[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Rules and Regulations]
[Pages 41398-41411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17549]



[[Page 41398]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 180

RIN Number 3038-AD27


Prohibition on the Employment, or Attempted Employment, of 
Manipulative and Deceptive Devices and Prohibition on Price 
Manipulation

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is adopting final rules pursuant to section 753 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act''), to implement amended subsections (c)(1) and (c)(3) of section 6 
of the Commodity Exchange Act (``CEA''). These rules broadly prohibit 
fraud and manipulation in connection with any swap, or contract of sale 
of any commodity in interstate commerce, or contract for future 
delivery on or subject to the rules of any registered entity.

DATES: Effective Date: These final Rules will become effective August 
15, 2011.

FOR FURTHER INFORMATION CONTACT: David Meister, Director, Division of 
Enforcement, 202-418-5624, or Mark D. Higgins, Counsel, Office of the 
General Counsel, 202-418-5864, [email protected], Commodity Futures 
Trading Commission, Three Lafayette Centre, 1151 21st Street, NW., 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into 
law. Title VII of the Dodd-Frank Act amended the CEA to establish a 
comprehensive new regulatory framework for swaps and security-based 
swaps. The legislation was enacted to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers and major swap participants; 
(2) imposing clearing and trade execution requirements on standardized 
derivative products; (3) creating robust recordkeeping and real-time 
reporting regimes; and (4) enhancing the Commission's rulemaking and 
enforcement authority with respect to, among others, all registered 
entities and intermediaries.
    In the wake of the financial crisis of 2008, Congress adopted 
section 753 of the Dodd-Frank Act, which provided the Commission with 
additional and broad authority to prohibit fraud and manipulation. In 
the following paragraphs, the Commission summarizes Dodd-Frank Act 
section 753's amendments to CEA section 6(c).
    New section 6(c)(1), the full text of which is provided in Section 
III below, broadly prohibits the use or employment of, or an attempt to 
use or employ, any ``manipulative or deceptive device or contrivance'' 
in contravention of such rules and regulations as the Commission 
``shall promulgate no later than 1 year after the date of enactment'' 
of the Dodd-Frank Act.
    As discussed below, final Rule 180.1 implements the provisions of 
CEA section 6(c)(1) by prohibiting, among other things, manipulative 
and deceptive devices, i.e., fraud and fraud-based manipulative devices 
and contrivances employed intentionally or recklessly, regardless of 
whether the conduct in question was intended to create or did create an 
artificial price. This final Rule will help promote the integrity of 
the markets, and protect market participants.
    Section 6(c)(1)(A), a ``Special Provision for Manipulation by False 
Reporting,'' extends the Commission's prohibition against unlawful 
manipulation to include ``delivering, or causing to be delivered for 
transmission through the mails or interstate commerce, by any means of 
communication whatsoever, a false or misleading or inaccurate report 
concerning crop or market information or conditions that affect or tend 
to affect the price of any commodity in interstate commerce, knowing, 
or acting in reckless disregard of the fact that such report is false, 
misleading or inaccurate.'' \1\ Importantly, section 6(c)(1)(C) 
provides a ``Good Faith Mistakes'' exception to this prohibition such 
that ``[m]istakenly transmitting, in good faith, false or misleading or 
inaccurate information to a price reporting service would not be 
sufficient to violate subsection (c)(1)(A).''
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    \1\ Section 9(a)(2) of the CEA, 7 U.S.C. 13(a)(2), also 
expressly prohibits false reporting.
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    Section 6(c)(2) prohibits the making of ``any false or misleading 
statement of a material fact to the Commission. * * *'' A prohibition 
regarding false statements to the Commission was previously included in 
section 6(c). Dodd-Frank Act section 753 expands the prohibition 
against false statements made in registration applications or reports 
filed with the Commission to include any statement of material fact 
made to the Commission in any context.
    CEA section 6(c)(3), the full text of which is provided in Section 
III below, makes it unlawful to ``manipulate or attempt to manipulate 
the price of any swap, or of any commodity in interstate commerce, or 
for future delivery on or subject to the rules of any registered 
entity.'' Final Rule 180.2 codifies section 6(c)(3).
    Section 753 of the Dodd-Frank Act also amends prior CEA section 
6(c) to provide, in cases of manipulation or attempted manipulation in 
violation of sections 6(c) or 9(a)(2), for a civil penalty of up to the 
greater of $1,000,000 or triple the monetary gain to the person for 
each such violation; and restitution to customers of damages 
proximately caused by violations of the person. For other violations, 
section 6(c)(10)(C) provides for a civil penalty of not more than an 
amount equal to the greater of $140,000 or triple the monetary gain for 
each such violation.
    Finally, section 753 of the Dodd-Frank Act provides that the above-
summarized amendments to CEA section 6(c) ``shall take effect on the 
date on which the final rule promulgated by the Commodity Futures 
Trading Commission pursuant to this Act takes effect.'' The final Rules 
will take effect 30 days after publication in the Federal Register.

II. The Rulemaking Proceeding Under CEA Section 6(c)

    This rulemaking proceeding \2\ began with the issuance of a Notice 
of Proposed Rulemaking (``NOPR'') on October 26, 2010, which was 
published in the Federal Register on November 3, 2010.\3\ Pursuant to 
CEA section 6(c),\4\ as amended by section 753 of the Dodd-Frank Act, 
the Commission proposed to add a new Part 180 to Title 17 of the Code 
of Federal Regulations. In the NOPR, the Commission solicited comments 
on all aspects of proposed Part 180. Twenty-seven parties filed 
comments, representing a variety of interested parties, including a 
member of the United States Congress, a law professor, economists, 
industry members and trade associations, energy news and price 
reporting organizations, designated contract markets

[[Page 41399]]

