFTC's exclusive authority under CEA 
2(a)(1)(A)); SEC v. Hopper, No. 04-1054, 2006 U.S. Dist. LEXIS 
17772, at *35 (S.D. Tex. Mar. 24, 2006) (allowing the SEC to 
challenge fraudulent and deceptive energy trading transactions under 
Rule 10b-5, despite assertions that the CFTC and FERC had exclusive 
jurisdiction to regulate commodities transactions and interstate 
wholesale electricity rates, respectively). Cf. CEA 9(a)(2), 7 
U.S.C. 13(a)(2) (making it unlawful for ``[a]ny person to manipulate 
or attempt to manipulate the price of any commodity in interstate 
commerce''); 7 U.S.C. 13b (authorizing the CFTC to issue cease and 
desist orders against commodities price manipulation); United States 
v. Reliant Energy Serv., 420 F. Supp. 2d 1043, 1062 (N.D. Cal. 2006) 
(holding that FERC's exclusive jurisdiction to regulate wholesale 
electricity markets did not bar CFTC enforcement action against 
commodities price manipulation); Amaranth Advisors LLC, 120 F.E.R.C. 
] 61,085; 2007 FERC LEXIS 1463, at *52 (July 26, 2007) (show cause 
order) (observing that the ``CFTC has jurisdiction over trading on 
its regulated exchanges [under the CEA], we have jurisdiction [under 
the EPAct 2005] over certain types of natural gas and electric 
markets, and where these markets are interconnected, both agencies 
have jurisdiction to prohibit market manipulation.'').
    \91\ See Ken Roberts, 276 F.3d at 593 (``[In] `an age of 
overlapping and concurring regulatory jurisdiction,''' declining to 
conclude ``that one agency may not regulate merely because another 
may.'') (citations omitted).
    \92\ Likewise, certain commenters urge the Commission to avoid 
any overlap with FERC authority to regulate certain energy markets. 
See, e.g., API at 15 n.26 (noting that a rule reaching oil pipelines 
would address conduct and markets already subject to FERC 
regulation); Plains at 1 (``FERC has extensive authority over oil 
pipelines and the adoption of an anti-manipulation provision 
applicable to these same entities by another regulatory authority 
creates a risk of conflicting and inconsistent standards, with 
resulting uncertainty.''); AOPL at 12, 20 (arguing that the 
Commission should avoid conflicts of jurisdiction with FERC because 
the cost of inconsistent and overlapping enforcement standards would 
be substantial). FERC's authority with respect to price manipulation 
in such markets is not exclusive, however, and would not preclude 
the Commission from promulgating an anti-manipulation rule that may 
reach conduct also subject to FERC's authority. See United States v. 
Reliant Energy Serv., 420 F. Supp. 2d 1043 (N.D. Cal. 2006).
---------------------------------------------------------------------------

    The proposed Rule is not intended to impose contradictory 
requirements on regulated entities in the futures markets or otherwise. 
To the extent, if any, that the proposed Rule's requirements could 
duplicate requirements already

[[Page 48325]]

established by other agencies for such markets, it would not impose 
additional compliance costs. Although the Commission acknowledges that 
different agencies could simultaneously initiate enforcement action 
with respect to the same activities, the Commission has had a 
longstanding practice of coordinating its enforcement efforts with 
agencies with which it shares overlapping jurisdiction.\93\ The 
Commission expects that it would continue that practice here, as 
feasible and appropriate, to ensure fairness to regulated entities and 
to conserve enforcement resources and maximize agency efficiency.\94\ 
The Commission seeks additional comments on the scope of persons 
covered by the proposed Rule.
---------------------------------------------------------------------------

    \93\ One commenter warns that poor coordination between the 
Commission and other agencies could lead to a situation wherein 
``multiple agencies may pursue certain potential violations, while 
other violations are left unchecked because each oversight agency 
expects or desires another to take the appropriate action.'' NPGA at 
2. To prevent such pitfalls of regulatory overlap, NPGA encourages 
the issuance of an Executive Order that clearly draws lines of 
jurisdiction among agencies. NPGA at 3.
    \94\ See, e.g., PMAA at 6 (urging the formation of a standing 
inter-agency task force on market manipulation charged with 
coordination and information sharing tasks); ISDA at 4 (encouraging 
the Commission to work with the CFTC to ensure that both agencies 
implement their anti-manipulation enforcement programs in a 
coordinated and efficient manner); CFDR at 6 (encouraging the 
Commission to work with the CFTC and FERC to adopt a clear anti-
manipulation standard for the wholesale crude oil, gasoline and 
petroleum distillates markets); ICE at 2 (``The Commission should 
coordinate with FERC and the CFTC to define their respective roles 
in the energy markets.''); SIGMA at 10 (urging the Commission to 
coordinate its present rulemaking with the CFTC to ``ensure that 
regulated parties are governed appropriately''); MFA at 22 (stating 
the Commission could avoid duplicative efforts if it developed a 
formal or informal arrangement to coordinate investigatory 
activities and even enforcement actions with the CFTC); Sutherland 
at 8 (urging the Commission and the CFTC to ``develop clear rules as 
to which agency will assume jurisdiction when the futures and 
financial market conditions are not in issue'').
---------------------------------------------------------------------------

C. Section 317.2: Definitions

    The proposed Rule sets forth five definitions, adding precision to 
the following terms used in EISA: ``crude oil;'' ``gasoline;'' 
``person;'' ``petroleum distillates;'' and ``wholesale.'' The proposed 
definitions establish the scope of the proposed Rule's coverage and 
provide guidance as to the Commission's intended enforcement of the 
proposed Rule. It is important to note, however, that Section 811 
prohibits manipulative or deceptive devices or contrivances ``in 
connection with'' the purchase or sale of the defined commodities at 
wholesale. As discussed in Section II.E.3 below, the proposed Rule 
would also reach manipulative conduct that extends beyond the defined 
terms if that conduct directly or indirectly impacts wholesale prices 
for the covered products.\95\ The Commission solicits comments on these 
proposed definitions, as well as any alternative or additional 
definitions, or other comments on this Section of the proposed Rule.
---------------------------------------------------------------------------

    \95\ The Commission does not believe, as some commenters argue, 
that the terms in Section 811 preclude the Commission from reaching 
supply decisions or services. See, e.g., API at 25-26 (urging the 
Commission to avoid construing the language of Section 811 to apply 
to supply decisions unconnected with a wholesale transaction); AOPL 
at 10 (arguing that EISA does not expressly cover ``transportation 
and related services provided by oil pipelines'').
---------------------------------------------------------------------------

1. Section 317.2(a): Crude oil
    The proposed Rule is intended to capture the direct or indirect use 
or employment of any manipulative or deceptive device or contrivance in 
connection with the wholesale purchase or sale of enumerated petroleum 
products, including crude oil. Section 317.2(a) of the proposed Rule 
defines ``crude oil'' to mean: ``the mixture of hydrocarbons that 
exist: (1) in liquid phase in natural underground reservoirs and which 
remain liquid at atmospheric pressure after passing through separating 
facilities, or (2) as shale oil or tar sands requiring further 
processing for sale as a refinery feedstock.'' As defined, ``crude 
oil,'' includes liquid crude oil and any hydrocarbon form that can be 
processed into a refinery feedstock. ``Crude oil'' does not include 
natural gas, natural gas liquids, or non-crude refinery feedstocks.
2. Section 317.2(b): ``Gasoline''
    The proposed Rule also covers the use or employment of any 
manipulative or deceptive device or contrivance in connection with the 
wholesale purchase or sale of ``gasoline.'' Section 317.2(b) of the 
proposed Rule defines ``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.'' The proposed definition of 
``gasoline'' is intended to capture those commodities regularly traded 
as finished products or as products requiring only oxygenate blending 
to be finished.
    Manipulative or deceptive conduct involving non-petroleum based 
commodities that directly or indirectly affect the price of gasoline 
(e.g., ethanol, reformate, or alkylate that may be blended into the 
finished product) may be the subject of Commission enforcement under 
the proposed Rule.\96\ For example, although ethanol is excluded from 
the definition of ``gasoline,'' the Commission believes that 
manipulation of ethanol may be covered under the proposed Rule where 
changes in ethanol prices directly or indirectly affect wholesale 
gasoline prices.
---------------------------------------------------------------------------

    \96\ Two commenters express concern about practices involving 
ethanol. TOMA at 2-3; IPMA at 2-3. But see ISDA at 19 (encouraging 
the Commission to ``exclude non-petroleum based ethanol products 
from the definition of petroleum distillates'').
---------------------------------------------------------------------------

3. Section 317.2(c): ``Person''
    The proposed Rule makes it unlawful for any ``person'' to engage in 
manipulative or deceptive conduct in connection with the wholesale 
purchase or sale of the enumerated petroleum products. Section 317.2(c) 
defines the term ``person'' to mean: ``any individual, group, 
unincorporated association, limited or general partnership, 
corporation, or other business entity.'' This definition is identical 
to that used in other Commission rules,\97\ and is consistent with the 
jurisdictional reach of the FTC Act.\98\
---------------------------------------------------------------------------

    \97\ See, e.g., Telemarketing Sales Rule, 16 CFR Part 310; 
Disclosure Requirements and Prohibitions Concerning Franchising, 16 
CFR Part 436.
    \98\ 73 FR at 25616 n.14. For a discussion of comments submitted 
on the scope of the application of the proposed rule, see Section 
II.B.
---------------------------------------------------------------------------

4. Section 317.2(d): ``Petroleum distillates''
    The proposed Rule also covers the use or employment of a 
manipulative or deceptive device or contrivance in connection with the 
wholesale purchase or sale of ``petroleum distillates.'' Section 
317.2(d) of the proposed Rule defines ``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.''
    ``Petroleum distillates'' include the middle distillate refinery 
streams from heavy fuel oils to lighter products such as on-road 
diesel, heating oil, and kerosene-based jet fuels. Similar to the 
Commission's proposed definition of ``gasoline,'' the definition of 
``petroleum distillates'' is limited to finished fuel products, other 
than ``gasoline'' produced at a refinery or blended in tank at a 
terminal. The proposed definition of ``petroleum distillates'' also 
responds to the request of ANPR commenters that the Commission