(exchanges), a government-sponsored enterprise, and members of the 
public.\5\
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    \2\ Rulemaking documents are available at: (http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/23_DFManipulation/index.htm).
    \3\ Prohibition of Market Manipulation, 75 FR 67657 (Nov. 3, 
2010).
    \4\ Section 753 of the Dodd-Frank Act directed the Commission to 
promulgate implementing rules and regulations by not later than one 
year after the date of enactment of the Dodd-Frank Act.
    \5\ Attachment A contains a list of the 27 parties who submitted 
comments related to this rulemaking.
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    Upon careful review and consideration of the entire record in this 
rulemaking and based on its extensive market regulation experience, the 
Commission has determined that it is appropriate and in the public 
interest to adopt the final Rules, which among other things, define for 
the public the statutory prohibition under CEA section 6(c)(1) against 
using or employing ``any manipulative or deceptive device or 
contrivance'' in connection with any swap, or a contract of sale of any 
commodity in interstate commerce, or for future delivery on or subject 
to the rules of any registered entity. Consistent with section 6(c)(1), 
the final Rule 180.1 prohibits, among other things, fraud and fraud-
based manipulative schemes, employed intentionally or recklessly (as 
discussed below), regardless of whether the conduct in question was 
intended to or did create an artificial price. Final Rules 180.1 and 
180.2 will help to promote the integrity of the markets, and protect 
market participants.
    After carefully reviewing the entire rulemaking record, the 
Commission finds it unnecessary to change the wording of the proposed 
regulatory text, except in one respect: Adding ``inaccurate'' to 
section 180.1(a)(4) (``* * * no violation of this subsection shall 
exist where the person mistakenly transmits, in good faith, false or 
misleading or inaccurate information to a price reporting service.''). 
This change is necessary to ensure symmetry between final Rule 180.1 
and CEA section 6(c)(1)(C). However, based on the public comments, the 
Commission has determined to provide clarification and interpretive 
guidance in this Preamble to final Rules 180.1 and 180.2.
    The Commission's statutory and legal basis for promulgating the 
final Rules, their purpose, and the Commission's responses to comments 
filed in this rulemaking, are discussed below.

III. Statutory Basis for the Final Rules

    CEA section 6(c)(1), entitled ``Prohibition Against Manipulation,'' 
is the statutory basis for final Rule 180.1, and provides that:

    It shall be unlawful for any person, directly or indirectly, to 
use or employ, or attempt to use or employ, in connection with any 
swap, or a contract of sale of any commodity in interstate commerce, 
or for future delivery on or subject to the rules of any registered 
entity, any manipulative or deceptive device or contrivance, in 
contravention of such rules and regulations as the Commission shall 
promulgate by not later than 1 year after the date of enactment of 
the [Dodd-Frank Act], provided no rule or regulation promulgated by 
the Commission shall require any person to disclose to another 
person nonpublic information that may be material to the market 
price, rate, or level of the commodity transaction, except as 
necessary to make any statement made to the other person in or in 
connection with the transaction not misleading in any material 
respect.

    CEA section 6(c)(3), entitled ``Other Manipulation,'' provides 
that:

    [I]t shall be unlawful for any person, directly or indirectly, 
to manipulate or attempt to manipulate the price of any swap, or of 
any commodity in interstate commerce, or for future delivery on or 
subject to the rules of any registered entity.

    CEA section 6(c)(3) and the Commission's general rulemaking 
authority pursuant to CEA section 8a(5) provide the statutory basis for 
final Rule 180.2.
    Commenters are overwhelmingly supportive of the Commission's 
efforts to implement clear and fair rules designed to protect market 
participants and promote the integrity of the markets. In the following 
sections, the Commission summarizes and responds to the comments 
received in this rulemaking.

IV. Discussion of CEA Section 6(c)(1) and Final Rule 180.1

A. Overview

    The language of CEA section 6(c)(1), particularly the operative 
phrase ``manipulative or deceptive device or contrivance,'' is 
virtually identical to the terms used in section 10(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'').\6\ The Supreme 
Court has interpreted these words to ``clearly connot[e] intentional 
misconduct.'' \7\ The Court has also stated that the statute was 
``designed as a catchall clause to prevent fraudulent practices.'' \8\
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    \6\ 15 U.S.C. 78j(b). Differences between the wording of 
Exchange Act Section 10(b) and CEA section 6(c)(1) include, but are 
not limited to, the express prohibition of the ``attempt to use'' 
any ``manipulative or deceptive device or contrivance'' in CEA 
section 6(c)(1), and the absence of a ``purchase or sale'' 
requirement in CEA section 6(c)(1). The Commission understands that 
under SEC Rule 10b-5 a plaintiff is not required to prove that money 
was actually invested in a specific security. See, e.g., SEC v. 
Zandford, 535 U.S. 813, 819-21 (2002).
    \7\ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201 (1976).
    \8\ Chiarella v. United States, 445 U.S. 222, 226 (1980), citing 
Hochfelder, 425 U.S. at 202, 206.
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    Based on the language in Exchange Act section 10(b), the Securities 
and Exchange Commission (``SEC'') promulgated SEC Rule 10b-5, which 
makes it unlawful for any person:

    (a) To employ any device, scheme, or artifice to defraud,
    (b) To make any untrue statement of a material fact or to omit 
to state a material fact necessary in order to make the statements 
made, in the light of the circumstances under which they were made, 
not misleading, or
    (c) To engage in any act, practice, or course of business which 
operates or would operate as a fraud or deceit upon any person, in 
connection with the purchase or sale of any security.\9\
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    \9\ 17 CFR 240.10b-5.

    Given the similarities between CEA section 6(c)(1) and Exchange Act 
section 10(b), the Commission deems it appropriate and in the public 
interest to model final Rule 180.1 on SEC Rule 10b-5.\10\ To account 
for the differences between the securities markets and the derivatives 
markets, the Commission will be guided, but not controlled, by the 
substantial body of judicial precedent applying the comparable language 
of SEC Rule 10b-5.\11\ Such extensive judicial review serves as an 
important benefit to the Commission and provides the public with 
increased certainty because the terms of Exchange Act Section 10(b) and 
SEC Rule 10b-5 have withstood challenges to their constitutionality in 
both civil and criminal matters.\12\
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    \10\ See, e.g., Morissette v. United States, 342 U.S. 246, 263 
(1952) (noting that where Congress borrows terms of art it 
``presumably knows and adopts the cluster of ideas that were 
attached to each borrowed word''); Nat'l Treasury Employees Union v. 
Chertoff, 452 F.3d 839, 857 (DC Cir. 2006) (stating that ``[t]here 
is a presumption that Congress uses the same term consistently in 
different statutes'').
    \11\ Further, by modeling final Rule 180.1 on SEC Rule 10b-5, 
the Commission takes an important step toward harmonization of 
regulation of the commodities, commodities futures, swaps and 
securities markets given that new CEA section 6(c)(1) and Exchange 
Act Section 10(b) include virtually identical prohibitions against 
``any manipulative or deceptive device or contrivance.''
    \12\ See, e.g., United States v. Persky, 520 F.2d 283, 287 (2d 
Cir. 1975) (rejecting criminal defendant's argument that Exchange 
Act section 10(b) and SEC Rule 10b-5 are unconstitutionally vague); 
SEC v. Pirate Investor LLC, 580 F.3d 233, 254 (4th Cir. 2009) 
(upholding civil judgment and finding that ``[a]ppellants' reliance 
on any ambiguity in the [section 10(b)] phrase `in connection with' 
as a reason to employ the canon of constitutional avoidance fails in 
light of the statute's purpose--providing a flexible regime for 
addressing new, perhaps unforeseen, types of fraud''), cert. denied, 
130 S. Ct. 3506, 2010 U.S. LEXIS 5345 (2010). The Federal Energy 
Regulatory Commission and the Federal Trade Commission have relied 
upon a statutory framework largely identical to Exchange Act section 
10(b) when promulgating rules similar to SEC Rule 10b-5. In so 
doing, both agencies have stated their intent to be guided by 
securities law precedent, as appropriate to their unique regulatory 
missions. FERC, Prohibition of Energy Market Manipulation, 71 FR 
4244, 4250 (Jan. 26, 2006) (FERC final anti-manipulation rule); FTC, 
Prohibitions on Market Manipulation, 74 FR 40686, 40688-89 (Aug. 12, 
2009) (FTC final anti-manipulation rule).