[[Page 48326]]

specifically define the term ``petroleum distillates'' more 
precisely.\99\
---------------------------------------------------------------------------

    \99\ See, e.g., MFA at 2 n.2 (encouraging the Commission to 
define the term ``petroleum distillate''); API at 23 n.42 (proposing 
that the definition of ``petroleum distillates'' include diesel, 
kerosene, jet fuel, and home heating oil); ISDA at 19 (proposing 
that the definition of ``petroleum distillates'' include diesel, 
home heating oil, and jet fuel).
---------------------------------------------------------------------------

5. Section 317.2(e): ``Wholesale''
    As previously noted, the proposed Rule prohibits the use or 
employment of a manipulative or deceptive device or contrivance in 
connection with the wholesale purchase or sale of enumerated petroleum 
products -- crude oil, gasoline, and petroleum distillates. The 
proposed Rule defines the term ``wholesale'' to mean: ``purchases or 
sales at the terminal rack level or upstream of the terminal rack 
level. Transactions conducted at wholesale do not include retail 
gasoline sales to consumers.''
    This definition is intended to make it clear that the proposed Rule 
would apply to any conduct that directly or indirectly affects market 
prices of an enumerated petroleum product at the terminal rack level or 
upstream of the terminal rack level.\100\ The proposed definition of 
``wholesale'' also makes explicit that the proposed Rule does not apply 
to ordinary sales of gasoline or other covered products to consumers at 
gasoline stations or other retail establishments.
---------------------------------------------------------------------------

    \100\ See, e.g., CFDR at 3 n.1; PMAA at 4-5.
---------------------------------------------------------------------------

    The Commission disagrees with commenters that define wholesale to 
exclude transactions at the terminal rack level. API, for example, 
asserts that wholesale transactions should not include terminal rack 
transactions, Dealer Tankwagon sales to dealers, and other terminal-
level sales.\101\ The Department of Energy's Energy Information 
Administration (``EIA''), however, defines a ``wholesale price'' to 
include rack prices.\102\ Moreover, a common definition of 
``wholesale'' is ``the sale of goods in quantity, as to retailers or 
jobbers, for resale.''\103\ Accordingly, the Commission believes it is 
appropriate for the proposed Rule to cover transactions at the terminal 
level.
---------------------------------------------------------------------------

    \101\ API at 24-25. See also PMAA at 4-5 (urging the Commission 
to exclude activities that occur at the terminal rack level).
    \102\ (http://www.eia.doe.gov/glossary/glossary_w.htm).
    \103\ (http://dictionary.reference.com/browse/wholesale).
---------------------------------------------------------------------------

D. Section 317.3: Prohibited Practices

    The Commission intends its proposed Rule to prohibit manipulative 
or deceptive conduct in connection with the purchase or sale of crude 
oil, gasoline, or petroleum distillates at wholesale. Specifically, 
Section 317.3 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,
     (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.
1. Section 317.3(a): Device, scheme, or artifice to defraud
    Section 317.3(a) prohibits the use or employment of any ``device, 
scheme, or artifice to defraud.'' As noted before, this language is 
derived from SEA Section 10(b) and SEC Rule 10b-5. It is intended to be 
a broad anti-fraud provision that will enable the Commission to police 
all forms of fraud and manipulation that affect wholesale petroleum 
markets. At the same time, the term ``fraud'' is not intended to cover 
every act that happens to affect a wholesale market for petroleum. 
Rather, as discussed in greater detail in the required elements section 
of this NPRM, it covers intentional acts that obstruct or impair 
wholesale petroleum markets.\104\ Determining whether specific conduct 
constitutes fraud is a question of fact that requires a case-by-case 
determination in light of all the circumstances.
---------------------------------------------------------------------------

    \104\ See, e.g., Dennis v. United States, 384 U.S. 855, 861 
(1966) (noting that fraud within the meaning of a statute need not 
be confined to the common law definition of fraud: any false 
statement, misrepresentation or deceit may suffice).
---------------------------------------------------------------------------

2. Section 317.3(b): False material facts and omissions of material 
fact
    Section 317.3(b) of the proposed Rule prohibits covered entities 
from misrepresenting, and in some instances omitting, material 
information in a wholesale petroleum market. Consistent with securities 
law, a fact is material if there is a substantial likelihood that a 
reasonable market participant would consider it in making its decision 
to transact because the material fact significantly alters the total 
mix of information available.\105\ As the Supreme Court has stated, 
``[t]he role of the materiality requirement is . . . to filter out 
essentially useless information that a reasonable investor would not 
consider significant, even as part of a larger `mix' of factors to 
consider in making his investment decision.''\106\ Thus, it is often 
not enough simply to show that a particular statement is false or 
incomplete if the misrepresented fact is otherwise insignificant.\107\ 
However, under securities law precedent, it is not necessary to prove 
that an investor would have acted differently if he or she had known 
the actual truth of the matter.\108\
---------------------------------------------------------------------------

    \105\ TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) 
sets forth the ``total mix'' or ``substantial likelihood'' test of 
materiality: a substantial likelihood that the disclosure of the 
omitted fact would have been viewed by a reasonable investor as 
having significantly altered the total mix of information made 
available. Accord Basic, Inc. v. Levinson, 485 U.S. 224, 231-2 
(1988) (adopting TSC Indus. test for materiality in Section 10(b) 
and Rule 10b-5 context).
    \106\ Basic, Inc. 485 U.S. at 234.
    \107\ Id. at 238.
    \108\ See Folger Adam Co. v. PMI Indus., Inc., 938 F.2d 1529, 
1534 (2d Cir. 1991), cert. denied, 502 U.S. 983 (1991).
---------------------------------------------------------------------------

a. Misrepresentations of material fact
    One type of misrepresentation of material fact captured by the 
proposed Rule is the reporting of false or misleading information to 
government agencies, to third-party reporting services, and to the 
public through corporate announcements. Many commenters agree that this 
type of behavior is problematic because industry participants rely on 
such market information to conduct business transactions.\109\ For 
example, false or deceptive announcements by refiners or pipelines, in 
particular, are likely to have an adverse impact on the market and the 
pricing of petroleum products, thereby harming market participants and 
ultimately consumers, because of the close attention paid to even 
slight changes in supply or inventory. Similarly, the reporting of 
false or misleading information to private data reporting services may 
have an impact on market prices and supply decisions.\110\
---------------------------------------------------------------------------

    \109\ API at 50; Plains at 4; PMAA at 7 (urging the Commission 
to prohibit the dissemination of false or misleading information 
made with the intent to defraud).
    \110\ Congress recognized the importance of truthful reporting 
by adopting Section 812 of EISA, which prohibits false reporting to 
the government. 42 U.S.C. 17302. See Platts at 2 (``Confidence in 
price discovery processes is vital for market participants, 
regulators and the public alike . . . .'').
---------------------------------------------------------------------------

b. Omissions of material information
    Section 317.3(b) imposes no general duty upon covered entities to 
disclose information such as cost and volume data. Nonetheless, Section 
317.3(b) prohibits omissions of material fact that

[[Page 48327]]

are necessary to ensure that a previously made statement is not 
misleading.\111\ Accordingly, there may be a violation of Section 
317.3(b) if a covered entity voluntarily provides information -- or is 
compelled to provide information by statute, order, or regulation -- 
but then fails to disclose a material fact, thereby making the 
information provided misleading.
---------------------------------------------------------------------------

    \111\ Based on securities law precedent, the relevant time 
period for determining materiality is at the time of the statement 
or omission, and not in hindsight. See Ganino v. Citizens Utils. 
Co., 228 F.3d 154, 165 (2d Cir. 2000).
---------------------------------------------------------------------------

3. Section 317.3(c): Conduct operating as a fraud or deceit
    Section 317.3(c) of the proposed Rule prohibits any act, practice, 
or course of business that ``operates or would operate as a fraud or 
deceit.'' This provision, also modeled after SEC Rule 10b-5, is 
intended to be a catch-all provision that prohibits any other conduct 
that constitutes a fraud on wholesale petroleum markets.
    In proposing this language -- ``operates as a fraud'' -- the 
Commission is mindful of objections raised to the identical language 
used in the FERC market manipulation rulemaking proceeding. A few 
commenters to FERC's proposed rule questioned whether the phrase 
``would operate as a fraud'' implied that no scienter is required, and 
some urged FERC specifically to add a scienter requirement to this 
language in the FERC rule.\112\ Following FERC's analysis, the 
Commission stresses that the phrase ``would operate as a fraud'' is to 
be read consistently with securities law precedent, meaning that there 
can be no law violation without a showing of scienter.\113\ Commenters 
to the FERC proceeding also questioned whether this language in the 
FERC rule is necessary in light of the anti-fraud language in the first 
section of the FERC rule, which is the same language used in proposed 
Rule Section 317.3(a).\114\ FERC noted in its final rule that the SEC 
brings numerous cases under this language in SEC Rule 10b-5, and 
removing this language from the FERC rule would ``create uncertainty by 
distinguishing the final rule from SEC Rule 10b-5 as to render 
analogous securities law precedent inapplicable.''\115\ That same 
reasoning applies here as well. Consequently, the Commission has 
tentatively decided to include subsection (c) (prohibiting conduct 
operating as a fraud or deceit) in the proposed Rule.
---------------------------------------------------------------------------

    \112\ 71 FR at 4252.
    \113\ See id.
    \114\ Id.
    \115\ Id.
---------------------------------------------------------------------------