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[[Page 41400]]

    Final Rule 180.1 prohibits fraud and fraud-based manipulations, and 
attempts: (1) By any person (2) acting intentionally or recklessly (3) 
in connection with (4) any swap, or contract of sale of any commodity 
in interstate commerce, or contract for future delivery on or subject 
to the rules of any registered entity (as defined in the CEA). CEA 
section 6(c)(1) and final Rule 180.1, like Exchange Act section 10(b) 
and SEC Rule 10b-5 upon which they are modeled, focus on conduct 
involving manipulation or deception.\13\
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    \13\ Santa Fe Industries v. Green, 430 U.S. 462, 473-76 (1977); 
Dirks v. SEC, 463 U.S. 646, 667 n. 27 (1983) (concluding that ``to 
constitute a violation of Rule 10b-5, there must be fraud''); 
Chiarella v. United States, 445 U.S. 222, 234-35 (1980) (stating 
that Exchange Act ``section 10(b) is aptly described as a catchall 
provision, but what it catches must be fraud''); Ernst & Ernst v. 
Hochfelder, 425 U.S. 185, 199 (1976) (rejecting argument for 
imposition of negligence standard that ``simply ignore[d] the use of 
the words `manipulative,' `device,' and `contrivance'--terms that 
make unmistakable a congressional intent to proscribe a type of 
conduct quite different from negligence. Use of the word 
`manipulative' is especially significant. It is and was virtually a 
term of art when used in connection with securities markets. It 
connotes intentional or willful conduct designed to deceive or 
defraud investors by controlling or artificially affecting the price 
of securities'') (internal citations omitted).
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    In the following paragraphs, the Commission addresses the comments 
that pertain to final Rule 180.1 in the following categories: (1) Scope 
of application of the final Rule; (2) disclosure implications of the 
final Rule; (3) operation of the provision prohibiting material 
misstatements and omissions; (4) statutory exception for good faith 
mistakes; (5) required scienter for a violation of the final Rule; (6) 
scope of the phrase ``in connection with''; and (7) penalty, procedure, 
effect on automated trading systems, and a proposal to define 
manipulation.\14\
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    \14\ The extent to which securities law precedent should apply 
is an issue that commenters often linked to more specific comments 
pertaining to the interpretation of the statute and proposed rule 
text. As such, the Commission considers commenters' views about 
securities law precedent in the specific contexts in which they 
arise.
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B. The Scope of the Application of Final Rule 180.1