4. Section 317.3 imposes no affirmative duties or obligations upon 
covered entities
    Based upon the comments and its own experience, the Commission 
chooses at this time not to propose any specific conduct obligations, 
such as a duty to supply, provide access, or disclose. The Commission 
in the ANPR requested comment on whether specific types of conduct 
should be prohibited by an anti-manipulation rule. In response, 
commenters generally oppose requiring specific conduct standards and 
focus their comments instead upon whether there should be a duty to: 
(1) supply product;\116\ (2) provide access to terminals or 
pipelines;\117\ or (3) disclose information.\118\ The Commission agrees 
with commenters that the market is generally the best determiner of 
supply and demand decisions. The Commission does not, however, 
foreclose the possibility that facts and circumstances may lead it to 
find that a decision to withhold supply or access that otherwise meets 
the requirements of the proposed Rule violates the proposed Rule.
---------------------------------------------------------------------------

    \116\ Several commenters state that a firm's supply decisions 
could be considered manipulative or deceptive, but only under 
limited circumstances. For example, IER recommends that the 
Commission reach supply decisions only if they are fraudulent, but 
it does not recommend new rules. IER at 4. Sutherland asserts that 
the only circumstance in which a firm's market supply decisions 
could be considered manipulative is if there is evidence of both ``a 
specific intent to manipulate a properly defined market [which the 
Commission can properly define, ``given its long experience under 
the antitrust laws.''] and the power to do so.'' Sutherland at 5 & 
n.9. Likewise, ISDA states that a rule should reach only supply 
decisions involving intentional deceptive or anticompetitive conduct 
resulting in manipulated prices. ISDA at 17.
    By contrast, many commenters oppose any attempt to regulate 
supply decisions. ABA, Flint Hills, and API contend that regulation 
of supply decisions should be beyond the authority of Section 811. 
ABA at 6-7; API at 47. See also Flint Hills at 19 (``The idea that 
the Commission can regulate business decisions about how much 
petroleum to sell, to whom to sell it, and at what price is 
misguided and potentially dangerous.''); Plains at 2-3 (FTC should 
not impose a duty to supply). ABA asserts that the antitrust laws 
are the best vehicle for determining the circumstances in which 
unilateral supply decisions should be lawful or unlawful. ABA at 6-
7. Moreover, ABA, API, and Flint Hills suggest that it would be 
difficult for the Commission to regulate such complex supply 
decisions. ABA at 6-7; API at 43-44; Flint Hills at 20.
    Similarly, several commenters assert that the Commission should 
not regulate supply decisions after natural disasters or require 
firms to release inventory during price spikes. IER, Flint Hills, 
ABA, and API describe the need for markets to respond freely to 
natural disasters. IER at 8; Flint Hills at 21; ABA at 7; API at 42-
43. ABA and API note the aftermath of Hurricanes Katrina and Rita as 
an example of the petroleum industry's quick response to a product 
shortage after a natural disaster. They assert that high prices were 
short-lived due to the industry's quick response. ABA at 7 n.20; API 
at 42-43.
    \117\ Several commenters, API, AOPL, and Plains, oppose any rule 
imposing a duty to provide access to terminals or pipelines, because 
a terminal or common carrier pipeline operator may have legitimate 
business reasons for denying access to third parties, or because 
FERC already regulates such access and terms of access. API at 15 
n.26, 51-52; AOPL at 25-27; Plains at 3. By contrast, Navajo Nation 
contends that a denial of pipeline access or to ``exchange 
transportation'' can result in an artificial limitation on a crude 
producer's ability to reach refineries, which may depress prices, 
thereby reducing output and discouraging investment to expand crude 
production. Navajo Nation proposes that the Commission adopt a rule 
``prohibiting an owner-operator of an interstate pipeline from 
denying a request for either actual physical transportation or 
exchange transportation on the pipeline when the owner-operator or 
its affiliate is an actual or potential purchaser or consumer of the 
crude oil supplied by the requesting party,'' unless the owner-
operator can provide an enumerated defense. Navajo Nation at 5-7.
    \118\ Some commenters observe that the SEC has broad authority 
to regulate the sale of and trade in securities, including imposing 
disclosure requirements. They voice concern that, by basing the 
proposed Rule on Section 10(b) and Rule 10b-5, the Commission is 
adopting the SEC's disclosure requirements as well. Although the 
proposed Rule is based on SEC law, the Commission is invoking only 
the SEC's anti-fraud provisions, not the entire body of SEC law in 
the proposed Rule. In a similar vein, the Commission chooses not to 
include any record-keeping requirement in the proposed Rule. See, 
e.g., API at 20 (arguing that the Commission ``should not create new 
disclosure obligations similar to those imposed on securities market 
participants by SEC regulations'').
---------------------------------------------------------------------------

    The Commission seeks comments on the foregoing, and specifically on 
the use of the SEC 10b-5 Rule as a model for the conduct prohibitions 
in the proposed Rule.

E. Elements of Proof Under a Rule Promulgated Pursuant to EISA

    The Commission believes that clarifying the elements of a violation 
under the proposed Rule will reduce regulatory uncertainty and assure 
greater compliance. In doing so, the Commission has looked to SEC 
precedent for guidance in the application of the proposed Rule. The 
Commission has determined that it would not likely act except in cases 
where an entity: (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.
    These elements track the elements that courts have prescribed under 
SEC

[[Page 48328]]

Rule 10b-5.\119\ Specifically, in enforcement actions under Rule 10b-5, 
the SEC must show: (1) a material misrepresentation; (2) in connection 
with the purchase or sale of a security; (3) scienter; and (4) use of 
the jurisdictional means.\120\ The SEC does not need to prove investor 
reliance, loss causation, or damages (or harm)\121\ because ``the 
[SEC's] duty is to enforce the remedial and preventive terms of the 
statute in the public interest, and not merely to police those whose 
plain violations have already caused demonstrable loss or 
injury.''\122\
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    \119\ The elements are also similar to those that FERC adopted 
for its final market manipulation rule. See 71 FR at 4253.
    \120\ Geman v. SEC, 334 F.3d 1183, 1192 (10th Cir. 2003); SEC v. 
C. Jones & Co., 312 F. Supp. 2d 1375, 1379 (D. Colo. 2004); SEC v. 
Autocorp Equities, Inc., 292 F. Supp. 2d 1310, 1318 (D. Utah 2003); 
SEA, 10(b), 15 U.S.C. 78j(b); 17 CFR 240.10b-5.
    \121\ SEC v. Credit Bancorp, Ltd., 195 F. Supp. 2d 475, 490-91 
(S.D.N.Y. 2002) (citing SEC v. North Am. Research & Dev. Corp., 424 
F.2d 63, 84 (2d Cir. 1970)). See also SEC v. Todt, 2000 U.S. Dist. 
LEXIS 2087, at *27 (S.D.N.Y. Feb. 25, 2000), aff'd, 2001 U.S. App. 
LEXIS 6042 (2d Cir. 2001); SEC v. Norton, 1997 U.S. Dist. LEXIS 
15167, at * 9 n.2 (S.D.N.Y. Oct. 3, 1997); 71 FR 4244, 4253; 3 
Thomas Lee Hazen, Treatise on the Law of Securities Regulation 12.1 
(5th ed. 2005) (``[A] successful government prosecution does not 
depend on a showing the price was actually driven above or below the 
security's fair value. It is sufficient to establish that the 
manipulator engaged in conduct calculated to artificially affect the 
security's price. However, in the context of private suit, an actual 
effect on price must be shown.'' (emphasis added)).
    \122\ SEC v. Credit Bancorp, Ltd., 195 F. Supp. 2d at 491 
(quoting Berko v. SEC, 316 F.2d 137, 143 (2d Cir. 1963), and citing 
SEC v. North American Research & Dev. Corp., 424 F.2d 63, 84 (2d 
Cir. 1970) (reliance not an element of a Rule 10b-5 claim in the 
context of an SEC proceeding)). Similarly, the government need not 
demonstrate specific reliance by the investor in a criminal 
prosecution for securities fraud, although it must show that the 
scheme at issue had some impact on the investor. See United States 
v. Ashdown, 509 F.2d 793, 799 (5th Cir. 1975); United States v. 
Schaefer, 299 F.2d 625, 629 (7th Cir. 1962). Although reliance, loss 
causation, and damages are not necessary for a violation of the 
proposed Rule, the Commission, like FERC, has determined that these 
elements will inform the assessment of any remedies, such as 
disgorgement or civil penalties, that may be appropriate under the 
circumstances. See 71 FR at 4253 n.102.
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1. The first element is a showing of manipulative conduct
    Under the first element, the Commission would need to show a 
completed manipulative or deceptive act. A manipulative or deceptive 
act is one that injects information that is materially false, 
misleading, or deceptive into the marketplace. For example, providing 
information that is false or misleading to companies that report 
details of transactions to the industry, such as price reporting 
services, would satisfy this element. Uncompleted acts would not be 
sufficient, however. For example, preparing false or misleading data 
for a reporting service but not actually transmitting it would not 
likely satisfy this element. Preparing a public announcement containing 
false or misleading information about sales or available supplies -- 
but not actually making the announcement -- also would not likely 
satisfy this element.
2. The second element is a showing of scienter
    Under the second element, the Commission would need to show 
scienter.\123\ As discussed below, a scienter requirement parallels 
securities law precedent\124\ and would help to ensure that the 
proposed Rule does not chill competitive behavior. Several commenters 
support such a requirement.\125\
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    \123\ Although not explicitly in its rule, FERC included an 
intent requirement in its interpretation of its rule, noting that 
``[t]he final rule is not intended to regulate negligent practices 
or corporate mismanagement, but rather to deter or punish fraud in 
wholesale energy markets.'' 71 FR at 4245-4246. See also, e.g., 
SIGMA at 6 (asserting that any rule proposed under Section 811, like 
the FERC rule, ``cannot `regulate negligent practices or . . . 
mismanagement but rather [are meant] . . . to deter or punish 
fraud.''').
    \124\ Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 
2499, 2507 (June 21, 2007) (quoting Ernst & Ernst v. Hochfelder, 425 
U.S. 185, 193-194 & n.12 (1976)); Ernst & Ernst, 425 U.S. at 197. In 
Ernst & Ernst, the Court continued that the terms ```manipulative,' 
`device,' and `contrivance' . . . make unmistakable a congressional 
intent to proscribe a type of conduct quite different from 
negligence.'' Ernst & Ernst, 425 U.S. at 199. See also Schreiber v. 
Burlington Northern, Inc., 472 U.S. 1, 6-7 (1985); Santa Fe Indus., 
Inc. v. Green, 430 U.S. 462, 476 (1977). See, e.g., API at 28 
(stating that `manipulative' and `deceptive,' as found in SEA 
Section 10(b), are generally understood to denote conduct that is 
deliberately intended to deceive); ISDA at 7-8 (arguing that through 
Section 10(b), ``Congress intended to prohibit only knowing or 
intentional misconduct''); CFDR at 13 (arguing that Section 10(b) 
does not embrace a lesser standard than specific intent).
    \125\ See, e.g., API at 27 (urging the Commission to adopt a 
specific intent standard); CAPP at 3 (stating ``that intent or state 
of mind should be made an essential element of prohibited 
conduct''); ISDA at 7 (urging the Commission to require specific 
intent); CFDR at 7 (``Manipulation should require proof of 
intentionally or recklessly deceptive conduct.''); SIGMA at 3 
(stating that any Section 811 rule ``must have a strict scienter 
requirement''); Muris at 11 (``In any manipulation rule, the 
Commission should require specific intent . . . .''); PMAA at 4 
(encouraging the Commission to include a scienter requirement). But 
see, e.g., NPGA at 4-5 (arguing that the rule should not include a 
scienter requirement).
---------------------------------------------------------------------------