1. Comments
    The Commission received several comments on the scope of the 
application of proposed Rule 180.1. United States Senator Carl Levin 
(``Senator Levin''), Chairman of the Permanent Subcommittee on 
Investigations, Committee on Homeland Security and Governmental 
Affairs, believes that the CFTC and SEC should harmonize their 
regulatory structures for combating disruptive and manipulative 
activities.\15\
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    \15\ Senator Levin Comment Letter at pages 3-4.
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    Better Markets, a non-profit public interest advocacy organization, 
states that the proposed Rules are critical to implementing the 
important expansion of the Commission's enforcement capability so that 
the transparent and reliable marketplace envisioned by the Dodd-Frank 
Act can be realized.\16\ Similarly, the Council of Institutional 
Investors (``Council'') supports proposed Rule 180.1 and believes that 
it will help promote the integrity of the price discovery process and 
fair dealing between market participants. The Council believes that, if 
accompanied by robust enforcement, the proposed Rule would promote 
investor confidence in the markets and contribute to the overall safety 
and soundness of the financial system.\17\ Likewise, the Petroleum 
Marketers Association of America (``PMAA'') believes that proposed 
Rules 180.1 and 180.2 will effectively implement the statutory and 
Congressional directive to clearly delineate and prevent impermissible 
conduct by market participants.\18\
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    \16\ Better Markets Comment Letter at page 1.
    \17\ Council Comment Letter at pages 1-2.
    \18\ PMAA Comment Letter at page 1.
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    University of Maryland School of Law Professor Michael Greenberger 
(``Professor Greenberger'') believes that proposed Rule 180.1 reflects 
an effective anti-manipulation rule mandated by section 753 of the 
Dodd-Frank Act. Professor Greenberger further believes that the 
Commission correctly asserts that proposed Rule 180.1 be given a broad, 
remedial reading similar to SEC Rule 10b-5.\19\
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    \19\ Professor Greenberger Comment Letter at page 2.
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    The CME Group, Inc. (``CME Group'') and the Commodity Markets 
Council (``CMC'') believe that proposed Rules 180.1 and 180.2 are vague 
and fail to provide market participants with sufficient notice of 
whether contemplated trading practices run afoul of a prohibition.\20\ 
Further, CME Group and CMC believe that proposed Rule 180.1 is 
susceptible to constitutional challenge under the Due Process 
Clause.\21\
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    \20\ CME Group Comment Letter at pages 2-3; CMC Comment Letter 
at page 2.
    \21\ CME Group at page 3; CMC at page 2.
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    The Futures Industry Association (``FIA''), International Swaps and 
Derivatives Association, Inc. (``ISDA''), and the Securities Industry 
and Financial Markets Association (``SIFMA'') (together, ``the 
Associations'') believe that the Commission should clarify the scope of 
the proposed regulation, the Commission's existing anti-manipulation 
authority under CEA section 9(a)(2), and its anti-fraud authority under 
CEA section 4b.\22\ The Associations urge the Commission to remove from 
all subparts of the proposed Rule language that prohibits an 
``attempt'' to manipulate and to clarify that the requirements for 
attempted manipulation remain consistent with current law under CEA 
section 6(c).\23\ The Managed Funds Association (``MFA'') believes that 
the Commission should interpret CEA section 6(c)(1) merely to clarify 
and refine the Commission's authority over swaps, and not to create any 
new antifraud authority or to create any new duties or obligations.\24\
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    \22\ Associations Comment Letter at page 9.
    \23\ Associations at page 8.
    \24\ MFA Comment Letter at pages 6-7.
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    The American Petroleum Institute (``API'') together with the 
National Petrochemical and Refiners Association (``NPRA''), and the 
Coalition of Physical Energy Companies (``COPE'') state that Congress 
intended the scope of section 753 of the Dodd-Frank Act to address only 
actual fraudulent manipulation of the commodities markets.\25\ Absent a 
manipulative effect on the market, API and NPRA believe that there 
should be no liability under proposed Rule 180.1.\26\ Further, API and 
NPRA state that the Commission should require proof that a party's 
deceptive or fraudulent conduct caused market conditions to deviate 
materially from the conditions that would have existed but for that 
conduct.\27\ Similarly, the Derivatives and Futures Law Committee of 
the Business Law Section of the American Bar Association (``ABA 
Derivatives Committee'') states that any Commission rules under CEA 
section 6(c)(1) should expressly target intentional or extremely 
reckless deceitful conduct specifically intended to cause artificial 
prices by corrupting or disabling the integrity of market price-setting 
processes and mechanisms rather than by a general anti-fraud rule 
patterned on SEC Rule 10b-5.\28\ The ABA Derivatives Committee believes 
that mere unfairness or impermissible overreaching without deception 
does not violate section 10(b) or SEC Rule 10b-5 thereunder.\29\
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    \25\ API and NPRA Comment Letter at page 3; COPE Comment Letter 
at page 2.
    \26\ API and NPRA at pages 2, 9, and 24.
    \27\ API and NPRA at page 10.
    \28\ ABA Derivatives Committee Comment Letter at pages 5 and 11-
13. According to the ABA Derivatives Committee, ``[a] rule that does 
not require evidence of a specific intent to cause artificial market 
prices as an element of a violation would result in a dangerously 
vague rule * * * [which] could expose participants to the threat of 
arbitrary and unfair enforcement.'' Id. at page 12.
    \29\ ABA Derivatives Committee at page 6.

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[[Page 41401]]

    Freddie Mac recommends that the Commission strengthen the 
protection of customers by clarifying that CEA section 6(c), as amended 
by section 753 of the Dodd-Frank Act and implemented by proposed Rule 
180.1, expressly prohibits ``front running'' and similar misuse of 
customer information by swap dealers as a form of fraud-based 
manipulation.\30\
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    \30\ Freddie Mac Comment Letter at pages 1-5.
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2. Commission Determination
    Upon review of the entire rulemaking record, the Commission 
determines that final Rule 180.1 is in the public interest and provides 
fair, reasonable, and adequate notice of the prohibited conduct. With 
respect to comments claiming that final Rule 180.1 is susceptible to a 
due process constitutional challenge because it purportedly does not 
give market participants fair notice of the prohibited conduct, the 
Commission notes that final Rule 180.1 is modeled on SEC Rule 10b-5, 
which has been subjected to extensive judicial review and has withstood 
constitutional challenges, including those based on a fair notice 
argument.\31\
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    \31\ The fair notice argument has been repeatedly rejected in 
the SEC Rule 10b-5 context in a wide variety of fact patterns. See, 
e.g., United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), 
aff'g in part and rev'g in part United States v. Winans, 612 F. 
Supp. 827, 848 (S.D.N.Y. 1985); United States v. Newman, 664 F.2d 
12, 18-19 (2d Cir. 1981), aff'd after remand, 722 F.2d 729 (2d 
Cir.), cert. denied, 464 U.S. 863 (1983); United States v. 
Chiarella, 588 F.2d 1358, 1369 (2d Cir. 1978); United States v. 
Brown, 555 F.2d 336, 339-40 (2d Cir. 1977); United States v. Persky, 
520 F.2d 283, 286-88 (2d Cir. 1975); SEC v. Shapiro, 494 F.2d 1301, 
1308 (2d Cir. 1974).
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    In response to comments requesting clarification regarding the 
relationship among final Rule 180.1 and existing CEA sections 4b and 
9(a)(2), the Commission notes that section 753(a) of the Dodd-Frank Act 
makes clear that nothing in new CEA section 6(c)(1) ``shall affect, or 
be construed to affect, the applicability of section 9(a)(2).'' 
Likewise, the Commission finds nothing in CEA section 6(c)(1) or final 
Rule 180.1 that affects, or should be construed to affect, the 
applicability of CEA section 4b.\32\ Section 6(c)(1) and final Rule 
180.1 augment the Commission's existing authority to prohibit fraud and 
manipulation.
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    \32\ Section 4b of the CEA, 7 U.S.C. 6b, prohibits, for example, 
a person from defrauding another person in connection with the 
making of commodity futures contracts for or on behalf of that other 
person. Clayton Brokerage Co. v. CFTC, 794 F.2d 573, 578 (11th Cir. 
1986). Thus, a broker's misrepresentations to his customer about 
risk may subject the broker to liability under CEA section 4b. Id.
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    The Commission declines to adopt the request of one commenter to 
remove language from proposed Rules 180.1 and 180.2 that make it a 
violation to ``attempt'' to engage in manipulation.\33\ The Commission 
is controlled by the language of CEA section 6(c)(1), which 
specifically directs the Commission to prohibit the ``attempt[ed]'' use 
or employment of any manipulative or deceptive devices or 
contrivances.\34\
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    \33\ Associations at page 8.
    \34\ The Commission understands that courts interpreting the 
statutory phrase ``any manipulative or deceptive device'' as it is 
used in Section 10(b) of the Exchange Act have deemed it broad 
enough to encompass an attempt. See, e.g., SEC v. Martino, 255 F. 
Supp. 2d 268, 287 (S.D.N.Y. 2003) (``[A]n attempted manipulation is 
as actionable as a successful one'').
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    The Commission declines to adopt the request of certain commenters 
to interpret CEA section 6(c)(1) as merely extending the Commission's 
existing anti-fraud and anti-manipulation authority to cover swaps. 
Such an interpretation would be inconsistent with the language of CEA 
section 6(c)(1), as amended by section 753 of the Dodd-Frank Act, under 
which Congress granted the Commission broad new authority to prohibit 
``any manipulative or deceptive device or contrivance'' in connection 
with any swap, or a contract of sale of any commodity in interstate 
commerce, or for future delivery on or subject to the rules of any 
registered entity.
    The Commission intends to interpret and apply CEA section 6(c)(1) 
and final Rule 180.1 ``not technically and restrictively, but flexibly 
to effectuate its remedial purposes.''\35\ Comments that the 
Commission's use of the word ``commodity'' in proposed Rule 180.1 
``indicates that the rule will apply to virtually every commercial 
transaction in the economy'' are misplaced.\36\ The final Rule requires 
a fraud or manipulation, or attempted fraud or manipulation, and that 
the fraud or manipulation or attempted fraud or manipulation, be ``in 
connection with'' any swap, or contract of sale of any commodity in 
interstate commerce, or contract for future delivery on or subject to 
the rules of any registered entity. The ``in connection with'' 
requirement is discussed in subsection G. below. And although CEA 
section 6(c)(1) and final Rule 180.1 give the Commission broad 
enforcement authority to prohibit fraud and manipulation in connection 
with a contract of sale for any commodity in interstate commerce, the 
Commission expects to exercise its authority under 6(c)(1) to cover 
transactions related to the futures or swaps markets, or prices of 
commodities in interstate commerce, or where the fraud or manipulation 
has the potential to affect cash commodity, futures, or swaps markets 
or participants in these markets.\37\ This application of the final 
Rule respects the jurisdiction that Congress conferred upon the 
Commission and fulfills its core mission and the purposes of the Act to 
protect market participants and promote market integrity.
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    \35\ See, e.g., Zandford, 535 U.S. at 819 (where a statute has a 
remedial purpose such as the prevention of fraud, the statute should 
be construed ``not technically and restrictively, but flexibly to 
effectuate its remedial purposes'') (internal quotation marks and 
citations omitted). See also R&W Technical Servs., Ltd. v. CFTC, 205 
F.3d 165, 173 (5th Cir. 2000) (In 1974, Congress gave the CFTC 
``even greater enforcement powers in part because of the fear that 
unscrupulous individuals were encouraging amateurs to trade in the 
commodities markets through fraudulent advertising. Remedial 
statutes are to be construed liberally, and in an era of increasing 
individual participation in commodities markets, the need for such 
protection has not lessened'').
    \36\ API and NPRA at page 3.
    \37\ By way of non-exclusive example, if an entity employed a 
deceptive device to sell precious metals to customers as a way for 
the customers to speculate on the value of such commodities, or if 
an entity employed a deceptive device to sell an agricultural 
commodity to persons seeking to hedge price risk in that commodity, 
depending on the facts and circumstances, the Commission would 
exercise its authority against the entity under Section 6(c)(1) and 
final Rule 180.1.
---------------------------------------------------------------------------

    The foregoing should not be interpreted, however, to mean that a 
violation of final Rule 180.1 necessarily requires proof of a market or 
price effect, as some commenters' recommend. It does not.\38\ A market 
or price effect may well be indicia of the use or employment of a 
manipulative or deceptive device or contrivance; nonetheless, a 
violation of final Rule 180.1 may exist in the absence of any market or 
price effect.\39\
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    \38\ In interpreting Exchange Act section 10(b) and SEC Rule 
10b-5, the Supreme Court has recognized that the interest in 
preserving the integrity of the securities markets was one of the 
purposes animating Exchange Act section 10(b), but rejected the 
notion that section 10(b) is limited to serving that objective 
alone. See Superintendent of Ins. of N.Y. v. Bankers Life & Casualty 
Co., 404 U.S. 6, 11-13 (1971).
    \39\ Id.
---------------------------------------------------------------------------

    In response to comments requesting that ``front-running'' and 
similar misuse of customer information be considered a form of fraud-
based manipulation under final Rule 180.1, the Commission declines to 
adopt any per se rule in this regard, but clarifies that final Rule 
180.1 reaches all manner of fraud and manipulation within the scope of 
the statute it implements, CEA section 6(c)(1).

C. The Disclosure Implications of Final Rule 180.1

1. Comments
    Some commenters express concern regarding whether proposed Rule 
180.1

[[Page 41402]]

would impose new disclosure obligations on commodities market 
participants.\40\ According to the Associations, MFA, CME Group, CMC, 
COPE, and the Working Group of Commercial Energy Firms (``CEF''), 
futures, options, swaps, and physical commodity markets are different 
from securities markets, which have extensive disclosure obligations, 
and nothing in the CEA mandates disclosure of market conditions or 
facts pertaining to the markets for commodities.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., Associations at pages 1-5; MFA at pages 2-4; CME 
Group at pages 2-3; CMC at page 2. The Associations assert, for 
example, that unlike the securities antifraud laws and rules, which 
are designed primarily for investor protection, the antifraud 
provisions in the futures markets are focused in large part, 
although not exclusively, on protections against manipulation. 
Associations at page 4.
    \41\ See, e.g., Associations at pages 1-5; MFA at pages 2-5; CME 
Group at pages 2-3; CMC at page 2; COPE at page 3; CEF Comment 
Letter at pages 3 and 8.
---------------------------------------------------------------------------

    The Associations, CEF, and MFA state that proposed Rule 180.1 
should not impose any new duties of disclosure, inquiry or diligence 
between two sophisticated parties to a bilateral transaction.\42\ 
Likewise, the ABA Derivatives Committee believes the Commission should 
make clear that the anti-manipulation rule under section 6(c)(l) does 
not create any new duties of inquiry, diligence or disclosure to 
parties to futures, options, swaps or cash commodity transactions.\43\ 
The ABA Derivatives Committee, the Associations, and MFA urge the 
Commission to make it explicit that any final Rule will be violated 
only if a party violates a pre-existing duty arising under contract, 
common law, or some other non-CEA source.\44\
---------------------------------------------------------------------------