    As an initial matter, the conduct addressed by Section 811 -- use 
or employment of a manipulative or deceptive device or contrivance -- 
is substantially similar to the conduct prohibited by Section 10(b) of 
the SEA.\126\ The Supreme Court has determined that this Section 10(b) 
language connotes ``intentional or willful conduct that is designed to 
deceive or defraud,'' and has concluded, therefore, that a violation of 
SEA Section 10(b) and Rule 10b-5 requires scienter; that is, ``a mental 
state embracing intent to deceive, manipulate, or defraud.''\127\ As 
several commenters argue, SEA Section 10(b) provides the most directly 
relevant precedents for analyzing the market manipulation standard of 
Section 811.\128\
---------------------------------------------------------------------------

    \126\ See, e.g., SIGMA at 6 (``[T]he Commission's authority 
rests on identical language to that of [Section] 10(b) . . . .''); 
API at 17 (arguing that Section 811's prohibitive language is 
derived from Section 10(b)); CFDR at 3 (``[T]he language of Section 
811 is effectively identical to the anti-manipulation proscriptions 
found in Section 10(b) . . . .'').
    \127\ Tellabs, Inc., 127 S.Ct. at 2507 (quoting Ernst & Ernst, 
425 U.S. at 193-194 & n.12); accord e.g., API at 2, 28-29.
    \128\ Moreover, the legislative materials cited above support 
the view that when Congress enacted Section 811, it chose this 
language in order to encourage the Commission to incorporate the 
scienter requirement into any rule promulgated under Section 811. 
See, e.g., SIGMA at 4 (``As it regards [Section] 811 of EISA, 
Congress plainly chose language that it has previously used in the 
context of the securities laws, knowing that the Court implies such 
usage to connote a strict scienter requirement.''); ISDA at 7 (``In 
enacting Section 811 . . . Congress used the same language . . . 
that it has used in other contexts and that courts consistently have 
interpreted to require scienter . . . .''); API at 17-18 (arguing 
that Congress made a ``conscious decision to model Section 811'' on 
the precedents of Section 10(b) and the EPAct 2005).
---------------------------------------------------------------------------

    Moreover, the Commission believes a showing of recklessness would 
satisfy the scienter element.\129\ This proposal is consistent with the 
legal and regulatory precedent governing SEC Rule 10b-5. 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 10b-5] 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 degree of recklessness.''\130\
---------------------------------------------------------------------------

    \129\ Some commenters note that, although a recklessness 
standard makes sense in the highly regulated securities markets 
characterized by fiduciary duties imposed on brokers and issuers and 
by a variety of disclosure obligations, it should not suffice to 
satisfy the scienter requirement with respect to transactions in 
physical commodities markets such as petroleum wholesale markets 
that lack similar disclosure obligations and fiduciary duties. See, 
e.g. API at 30 (``Importing a `recklessness' standard from the 
highly regulated securities markets into unregulated petroleum 
wholesale markets would create new market uncertainty.''); ISDA at 9 
(stating that a recklessness standard ``is not appropriate in the 
wholesale, physical Petroleum Products markets . . . .''). See also, 
e.g., SIGMA at 5 (arguing that allowing recklessness to satisfy the 
scienter requirement of Section 811 would ``[make] the rule an open 
ended invitation to litigate any grievance'').
    \130\ Tellabs, Inc., 127 S. Ct. at 2507 n.3 (citing Ernst & 
Ernst, 425 U.S. at 194 n.12); Ottman v. Hunger Orthopedic Group, 
Inc., 353 F.3d 338, 343 (4th Cir. 2003) (collecting Court of Appeals 
cases). Note, however, the Supreme Court has reserved the question 
whether reckless behavior is, in fact, sufficient for civil 
liability under SEA Section 10(b) and Rule 10b-5. See Tellabs. Inc., 
127 S. Ct. at 2507 n.3.

---------------------------------------------------------------------------

[[Page 48329]]

    Indeed, the Courts of Appeals have adopted a number of different 
formulations as to precisely what constitutes recklessness. Thus, for 
example, the Court of Appeals for the Seventh Circuit has defined 
---------------------------------------------------------------------------
reckless conduct as a

     highly unreasonable [act or] omission, involving not merely 
simple, or even inexcusable negligence, but an extreme departure from 
the standards of ordinary care, and which presents a danger of 
misleading buyers or sellers that is either known to the defendant or 
is so obvious that the actor must have been aware of it.\131\
---------------------------------------------------------------------------

    \131\ Sundstrand Corp. v. Sun Chemical Corp., 553 F. 2d 1033, 
1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) (quoting 
Franke v. Midwestern Oklahoma Development Authority, CCH Fed. Sec. 
L. Rep. [*] 95,786 at 90,850 (W.D. Okl. 1976)).

    More recently, the Court of Appeals for the District of Columbia 
Circuit has relied upon Sundstrand Corp. to conclude that establishing 
recklessness requires evidence from which it can be reasonably inferred 
that the violator both acted with an extreme departure from standards 
of ordinary care and either knew or must have known that its conduct 
created a danger of misleading buyers or sellers.\132\ The Commission 
believes that a recklessness standard as articulated by the Seventh and 
District of Columbia Circuits would be adequate to establish scienter 
for any future violation.
---------------------------------------------------------------------------

    \132\ SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992) 
(citingSundstrand Corp., 553 F.2d at 1045).
---------------------------------------------------------------------------

3. The third element is that a person engage in conduct ``in connection 
with'' the purchase or sale of a covered commodity at wholesale
    Finally, under the third element, the Commission would need to show 
a nexus between the manipulative conduct and the purchase or sale of 
crude oil, gasoline, or petroleum distillates at wholesale. Guided by 
Supreme Court precedent in the securities area, the Commission 
interprets the phrase ``in connection with'' as requiring fraudulent 
conduct to coincide with a purchase or sale of crude oil, gasoline, or 
petroleum distillates at wholesale.\133\ At the same time, the 
Commission does not interpret the ``in connection with'' requirement so 
broadly as to turn every common law fraud that happens to touch a 
purchase or sale of a covered or uncovered petroleum product into a 
rule violation.\134\ Specifically, the proposed Rule would reach 
manipulative conduct that extends beyond the defined terms if that 
conduct directly or indirectly impacts wholesale prices for the covered 
products.
---------------------------------------------------------------------------

    \133\ 42 U.S.C. 17301. See SEC v. Zanford, 535 U.S. 813, 820 
(2002); Superintendent of Ins. of State of N.Y. v. Bankers Life & 
Cas. Co., 404 U.S. 6, 12-13 (1971) (holding that the ``in connection 
with'' requirement was met because the plaintiff had ``suffered an 
injury as a result of deceptive practices touching its sale of 
securities.''). See also Merrill Lynch, Pierce, Fenner & Smith, Inc. 
v. Dabit, 547 U.S. 71, 85 (2006) (``Moreover, when this court has 
sought to give meaning to the phrase [`in connection with'] in the 
context of [Section] 10(b) and Rule 10b-5, it has espoused a broad 
interpretation.'').
    \134\ See Zanford, 535 U.S. at 820.
---------------------------------------------------------------------------

    In response to the ANPR, some commenters urge the Commission not to 
apply the ``in connection with'' requirement to specific types of 
conduct. For example, CAPP suggests that the Commission not construe 
``in connection with'' to cover importing crude oil,\135\ while API 
argues that the Commission not construe ``in connection with'' to refer 
to supply decisions.\136\ Other commenters take the position that the 
Commission should interpret ``in connection with'' to exempt 
transactions not within the Commission's jurisdiction, specifically 
commodity trading, because those transactions, they assert, are within 
the exclusive jurisdiction of the CFTC.\137\
---------------------------------------------------------------------------

    \135\ CAPP at 4. Other commenters raise questions that relate 
more to wholesale purchase and sale transactions. See, e.g. API at 
26-27 (asserting that Section 811 should not apply to over-the-
counter derivatives contracts); Hess at 10-11 (arguing that futures 
and over-the-counter markets should not be regulated by the 
Commission); ISDA at 5 (stating that a Commission market 
manipulation rule should not apply to futures transactions); PMAA at 
4-5 (arguing that regulations should not apply to ``participants or 
activities'' that occur below the rack).
    \136\ API at 25 (asserting that ``Section 811 . . . should not 
apply to supply decisions that are unconnected to [wholesale 
petroleum transactions]''). API lists various supply decisions it 
does not believe should be covered under the ``in connection with'' 
requirement, including: ``refining decisions, facility maintenance 
and upgrades, [and] the management of inventory levels.'' API at 25-
26.
    \137\ MFA at 6-12; CFDR at 6 n.4; Hess at 12 n.10; CFTC at 1-2; 
API at 3, 26-27; ISDA at 5 n.9. These comments are addressed above 
in Section II.B.
---------------------------------------------------------------------------

    The Commission disagrees. The Commission may enforce the proposed 
Rule if the conduct directly or indirectly affects a covered wholesale 
petroleum transaction within the Commissions's jurisdiction -- in this 
matter, a purchase or sale of crude oil, gasoline, or petroleum 
distillates. Therefore, any conduct that is done in connection with the 
wholesale purchase or sale of a covered or uncovered product -- 
including importing covered or uncovered products and making supply 
decisions related to covered or uncovered products -- could be subject 
to the proposed Rule.
4. A showing of price effects is not an element of a cause of action
    The Commission does not intend to require proof of effects as an 
element of a cause of action. First, a plain reading of EISA does not 
require such proof. Section 811 prohibits the ``use or employment'' of 
any manipulative or deceptive device or contrivance.\138\ The proposed 
Rule would be violated at the stage when the actor uses or employs a 
manipulative or deceptive device or contrivance -- whether or not those 
actions can be shown to result in discernible price effects. Nothing in 
the statute or proposed Rule suggests that manipulative or deceptive 
conduct must result in identifiable price effects before such conduct 
is culpable.\139\
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    \138\ The enabling statute is clear: ``It is unlawful . . . to 
use or employ . . . any manipulative or deceptive device or 
contrivance.'' 42 U.S.C. 17301.
    \139\ Not requiring proof of effects as an element is consistent 
with precedent established under SEC Rule 10b-5. See generally 
United States v. Smith, 155 F.3d 1051, 1063 (9th Cir. 1988); see 
also SEC v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996).
---------------------------------------------------------------------------

    Second, there is no economic justification for fraud or deception 
in an exchange economy. Thus, harm to the market can be inferred. 
Fraudulent behavior interferes with market signals, reduces 
transparency in the market, and casts into doubt the very information 
that allows markets to function properly.\140\ There is no need to 
determine separately whether there is evidence of harm; therefore, 
requiring proof of price effects is unnecessary.\141\
---------------------------------------------------------------------------

    \140\ See United States v. Hall, 48 F. Supp. 2d 386, 387 
(S.D.N.Y. 1999) (``Whether the price of a stock is `artificial' does 
not turn on whether the stock is trading above or below its `true 
worth.' Rather, the trading price of a stock is determined by 
available information and market forces, and a stock is trading at 
an `artificial level' when it is trading at a level above what 
market forces would otherwise dictate.''). See also CAPP 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 at 1 (``Price manipulation has a 
corrosive effect on the proper functioning of any market.'').
    \141\ While the Commission does not intend to require 
discernible price effects as an element of a rule violation, it 
will, nevertheless, consider the extent of any price effects or 
other harm resulting from the market manipulation in assessing a 
civil penalty.
---------------------------------------------------------------------------

    Third, the Commission believes that requiring a showing of price 
effects raises an unnecessary risk of regulatory error. Prices of 
commodity products such as petroleum are inherently volatile and are a 
function of many factors.\142\ The Commission's

[[Page 48330]]

experience in investigating petroleum pricing anomalies demonstrates 
the difficulty of identifying price changes that result directly from 
any specific act or conduct.\143\
---------------------------------------------------------------------------

    \142\ See, e.g., API at 53 (stating that the artificial price 
concept is difficult to apply to petroleum markets because petroleum 
markets, in contrast to futures markets, use many non-standardized 
contracts); ISDA at 15-16 (stating that the artificial price 
standard ``has proven to be very difficult to understand and apply 
in practice'').
    \143\ The practical difficulty in discerning accurately what 
constitutes an artificial price is discussed by the ABA. ABA at 7 
(``[D]etermining what supply allocations and price levels would most 
benefit consumers over the long run would be impossible for the FTC 
or any regulator in this complex industry.''); see also IER at 4 
(arguing that regulators should not second-guess the decisions of 
market participants in the petroleum industry because it could lead 
to ``an inefficient amount of risk-taking among producers.''); Muris 
at 8 (``Judgments about the `right' mix of sales and distribution 
are beyond the capacity of any individual or organization to make 
accurately. That, of course, is why our economy relies on markets to 
make such decisions, and on the profit motive to guide the behavior 
of individual firms.'').
---------------------------------------------------------------------------

    Finally, the Commission believes that the scienter requirement, in 
addition to proof of an overt act, should provide sufficient safeguards 
against overbreadth.\144\ Consequently, the Commission believes the 
proposed Rule addresses commenters' concerns that, absent an effects 
requirement, any rule would be overbroad and interfere with pricing 
signals.\145\ The Commission seeks comment on the foregoing, including 
in particular whether its articulation of the appropriate elements of a 
cause of action under the Rule furthers the goals of EISA and the 
proposed Rule.
---------------------------------------------------------------------------

    \144\ Proof of an overt manipulative or deceptive act together 
with proof of requisite intent provide sufficient safeguards against 
both regulatory overreach and judicial error.
    \145\ See Flint Hills at 19 (stating that a market economy 
relies on prices and profit motive to allocate resources 
efficiently; thus, regulators must allow market participants to 
respond to market signals when making production and product 
allocation decisions without ``fear of being second guessed''); 
Muris at 9 (``One way to reduce the risk of errors is to require a 
showing of (1) an effect on price . . . .''); API at 31 (``Applying 
Section 811 to conduct that does not cause a material deviation in 
market prices would unduly expand the FTC's regulatory oversight and 
would likely harm consumer welfare in the long run by chilling 
competitive market behavior, thereby potentially increasing 
prices.'').
---------------------------------------------------------------------------

F. Section 317.4: Preemption

    Section 815(c) of EISA states that ``[n]othing in this subtitle 
preempts any State law.''\146\ To give effect to that provision, 
Section 317.4 of the proposed Rule contains a standard preemption 
provision, making clear that the Commission does not intend to preempt 
the laws of any state or local government, except to the extent of any 
conflict. Section 317.4 also explains that there is no conflict between 
federal and state and local law, and therefore no preemption, if such 
state or local law affords equal or greater protection from the 
manipulative conduct prohibited by the proposed Rule.\147\
---------------------------------------------------------------------------

    \146\ 42 U.S.C. 17305.
    \147\ See, e.g., Disclosure Requirements and Prohibitions 
Concerning Franchising, 16 CFR 436.10(b); Disclosure Requirements 
and Prohibitions Concerning Business Opportunities, 16 CFR 437 n.2.
---------------------------------------------------------------------------

G. Section 317.5: Severability

    Section 317.5 of the proposed Rule contains a standard severability 
provision. This provision makes clear that, if any part of the Rule is 
held invalid by a court, the remainder of the Rule will still be in 
effect.\148\
---------------------------------------------------------------------------

    \148\ See, e.g., Telemarketing Sales Rule, 16 CFR 310.9; Used 
Motor Vehicle Trade Regulation Rule, 16 CFR 455.7.
---------------------------------------------------------------------------

H. Invitation to Comment and Advance Notice of Workshop

    All persons are hereby given notice of the opportunity to submit 
written data, views, facts, and arguments addressing the issues raised 
in this NPRM. All comments should be filed as prescribed in the 
ADDRESSES Section above, and must be received by September 18, 2008. In 
addition, the Commission anticipates that it may be advantageous to 
hold a public workshop to discuss in greater detail the written 
comments submitted by the public in response to the NPRM, and, in 
particular, any areas of significant controversy or divergent opinion 
that may arise from the comments. In order to be eligible to 
participate in a workshop, should one be held, a person must submit a 
comment in response to this NPRM. If it is determined that a workshop 
is necessary, details about the event will be announced in a press 
release and be available at (http://www.ftc.gov/ftc/oilgas/index.html).

I. Communications by Outside Parties to the Commissioners or Their 
Advisors

    Written communications and summaries or transcripts of oral 
communications respecting the merits of this proceeding from any 
outside party to any Commissioner or Commissioner's advisor will be 
placed on the public record.\149\
---------------------------------------------------------------------------

    \149\ See 16 CFR 1.26(b)(5).
---------------------------------------------------------------------------

J. Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 (``RFA'')\150\ generally 
requires a description and analysis of proposed and final rules that 
will have significant economic impact on a substantial number of small 
entities. The RFA requires an agency to provide an Initial Regulatory 
Flexibility Analysis (``IRFA'')\151\ with a proposed Rule and a Final 
Regulatory Flexibility Analysis (``FRFA'')\152\ with the final rule, if 
any. The Commission is not required to make such analyses if a rule 
would not have such an effect.\153\
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    \150\ 5 U.S.C. 601-612.
    \151\ 5 U.S.C. 603.
    \152\ 5 U.S.C. 604.
    \153\ 5 U.S.C. 605.
---------------------------------------------------------------------------

    Although the scope of the proposed Rule may reach a substantial 
number of small entities as defined in the RFA, the Commission does not 
believe that the proposed Rule will have a significant economic impact 
on those businesses.\154\ The Commission specifically requested 
comments on the economic impact of a proposed Rule and received 
none.\155\ Given that there are no reporting requirements, document or 
data retention provisions, or any other affirmative duties imposed, it 
is unlikely that the proposed Rule imposes costs to comply beyond 
standard costs associated with ensuring that behavior and statements 
are not manipulative or deceptive. Therefore, the Commission believes 
that the proposed Rule, if finalized, will not have a significant 
economic impact on a substantial number of small entities. 
Notwithstanding this belief, the Commission provides a full IRFA 
analysis to aid in its solicitation for comments on this topic.
---------------------------------------------------------------------------

    \154\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. 15 
U.S.C. 632.
    \155\ 73 FR at 25624.
---------------------------------------------------------------------------