    \42\ Associations at page 4; CEF at page 8; MFA at pages 2 and 
4.
    \43\ ABA Derivatives Committee at page 15.
    \44\ ABA Derivatives Committee at page 15; Associations at pages 
4-5; MFA at pages 4-5.
---------------------------------------------------------------------------

    API and NPRA urge the Commission to state explicitly that silence, 
pure omissions (omissions that do not relate to explicit 
representations), and ``no comment'' statements are not actionable. 
They also contend that ``[t]here should be no affirmative duty to 
convey information to a counterparty in the nature of the reporting and 
information requirements as under securities law.'' \45\ Similarly, API 
and NPRA recommend that the Commission confirm that there is no duty to 
update statements that were truthful at the time that they were 
made.\46\ CME Group states that the duty to correct inaccurate 
statements should be limited to circumstances where a futures market 
participant realizes a statement was incorrect when the statement was 
made.\47\
---------------------------------------------------------------------------

    \45\ API and NPRA at page 19.
    \46\ API and NPRA at page 24.
    \47\ CME Group at page 8.
---------------------------------------------------------------------------

    The Associations seek clarification that proposed Rule 180.1 will 
not impede the ability of market participants to take positions and 
trade on the basis of nonpublic information that they obtain 
legitimately (i.e., not through the breach of a pre-existing duty to 
keep such information confidential or through another party's similar 
breach of a pre-existing duty).\48\ CME Group further states that the 
Commission should not adopt a ``misappropriation'' theory of ``insider 
trading''--that is, where one misappropriates confidential information 
for securities trading purposes, in breach of a duty owed to the source 
of the information.\49\ The ABA Derivatives Committee recommends the 
Commission make clear that securities law doctrines such as the 
prohibition on insider trading and the ``fraud-on-the-market'' theory 
do not apply under the final Rule.\50\
---------------------------------------------------------------------------

    \48\ Associations at page 5.
    \49\ CME Group at pages 4-5.
    \50\ ABA Derivatives Committee at pages 8-9 (stating that the 
fraud-on-the-market theory ``establishes a rebuttable presumption in 
private rights of action under Exchange Act Section 10(b) and SEC 
Rule 10b-5 that in an efficient market for a security a plaintiff 
can be held to have relied on a defendant's fraudulent 
misrepresentation or omission in connection with the purchase or 
sale of a security--even if the plaintiff was not aware of the 
misrepresentation or omission--by virtue of the plaintiff's reliance 
on the fact that a security's price reflects the fraudulent 
misrepresentation and omission'') (citations omitted) (emphasis in 
original).
---------------------------------------------------------------------------

    The West Virginia Oil Marketers & Grocers Association (``OMEGA'') 
states that trading based on inside information should be 
prohibited.\51\
---------------------------------------------------------------------------

    \51\ OMEGA Comment Letter at page 3; accord Mr. Peter Carini 
Comment Letter at page 3; Pen Fern Oil Co., Inc. Comment Letter at 
page 3; Scullin Oil Co. Comment Letter at page 3.
---------------------------------------------------------------------------

    Responding to other commenters that the CFTC should not incorporate 
the standards and case law under SEC Rule 10b-5, Professor Greenberger 
states that the anti-manipulation rules and regulations are not bound 
by the legal frameworks of the two markets. Professor Greenberger 
states that the focal point of these anti-manipulation rules is to 
maintain market integrity, which is a common goal shared by both the 
securities and futures markets.\52\
---------------------------------------------------------------------------

    \52\ Professor Greenberger at pages 2-4. Professor Greenberger 
further states that the influx of capital from retail investors to 
the commodity markets through Exchange Traded Funds has changed the 
dynamics of the futures markets. Id.
---------------------------------------------------------------------------

    PMAA believes that the Commission, in relying on SEC Rule 10b-5, is 
cognizant of and more than capable of advancing its distinct regulatory 
responsibilities in ensuring a transparent marketplace free from 
manipulation.\53\ PMAA believes that proposed Rule 180.1 will 
effectively implement the statutory and Congressional directive to 
clearly delineate and prevent impermissible conduct by market 
participants.\54\
---------------------------------------------------------------------------

    \53\ PMAA at page 1.
    \54\ PMAA at page 2.
---------------------------------------------------------------------------

2. Commission Determination
    As a general matter, the Commission does not believe that final 
Rule 180.1, or the statute it implements, are problematic or will 
create uncertainty as to the existence of disclosure obligations when 
applied to the markets the Commission regulates. This is not to say 
that commenters did not raise valid concerns about how securities law 
precedent will be applied in the commodities markets with respect to 
disclosure obligations. The Commission believes that Congress addressed 
these concerns, however, by enacting CEA section 6(c)(1), which 
provides that ``no rule or regulation promulgated by the Commission 
shall require any person to disclose to another person nonpublic 
information that may be material to the market price, rate, or level of 
the commodity transaction, except as necessary to make any statement 
made to the other person in or in connection with the transaction not 
misleading in any material respect.'' To be clear, the Commission is 
not, by this rulemaking, imposing any new affirmative duties of 
inquiry, diligence, or disclosure.\55\
---------------------------------------------------------------------------

    \55\ The derivatives markets are not, however, caveat emptor 
markets. The CEA has many provisions designed to protect market 
participants through disclosure requirements applicable to 
Commission registrants. See, e.g., 17 CFR part 155 (risk disclosure 
obligations); 17 CFR 4.20-27 (duties and disclosure obligations on 
Commodity Pool Operators). Depending on the facts and circumstances, 
violation of such duties could constitute a violation of the final 
Rule.
---------------------------------------------------------------------------

    Further, it is not a violation of final Rule 180.1 to withhold 
information that a market participant lawfully possesses about market 
conditions. The failure to disclose such market information prior to 
entering into a transaction, either in an anonymous market setting or 
in bilateral negotiations, will not, by itself, constitute a violation 
of final Rule 180.1. Therefore, the Commission clarifies that silence, 
absent a pre-existing duty to disclose, is not deceptive within the 
meaning of final Rule 180.1.\56\ Similarly, the Commission interprets 
``no comment'' statements as

[[Page 41403]]

``generally the functional equivalent of silence.'' \57\
---------------------------------------------------------------------------