1. Description of the reasons that action by the agency is being 
considered
    Section 811 grants the Commission the authority to promulgate a 
rule that ``is necessary or appropriate in the public interest or for 
the protection of United States citizens.''\156\ As discussed above, 
the Commission believes that promulgating the proposed Rule is 
appropriate to prevent manipulative practices affecting wholesale 
markets for petroleum products and the Commission has tailored its 
proposed Rule specifically to reach manipulative behavior that likely 
impacts those commodities described in Section 811.
---------------------------------------------------------------------------

    \156\ 42 U.S.C. 17301.
---------------------------------------------------------------------------

2. Succinct statement of the objectives of, and the legal basis for, 
the proposed Rule
    The legal basis of the proposed Rule is Section 811 of EISA, which 
makes illegal manipulative and deceptive conduct in the purchase or 
sale of petroleum products at wholesale in

[[Page 48331]]

contravention of rules, if any, that the Commission may promulgate. The 
proposed Rule is intended to define the conduct that the law 
proscribes. If adopted, such rule will supplement the Commission's 
existing antitrust and consumer protection law enforcement tools.
3. Description of, and where feasible, estimate of the number of small 
entities to which the proposed Rule will apply
    The proposed Rule applies to entities engaging in the purchase or 
sale of crude oil, gasoline, and petroleum distillates. These 
potentially include petroleum refiners, blenders, wholesalers and 
dealers (including terminal operators that sell covered commodities). 
Although many of these entities are large international and domestic 
corporations, the Commission believes that a number of these covered 
entities may fall into the category of small entities.\157\ According 
to the SBA size standards, and utilizing SBA source data, the 
Commission estimates that between approximately 1700 and 5200 covered 
entities would be classified as ``small entities.''\158\
---------------------------------------------------------------------------

    \157\ Directly covered entities under this proposed Rule are 
classified as small businesses under the Small Business Size 
Standards component of the North American Industry Classification 
System (``NAICS'') if they are: petroleum refiners (NAICS code 
324110) with no more than 1,500 employees nor greater than 125,000 
barrels per calendar day Operable Atmospheric Crude Oil Distillation 
capacity; petroleum bulk stations and terminals (NAICS code 424710) 
with no more than 100 employees; or petroleum and petroleum products 
merchant wholesalers (except bulk stations and terminals (NAICS code 
424720) with no more than 100 employees. See U.S. Small Business 
Administration, Table of Small Business Size Standards Matched to 
North American Industry Classification System Codes (Mar. 11, 2008), 
available at (http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf).
    \158\ The SBA publication that provides data on number of firms 
and number of employees by firm does not provide sufficient 
precision to gauge accurately the number of small business that may 
be impacted by the proposed Rule. The data are provided in 
increments of 1-4 employees, fewer than 20 employees and fewer than 
500 employees. Small Business Administration, Employer Firms, & 
Employment by Employment Size of Firm by NAICS Codes, 2005, 
available at (http://www.sba.gov/advo/research/us05_n6.pdf). Thus 
for the 177 petroleum refiners listed, 139 show that they have less 
than 500 employees. Although the Commission is unaware of more than 
5 refiners with less than 125,000 barrels of crude distillation 
capacity, the data may be kept by refinery, rather than refiner. 
Similar problems exist for the bulk terminal and bulk wholesale 
categories listed above, in which the relevant small business cut 
off is greater than 100 employees. Thus, the range of ``small'' 
entities appears unreliable and the Commission seeks comment or 
information providing better data.
---------------------------------------------------------------------------

    The scope of the proposed Rule could be broader depending on 
whether illegal manipulative conduct impacts covered commodities 
directly or other commodities with the effect of impacting the covered 
commodities contemplated by the proposed Rule. The Commission seeks 
comments on whether the proposed Rule may reach other small entities 
and what economic impact, if any, the proposed Rule would have on those 
entities.
4. Projected reporting, record-keeping, and other compliance 
requirements, including an estimate of the classes of small entities 
that will be subject to the requirement and the type of professional 
skills necessary for preparation of the report or record
    The Commission does not propose, and the proposed Rule does not 
contain, any requirement that covered entities create, retain, submit, 
or disclose any information. Accordingly, the proposed Rule will impose 
no new record-keeping or related data retention and maintenance or 
disclosure requirements on any covered entity, including small 
entities. The Commission has not identified additional costs necessary 
to comply with the proposed Rule beyond existing costs associated with 
behaving in a nondeceptive, truthful manner. The Commission seeks 
comments on whether the proposed Rule imposes costs on any covered 
entities including a description of specific costs and estimates of the 
magnitude of those costs.
5. Other duplicative, overlapping, or conflicting federal rules
    As discussed previously, other federal agencies have regulatory 
authority to prohibit in whole or in part manipulative and deceptive 
practices involving petroleum products. The SEC has authority to stop 
manipulative and deceptive practices involving the securities and 
securities offerings of companies involved in the petroleum industry. 
The CFTC also has authority to bring an action against any person who 
is manipulating or attempting to manipulate the petroleum futures 
markets.\159\
---------------------------------------------------------------------------

    \159\ Commenters such as MFA specifically argue that the 
proposed Rule should have a safe harbor provision or other explicit 
exemption for the futures markets in order to avoid an overlap with 
the CFTC's jurisdiction under Section 2 of the CEA. MFA at 5. 
According to commenters, including the CFTC, such an overlap would 
create potentially duplicative or inconsistent regulatory 
requirements, thus undermining uniform regulatory scheme that 
Congress sought to establish for the futures markets under the CEA. 
See, e.g., CFTC at 1-2; API at 14, 16, 27; Flint Hills at 12; Hess 
at 12 n.10; NPGA at 2 (``A flawed regulatory scheme may result in 
reporting requirements being duplicative, standards and definitions 
of proscribed behavior being inconsistent . . . .''); MFA at 13-14 
(arguing that any proposed rule should not reach futures trading 
activities regulated by the CFTC). Several other commenters express 
concern that even if the Commission could avoid inconsistent 
regulatory requirements, market participants would still be unfairly 
burdened by duplicative enforcement. See Flint Hills at 14; Hess at 
12; NPGA at 2.
---------------------------------------------------------------------------

    As explained in Section II.B, above, the proposed Rule is not 
intended to impose contradictory requirements on regulated entities in 
the futures markets or otherwise. To the extent, if any, that the 
proposed Rule's requirements could duplicate requirements already 
established by other agencies for such markets, the proposed Rule 
should not impose any additional compliance costs. Although the 
Commission acknowledges that different agencies could simultaneously 
initiate enforcement action with respect to the same activities, the 
Commission has had a longstanding practice of coordinating its 
enforcement efforts with agencies that have overlapping 
jurisdiction.\160\ The Commission expects to continue that practice 
here, as feasible and appropriate, to ensure fairness to regulated 
entities and to conserve enforcement resources and maximize agency 
efficiency.\161\ However, the Commission is requesting comment on the 
extent to which other federal standards on manipulation may duplicate, 
satisfy, or inform the proposed Rule's requirements. In addition, the 
Commission seeks comment and information about any statutes or rules 
that may conflict with the proposed requirements, as well as any other 
state, local, or industry rules or policies that require covered 
entities to implement practices that comport with the requirements of 
the proposed Rule.
---------------------------------------------------------------------------

    \160\ One commenter warned that poor coordination between the 
Commission and other agencies could lead to a situation wherein 
``multiple agencies may pursue certain potential violations, while 
other violations are left unchecked because each oversight agency 
expects or desires another to take the appropriate action.'' NPGA at 
2. To prevent such pitfalls of regulatory overlap, NPGA encouraged 
the issuance of an Executive Order that clearly draws lines of 
jurisdiction among agencies. Id. at 3.
    \161\ See Section II.B (and footnotes therein) for a discussion 
of concerns raised by commenters about potentially duplicative or 
inconsistent regulatory requirements.

---------------------------------------------------------------------------

[[Page 48332]]

6. Description of any significant alternatives to the proposed Rule 
that would accomplish the stated objectives of applicable statutes and 
that minimize any significant economic impact of the proposed Rule on 
small entities, including alternatives considered, such as: (1) 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) clarification, consolidation, or simplification of 
compliance and reporting requirements under the rule for such small 
entities; and (3) any exemption from coverage of the rule, or any part 
thereof, for such small entities
    The proposed Rule is narrowly tailored to reduce compliance burdens 
on covered entities, regardless of size. In formulating the proposed 
Rule, the Commission has taken several significant steps to minimize 
potential burdens. Most significantly, the proposed Rule focuses on 
preventing manipulation and deception in wholesale petroleum markets. 
The Commission has declined to include specific conduct or duty 
requirements, such as a duty to supply product or a duty to provide 
access to pipelines and terminals. In addition, the proposed Rule makes 
clear that covered entities need not disclose price, volume, and other 
data to the market. Finally, the proposed Rule contains no record-
keeping requirement.
    While the Commission believes that the proposed Rule imposes no 
unique compliance costs, it nonetheless requests comment on this issue, 
in particular, whether the proposed Rule's prohibited practices impose 
a significant impact upon a substantial number of small entities, and 
what modifications to the Rule the Commission should consider to 
minimize the burden on small entities.
7. Questions for comment to assist regulatory flexibility analysis
    The Commission requests commenters to provide information as to the 
potential scope and economic impact of the proposed Rule so that the 
Commission may better assess the economic impact of the language of any 
final rule if it determines to promulgate such rule. Specifically, the 
Commission requests comment on:
    a. the number and type of small entities affected by the proposed 
Rule;
    b. any or all of the provisions in the proposed Rule with regard 
to: (i) the impact of the provision(s) (including benefits and costs to 
implement and comply with the Rule or Rule provision), if any; (ii) 
what alternatives, if any, the Commission should consider, as well as 
the costs and benefits of those alternatives, paying specific attention 
to the effect of the proposed Rule on small entities;
    c. ways in which the proposed Rule could be modified to reduce any 
costs or burdens on small entities, including whether and how 
technological developments could further reduce the costs of 
implementing and complying with the proposed Rule for small entities;
    d. any information quantifying the economic costs and benefits of 
the proposed Rule on the entities covered, including small entities; 
and
    e. the identity of any relevant federal, state, or local rules that 
may duplicate, overlap, or conflict with the proposed Rule.