    \56\ Cf. Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17 (1988) 
(``Silence, absent a duty to disclose, is not misleading under [SEC] 
Rule 10b-5'').
    \57\ Id. (internal quotation marks and citation omitted).
---------------------------------------------------------------------------

    The Commission received comments regarding hedging or speculating 
(i.e., trading) on the basis of material nonpublic information.\58\ 
These comments use the label ``insider trading,'' which can mean 
different things in different contexts. The Commission recognizes that 
unlike securities markets, derivatives markets have long operated in a 
way that allows for market participants to trade on the basis of 
lawfully obtained material nonpublic information. This final Rule does 
not prohibit trading on the basis of material nonpublic information 
except as provided in the following paragraph or otherwise prohibited 
by law.\59\ Further, the Commission reiterates that the final Rule does 
not create an affirmative duty of disclosure (except, as provided by 
section 6(c)(1), ``as necessary to make any statement made to the other 
person in or in connection with the transaction not misleading in any 
material respect'').
---------------------------------------------------------------------------

    \58\ See, e.g., Associations at page 5; MFA at page 5.
    \59\ See, e.g., Dodd-Frank Act section 746, amending CEA section 
4c(a) (7 U.S.C. 6c(a)).
---------------------------------------------------------------------------

    Depending on the facts and circumstances, a person who engages in 
deceptive or manipulative conduct in connection with any swap, or 
contract of sale of any commodity in interstate commerce, or contract 
for future delivery on or subject to the rules of any registered 
entity, for example by trading on the basis of material nonpublic 
information in breach of a pre-existing duty (established by another 
law or rule, or agreement, understanding, or some other source), or by 
trading on the basis of material nonpublic information that was 
obtained through fraud or deception, may be in violation of final Rule 
180.1. The Commission believes that this application of the final Rule 
would be consistent with our responsibility to protect market 
participants and promote market integrity and with our statement in the 
NOPR that section 6(c)(1) is a broad catch-all provision, reaching any 
manipulative or deceptive device or contrivance.'' \60\
---------------------------------------------------------------------------

    \60\ 75 FR at 67658.
---------------------------------------------------------------------------

    The Commission declines to adopt comments recommending outright 
rejection of the potential application of the ``fraud-on-the-market'' 
theory under final Rule 180.1.\61\ The ``fraud-on-the-market'' theory 
includes a presumption of reliance, which is a required element in 
private rights of action arising under SEC Rule 10b-5. Unlike a private 
litigant, however, the government is not required to prove reliance in 
an enforcement action under SEC Rule 10b-5 just as it is not required 
to demonstrate harm to investors.\62\ Consistent with judicial 
interpretations of Exchange Act section 10(b) and SEC Rule 10b-5, the 
Commission does not interpret the final Rule as requiring a showing of 
reliance or harm to market participants in a government action brought 
under CEA section 6(c)(1) and final Rule 180.1. At the same time, we 
decline to opine on the required elements of a private right of action 
under CEA section 6(c)(1) and final Rule 180.1 as it is beyond the 
purview of this rulemaking.
---------------------------------------------------------------------------

    \61\ In the securities context, ``the `fraud-on-the-market' 
presumption helps investors who cannot demonstrate that they, 
themselves, relied on fraud that reached the market.'' Stoneridge In 
v. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 171 
(2008).
    \62\ See, e.g., Berko v. SEC, 316 F.2d 137, 143 (2d Cir. 1963) 
(finding reliance and injury to private shareholders ``legally 
irrelevant'' to the SEC's Exchange Act section 10(b) and SEC Rule 
10b-5 claim); see also United States v. Haddy, 134 F.3d 542 (3d Cir. 
1998) (concluding that securities laws did not require proof of 
reliance in an Exchange Act section 10(b) action brought by 
government).
---------------------------------------------------------------------------

D. The Operation of the Provision Prohibiting Material Misstatements 
and Omissions

1. Comments
    COPE states that inclusion of the words ``attempt to make'' any 
untrue or misleading statement of a material fact in proposed Rule 
180.1(a)(2) is vague and confusing. COPE requests that the Commission 
clarify proposed Rule 180.1(a)(2) to state that the proscribed acts 
must be done with the intent to deceive, manipulate, or defraud.\63\
---------------------------------------------------------------------------

    \63\ COPE at page 5.
---------------------------------------------------------------------------

    API and NPRA believe that the Commission should clarify that only 
statements and acts pertaining to transactions in futures, swaps, or 
commodities markets underlying futures or swaps may give rise to 
liability under proposed Rule 180.1.\64\ API and NPRA also believe that 
the Commission should exercise its discretion to exclude ``partial 
omissions'' from any final Rule.\65\
---------------------------------------------------------------------------

    \64\ API and NPRA at page 11.
    \65\ API and NPRA at page 23.
---------------------------------------------------------------------------

    Mr. Chris Barnard (``Barnard'') believes the proposed rules should 
apply to both positive misconduct and misconduct by omission given the 
ongoing nature of the rights and obligations that may be created in a 
swap agreement.\66\
---------------------------------------------------------------------------

    \66\ Barnard Comment Letter at page 2.
---------------------------------------------------------------------------

2. Commission Determination
    The Commission declines to adopt comments recommending deletion of 
the phrase ``or attempt to make'' in final Rule subsection 180.1(a)(2). 
This phrase captures situations where a person attempts to employ a 
manipulative device or artifice to defraud. For example, when a 
supervisor attempts to have a subordinate make a fraudulent material 
misstatement or omission but that subordinate rebuffs the supervisor, 
the phrase ``or attempt to make'' would operate to reach the 
supervisor's attempted fraud.
    The Commission declines to modify the proposed Rule in response to 
comments requesting that only statements and acts pertaining to 
``transactions'' in futures, swaps, or commodities markets underlying 
futures or swaps may give rise to liability under proposed Rule 
180.1.\67\ Rather, CEA section 6(c)(1) prohibits manipulative or 
deceptive devices or contrivances in connection with any swap, or a 
contract of sale of any commodity in interstate commerce, or for future 
delivery on or subject to the rules of any registered entity.\68\ The 
Commission also declines to make modifications in response to comments 
recommending that the Commission exercise its discretion to exclude 
``partial omissions'' from the final Rule.\69\ Fraud-by-partial-
omission or half-truths could violate final Rule 180.1 if the facts and 
circumstances of a particular case so warrant. Finally, the Commission 
declines to impose any restriction on final Rule 180.1(a)(2) to 
misstatements or omissions that distort or, in the case of an attempted 
violation of 180.1(a)(2), are likely to distort market conditions. Such 
a restriction would be tantamount to requiring a price or market effect 
for a violation of final Rule 180.1. As stated above, the Commission 
rejects any such requirement for a violation of final Rule 180.1 
because the statute it implements, CEA section 6(c)(1), imposes no such 
requirement.
---------------------------------------------------------------------------