K. Paperwork Reduction Act

    The Commission does not contemplate requiring any entity covered by 
the Rule to create, retain, or submit any data. Accordingly, the 
proposed Rule does not include any new information collection 
requirements under the provisions of the Paperwork Reduction Act of 
1995 (``PRA'').\162\
---------------------------------------------------------------------------

    \162\ 44 U.S.C. 3501-3521. Under the PRA, federal agencies must 
obtain approval from OMB for each collection of information they 
conduct or sponsor. ``Collection of information'' means agency 
requests or requirements that members of the public submit reports, 
keep records, or provide information to a third party. 44 U.S.C. 
3502(3).
---------------------------------------------------------------------------

    In the ANPR, the Commission solicited comment on whether covered 
entities should report market data, such as cost and volume data for 
wholesale transactions.\163\ In response, one commenter notes that 
Section 812 already addresses the making of false reports and should 
not be construed as giving the Commission authority to impose new 
reporting requirements.\164\
---------------------------------------------------------------------------

    \163\ 73 FR at 25622.
    \164\ ISDA at 16 (``Neither Section 811 nor Section 812 of the 
EISA authorizes the Commission to impose new reporting 
requirements.''). See, e.g., CFDR at 16 (``The Commission should not 
promulgate a rule that purports to impose disclosure obligations on 
market participants where no disclosure obligations otherwise exist 
under current law.''); API at 52. But see, e.g., PMAA at 8-9 
(stating that the Commission has authority under Section 811 to 
impose new reporting requirements); NPGA at 3 (``The authority to 
mandate the maintenance and submission of [information regarding 
wholesale petroleum transactions] is inherent in the EISA 
prohibitions against manipulative activities in Section 811 and the 
reporting of false information to Federal authorities in Section 
812.'').
---------------------------------------------------------------------------

    The Commission has determined that a record retention or submission 
requirement is not necessary or appropriate at this time. However, the 
Commission's experience with any final rule that may be adopted under 
Section 811 or pursuant to its investigative and enforcement role under 
Section 812 may suggest a particular need to require firms to create or 
maintain particular information.\165\ If such a need arises, the 
Commission may, in the future, adopt such rules as necessary or 
appropriate in the public interest or for the protection of United 
States citizens.
---------------------------------------------------------------------------

    \165\ Platts at 3 (taking no position on reporting to government 
agencies, but ``strongly endors[ing] any efforts to make more data 
available on an equal basis to all market participants'').
---------------------------------------------------------------------------

L. Request for Comments

    The Commission seeks comment on various aspects of the proposed 
Rule. Without limiting the scope of issues on which it seeks comment, 
the Commission is particularly interested in receiving comments on the 
questions that follow. In responding to these questions, include 
detailed, factual supporting information whenever possible.
1. General Questions for Comment
    Please provide comment on each proposed aspect of the proposed 
Rule. Regarding each proposed provision commented on, please include 
answers to the following questions.
    a. What is the effect (including any benefits and costs), if any, 
on consumers?
    b. What is the impact (including any benefits and costs), if any, 
on individual firms that must comply with the proposed Rule?
    c. What is the impact (including any benefits and costs), if any, 
on industry?
    d. What changes, if any, should be made to the proposed Rule to 
eliminate any unnecessary cost to industry or consumers?
    e. How would the proposed Rule affect small business entities with 
respect to costs, profitability, competitiveness, and employment?
2. Questions on Proposed Specific Provisions
    Rulemaking Standard

    a. Is the Commission's determination that the proposed Rule meets 
the rulemaking standard -- that the rule is ``necessary or appropriate 
in the public interest or for the protection of United States 
citizens'' -- correct? In what way is the proposed Rule necessary or 
appropriate? In what way does the proposed Rule fail to be necessary or 
appropriate?

    Section 317.1 -- Scope

    b. The Commission did not provide for safe harbors or exemptions 
from the

[[Page 48333]]

proposed Rule. Should there be safe harbors or exemptions? If so, what 
should they be? To what should they apply; that is, what types of acts 
or practices should constitute a safe harbor? Why should that be so? 
What types of acts or practices should be exempt? Why should that be 
so?

    Section 317.2 -- Definitions

    c. Do the proposed definitions adequately describe the scope of the 
proposed Rule's coverage? If not, how should they be modified? Are the 
proposed definitions accurate? Are there alternative definitions that 
the Commission should consider? Should additional terms be defined, 
and, if so, how? What would be the costs and benefits of each suggested 
definition?

    Section 317.3 -- Prohibited Practices

    d. The proposed Rule uses SEC Rule 10b-5 as a model. Will the Rule 
10b-5 model function properly with respect to wholesale petroleum 
markets? If not, why not? What alternative approach could be used? If 
an alternative approach or model could be used here, what would be the 
costs and benefits of using an alternative approach or model?
    e. The proposed Rule targets practices that act as a fraud or 
deceit. Has the Commission adequately delineated such practices? If 
not, why not? Is there a list of practices that should be covered by 
the proposed Rule? If so, what are they and why should they be 
included? Are there practices that should be excluded from the proposed 
Rule? If so, what are they and why should they be excluded?
    f. Has the proposed Rule sufficiently laid out any affirmative 
duties or other obligations upon entities covered under the proposed 
Rule? If not, why not?
    g. Section 317.3(a) of the proposed Rule prohibits the use or 
employment of any ``device, scheme, or artifice to defraud.'' Is this 
language sufficiently broad enough to enable the Commission to police 
all forms of fraud and manipulation that affect wholesale petroleum 
markets? If not, why not? How could the proposed Rule be modified to 
ensure that all forms of devices, schemes, or artifices to defraud are 
covered?
    h. Section 317.3(b) of the proposed Rule prohibits covered entities 
from misrepresenting, and in some instances from omitting, material 
information in wholesale petroleum markets. Is this prohibition 
adequate to enable the Commission to deter and punish persons who 
intentionally provide false or misleading information to government 
agencies, third-party reporting services, or the public through 
corporate announcements? Why or why not? Does the proposed Rule need to 
be modified in anyway to better address any misrepresentations or 
omissions, and if so, what should those modifications be?
    i. What factors should the Commission consider in weighing whether, 
once an announcement is made by a person subject to the proposed Rule, 
an affirmative obligation may then exist to provide full and complete 
disclosure?
    j. Section 317.3(b) prohibits omissions of material fact that are 
necessary to ensure that a previously made statement is not misleading. 
Will this provision address the harms that may occur in the reporting 
of information in the wholesale petroleum industry? If not, why not and 
how could the proposed Rule be modified to better address such harms?
    k. Section 317.3(c) of the proposed Rule prohibits any act, 
practice, or course of business that ``operates or would operate as a 
fraud or deceit.'' Will this sub-section be useful to the FTC as a 
``catch-all'' provision that captures fraud on wholesale petroleum 
markets? If not, why not? Is this provision, in light of the inclusion 
of the more specific anti-fraud provision in proposed Rule Section 
317.3(a)? If not, why not?
    l. Does the Rule's prohibition on manipulative or deceptive conduct 
promote well-functioning market processes ``in connection with the 
purchase or sale of crude oil, gasoline, or petroleum distillates at 
wholesale''? If so, why not?
    m. Does the proposed Rule have sound bases in economic policy for 
prohibiting manipulative and deceptive conduct? Why or why not?
    n. Do additional factual predicates exist to support a basis for 
the proposed Rule to fill a gap in Commission jurisdiction under 
Section 5 of the FTC Act or to support extending Commission authority 
beyond the scope of Section 5 of the FTC Act? If so, describe such 
factual predicates.
    o. Should the Commission consider any affirmative defenses to rule 
violations? If so, what affirmative defenses should the Commission 
consider and how can those defenses be justified?
    p. Is the proposed Rule's basis for requiring a showing of scienter 
as an element of proof sound? Should a scienter requirement be part of 
the text of Section 317.3 of the proposed Rule? Is the Commission's 
tentative determination that both intentional and reckless conduct may 
satisfy the scienter requirement appropriate? Why or why not?
    q. The Commission tentatively has concluded that the ``in 
connection with'' language in the proposed Rule would reach 
manipulative conduct that extends beyond the defined terms (e.g., crude 
oil, gasoline, petroleum distillates) if that conduct directly or 
indirectly impacts wholesale prices for the covered products. What 
would be the advantage (disadvantage) of this approach and why?
    r. Should the proposed Rule be available to challenge ``attempted 
manipulation,'' defined as uncompleted fraudulent or deceptive conduct? 
Are there advantages to this approach and why? Are there disadvantages 
to this approach and why? Are there examples of ``attempted 
manipulation'' that should be covered by the proposed Rule? If so, what 
are they and why should they be covered?
    s. The Commission tentatively has concluded that liability should 
not require proof of price effects. What would be the advantage 
(disadvantage) of requiring proof of price effects?
    t. The Commission tentatively has determined that a record 
retention or submission requirement is not necessary or appropriate at 
this time. Are there records that the Commission should, in fact, 
require companies to retain or submit? If so, what types of records 
should be retained or submitted and why?

    Section 317.4 -- Preemption

    u. The Commission has determined that the proposed Rule should not 
preempt the laws of any state or local government, except to the extent 
that any such law conflicts with this proposed Rule. What impact is 
this approach likely to have upon the industry? Individual companies? 
Consumers?

    Regulatory Flexibility Act

    v. Is the Commission estimate that between approximately 1700 and 
5200 ``small entities'' will be covered by the proposed Rule accurate? 
Why or why not?
    w. The proposed Rule does not contain any requirement that covered 
entities create, retain, submit, or disclose any information. Is the 
Commission correct in its determination that, accordingly, the proposed 
Rule will impose no record-keeping or related data retention and 
maintenance or disclosure requirements on any covered entity, including 
small entities? Why or why not?
    x. Identify any statutes or rules that may conflict with the 
proposed Rule requirements, as well as any other state,

[[Page 48334]]

local, or industry rules or policies that require covered entities to 
implement practices that comport with the requirements of the proposed 
Rule.
    y. Do the prohibited practices in the proposed Rule impose a 
significant impact upon a substantial number of small entities? If so, 
what modifications to the proposed Rule should the Commission consider 
to minimize the burden on small entities?

List of Subjects in 16 CFR Part 317

    Trade practices.

0
Accordingly, for the reasons set forth in the preamble, the Commission 
proposes to amend Title 16, Chapter 1, Subchapter C of the Code of 
Federal Regulations by adding Part 317 to read as follows:

PART 317--PROHIBITION OF ENERGY MARKET MANIPULATION RULE

Sec.
317.1 Scope.
317.2 Definitions.
317.3 Prohibited practices.
317.4 Preemption.
317.5 Severability.

    Authority: 42 U.S.C. 17301-17305; 15 U.S.C. 41-58.


Sec.  317.1  Scope.

    This part implements Subtitle B of Title VIII of The Energy 
Independence and Security Act of 2007 (``EISA''), Pub. L. 110-140, 121 
Stat. 1723 (December 19, 2007), codified at 42 U.S.C. 17301-17305. This 
rule applies to any person over which the Federal Trade Commission has 
jurisdiction under the Federal Trade Commission Act, 15 U.S.C. 41 et 
seq.


Sec.  317.2  Definitions.

    The following definitions shall apply throughout this rule:
    (a) Crude oil means the mixture of hydrocarbons that exist:
    (1) in liquid phase in natural underground reservoirs and which 
remain liquid at atmospheric pressure after passing through separating 
facilities, or
    (2) as shale oil or tar sands requiring further processing for sale 
as a refinery feedstock.
    (b) Gasoline means
    (1) finished gasoline, including, but not limited to, conventional, 
reformulated, and oxygenated blends, and
    (2) conventional and reformulated gasoline blendstock for oxygenate 
blending.
    (c) Person means any individual, group, unincorporated association, 
limited or general partnership, corporation, or other business entity.
    (d) Petroleum distillates means
    (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.
    (e) Wholesale means purchases or sales at the terminal rack level 
or upstream of the terminal rack level. Transactions conducted at 
wholesale do not include retail gasoline sales to consumers.


Sec.  317.3  Prohibited practices.

    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 business that 
operates or would operate as a fraud or deceit upon any person.


Sec.  317.4  Preemption.

    The Federal Trade Commission does not intend, through the 
promulgation of this Rule, to preempt the laws of any state or local 
government, except to the extent that any such law conflicts with this 
Rule. A law is not in conflict with this Rule if it affords equal or 
greater protection from the use or employment, directly or indirectly, 
of any deceptive or manipulative device or contrivance, in connection 
with the purchase or sale of crude oil, gasoline, or petroleum 
distillates at wholesale.


Sec.  317.5  Severability.

    The provisions of this Rule are separate and severable from one 
another. If any provision is stayed or determined to be invalid, it is 
the Commission's intention that the remaining provisions shall continue 
in effect.
    By direction of the Commission.

Donald S. Clark,
Secretary.

    Note: The following attachment will not appear in the Code of 
Federal Regulations.

Attachment A

ANPR Commenters

American Bar Association/Section of Antitrust Law (``ABA'')
Association of Oil Pipe Lines (``AOPL'')
American Petroleum Institute and the National Petrochemical and 
Refiners Association (``API'')
Patrick Barrett (``Barrett'')
Lawrence Barton (``Barton'')
Dave Beedle (``Beedle'')
Stanley Bergkamp (``Bergkamp'')
Louis Berman (``Berman'')
Bezdek Associates, Engineers PLLC (``Bezdek'')
Katherine Bibish (``Bibish'')
John Booke (``Booke'')
Bradley (``Bradley'')
Jeremy Bradley (``J. Bradley'')
Charles Bradt (``Bradt'')
Wendell Branham (``Branham'')
Lorraine Bremer (``Bremer'')
Gloria Briscolino (``Briscolino'')
Rick Brownstein (``Brownstein'')
Byrum (``Byrum'')
Canadian Association of Petroleum Producers (``CAPP'')
Jeff Carlson (``Carlson'')
Jacquelynne Catania (``Catania'')
Marie Cathey (``Cathey'')
New York City Bar Committee on Futures & Derivatives Regulation 
(``CFDR'')
U.S. Commodities Futures Trading Commission (``CFTC'')
Manuel Chavez (``Chavez'')
Michael Chudzik (``Chudzik'')
D. Church (``Church'')
Earl Clemons (``Clemons'')
Dan Clifton (``Clifton'')
Kim Cruz (``Cruz'')
Jerry Davidson (``Davidson'')
Don Deresz (``Deresz'')
Charlene Dermond (``Dermond'')
Kimberly DiPenta (``DiPenta'')
Penny Donaly (``Donaly1'')
Penny Donaly (``Donaly2'')
Penny Donaly (``Donaly3'')
Penny Donaly (``Donaly4'')
Harold Ducote (``Ducote'')
Deep River Group, Inc. (``DRG'')
Mary Dunaway (``Dunaway'')
Econ One Research, Inc. (``Econ One'')
Kevin Egan (``Egan'')
DJ Ericson (``Ericson'')
Mark Fish (``Fish'')
Flint Hills Resources (``Flint Hills'')
Bob Frain (``Frain'')
Joseph Fusco ( ``Fusco'' )
Tricia Glidewell (``Glidewell'')
Robert Gould (``Gould'')
James Green (``Green'')
Michael Greenberger (``Greenberger'')
Christine Gregoire, Governor, State of Washington (``Gregoire'')
Hagan (``Hagan'')
Charles Hamel (``Hamel'')
Chris Harris (``Harris'')
Thomas Herndon (``Herndon'')
Johnny Herring (``Herring'')
Hess Corporation (``Hess'')
David Hill (``Hill'')
Hopper (``Hopper'')
Sharon Hudecek (``Hudecek'')
Intercontinental Exchange, Inc. (``ICE'')
Institute for Energy Research (``IER'')
Independent Lubricant Manufacturers Association (``ILMA'')
Illinois Petroleum Marketers Association (``IPMA'')
International Swaps and Derivatives Association, Inc. (``ISDA'')

[[Page 48335]]

Micki Jay (``Jay'')
Kenneth Jensen (``Jensen'')
Paul Johnson (``Johnson'')
Tacie Jones (``Jones'')
Joy (``Joy'')
John Kaercher (``Kaercher'')
Kas Kas (``Kas'')
Kipp (``Kipp'')
Paola Kipp (``P. Kipp'')
Jerry LeCompte (``LeCompte'')
Kurt Lennert (``Lennert'')
Loucks (``Loucks'')
Robert Love (``Love'')
R. Matthews (``Matthews'')
Catherine May (``May'')
Mike Mazur (``Mazur'')
Sean McGill (``McGill'')
Kathy Meadows (``Meadows'')
Managed Funds Association; Futures Industries Association; New York 
Mercantile Exchange; and CME Group Inc. (``MFA'')
Bret Morris (``Morris'')
Theresa Morris-Ramos (``Morris-Ramos'')
Scott Morosini (``Morosini'')
Timothy J. Muris and J. Howard Beales, III (``Muris'')
Navajo Nation Resolute Natural Resources Company and Navajo Nation 
Oil and Gas Company (``Navajo Nation'')
Laurie Nenortas (``Nenortas'')
James Nichols (``Nichols'')
Virgil Noffsinger (``Noffsinger'')
Noga (``Noga'')
Richard Nordland (``Nordland'')
National Propane Gas Association (``NPGA'')
Kerry O'Shea, (``O'Shea'')
Jeffery Parker (``Parker'')
Pamela Parzynski (``Parzynski'')
Brook Paschkes (``Paschkes'')
Brijesh Patel (``Patel'')
Stefanie Patsiavos (``Patsiavos'')
P D (``PD'')
Guillermo Pereira (``Pereira'')
James Persinger (``Persinger'')
Mary Phillips (``Phillips'')
Plains All American Pipeline, LLP (``Plains'')
Platts (``Platts'')
Betty Pike (``Pike'')
Petroleum Marketers Association of America (``PMAA'')
Joel Poston (``Poston'')
Radzicki (``Radzicki'')
Gary Reinecke (``Reinecke'')
Steve Roberson (``Roberson'')
Shawn Roberts (``Roberts'')
Linda Rooney (``Rooney'')
Mel Rubinstein (``Rubinstein'')
secret (``secret'')
Joel Sharkey (``Sharkey'')
Society of Independent Gasoline Marketers of America (``SIGMA'')
Daryl Simon (``Simon'')
David Smith (``D. Smith'')
Donald Smith (``Do. Smith'')
Mary Smith (``M. Smith'')
Donna Spader (``Spader'')
Stabila (``Stabila'')
Alan Stark (``A. Stark'')
Gary Stark (``G. Stark'')
Robert Stevenson (``Stevenson'')
Ryan Stine (``Stine'')
Maurice Strickland (``Strickland'')
Sutherland, Asbill, and Brennan, LLP (``Sutherland'')
L.D. Tanner (``Tanner'')
Dennis Tapalaga (``Tapalaga'')
Tennessee Oil Marketers Association (``TOMA'')
Theisen (``Theisen'')
Greg Turner (``Turner'')
U.S. citizen (``U.S. citizen'')
U.S. Department of Justice, Criminal Fraud Section (``USDOJ'')
Jeff Van Hecke (``Van Hecke'')
Louis Vera (``Vera'')
Thomas Walker (``Walker'')
Victoria Warner (``Warner'')
Lisa Wathen (``Wathen'')
Watson (``Watson'')
Gary Watson (``G. Watson'')
Joseph Weaver (``Weaver'')
Webb (``Webb'')
Douglas Willis (``Willis'')
[FR Doc. E8-19154 Filed 8-18-08; 8:45 am]
BILLING CODE 6750-01-S