    \67\ API and NPRA at page 11.
    \68\ See discussion in subsection G below.
    \69\ API and NPRA at page 23.
---------------------------------------------------------------------------

E. The Statutory Exception for Good Faith Mistakes

1. Comments
    When considering the application of final Rule 180.1(a)(2), several 
commenters asked the Commission to extend CEA section 6(c)(1)(C)'s 
provision for ``Good Faith Mistakes'' in the mistaken transmission of 
``false or misleading or inaccurate information to a price reporting 
service'' to other

[[Page 41404]]

violations under CEA section 6(c)(1) and proposed Rule 180.1. API and 
NPRA request that the good faith exception be expanded to cover ``all 
public statements or reports by a market participant or other 
communications covered by the proposed rule.'' \70\ Platts seeks 
extension of CEA section 6(c)(1)(C)'s good faith mistakes exception to 
proposed Rules 180.1 and 180.2, and Argus Media, Inc. (``Argus'') asks 
the Commission to extend CEA section 6(c)(1)(C) to CEA section 
9(a)(2).\71\
---------------------------------------------------------------------------

    \70\ API and NPRA at page 25.
    \71\ Platts Comment Letter at pages 4-6; Argus Comment Letter at 
pages 1 and 5-6.
---------------------------------------------------------------------------

2. Commission Determination
    In crafting CEA section 6(c)(1)(C), Congress could have extended 
the exception for good faith mistakes to all of CEA sections 6(c) and 
9(a)(2) but did not do so. Following the plain text of CEA section 
6(c)(1)(C), the Commission limited the good faith exception in final 
Rule 180.1 to the mistaken transmission of false or misleading or 
inaccurate information to a price reporting service. The Commission 
also makes clear that the scienter requirement of final Rule 180.1, 
final Rule 180.2, and CEA section 9(a)(2) functions to ensure that 
good-faith mistakes or negligence will not constitute a violation of 
the final Rules under any circumstance. Thus, a person lacking the 
requisite scienter cannot be found to have engaged in a manipulative or 
deceptive device or contrivance within the meaning of CEA section 
6(c)(1).

F. The Required Scienter for a Violation of Final Rule 180.1

1. Comments
    Several commenters asked the Commission to clarify the standard of 
scienter under proposed Rule 180.1.
    Senator Levin recommends that the Commission shift the burden of 
proof with respect to intent to market participants, which would 
require them to show that their conduct was not manipulative.\72\
---------------------------------------------------------------------------

    \72\ Senator Levin at page 4.
---------------------------------------------------------------------------

    API and NPRA state that the Commission should clarify that scienter 
may not be premised on the collective knowledge of an entire company, 
but instead must be based on the knowledge of the person participating 
in the deceptive or fraudulent conduct.\73\
---------------------------------------------------------------------------

    \73\ API and NPRA at page 18.
---------------------------------------------------------------------------

    The ABA Derivatives Committee, CEF, MFA, API and NPRA disagree with 
the Commission's proposal to adopt recklessness as the scienter 
requirement, believing instead that the language of the statute 
supports a specific intent standard.\74\ In the alternative, API and 
NPRA, CMC, Edison Electric Institute (``EEI''), MFA, and the 
Associations propose a standard of ``extreme recklessness.'' \75\ 
Additionally, commenter COPE states that the Commission should make 
clear that the type of recklessness contemplated is not recklessness in 
a tort sense, but rather a business activity that diverges so greatly 
from rational market behavior as to indicate a fraudulent intent.\76\
---------------------------------------------------------------------------

    \74\ ABA Derivatives Committee at pages 11-13; CEF at page 5; 
MFA at pages 6-7; API and NPRA at pages 12-16. API and NPRA also 
believe that a recklessness standard may be appropriate in the 
highly regulated securities context with its fiduciary duties and 
strict disclosure requirements, but a recklessness standard in this 
context would increase the costs of complying with a market 
manipulation rule and deter market participants from disclosing 
relevant information that helps markets to function more 
efficiently.
    \75\ API and NPRA at page 17; CMC at page 2; EEI Comment Letter 
at page 4; MFA at page 6; Associations at pages 2 and 6-9.
    \76\ COPE at page 7.
---------------------------------------------------------------------------

    The ABA Derivatives Committee requests that in cases alleging 
manipulation under final Rule 180.1, the Commission must show a 
specific intent to cause an artificial price to satisfy the scienter 
requirement.\77\
---------------------------------------------------------------------------

    \77\ ABA Derivatives Committee at pages 11-15.
---------------------------------------------------------------------------

    CEF requests that if a recklessness standard is adopted, it should 
not extend to violations arising under CEA section 9(a)(2).\78\ In 
addition, CEF suggests that the Commission confirm that it will not 
adopt a scienter requirement ``that creates an implied presumption that 
sophisticated traders understand and are aware of the effects of their 
actions taken in the normal course of business on other commodity or 
securities markets.'' \79\
---------------------------------------------------------------------------

    \78\ CEF at page 7.
    \79\ CEF at page 7. Rather, CEF believes that the CFTC should 
evaluate alleged manipulation on a case-by-case basis, taking into 
consideration the facts and circumstances of each case.
---------------------------------------------------------------------------

    PMAA supports and encourages the Commission to adopt 
``recklessness'' as the level of scienter, particularly when evaluating 
issues relating to algorithmic market manipulation.\80\ According to 
PMAA, the Commission's adoption of a ``recklessness'' standard in CEA 
section 4c(a)(7) and proposed Rules 180.1 and 180.2 should impose 
enhanced duties of diligence on those using or employing automated 
trading systems.\81\
---------------------------------------------------------------------------

    \80\ PMAA at page 2.
    \81\ PMAA at page 2.
---------------------------------------------------------------------------

    Mr. Clarence Townsend (``Townsend'') believes the standard of 
scienter should be strengthened to ``reckless manipulation.'' \82\
---------------------------------------------------------------------------

    \82\ Townsend Comment Letter at page 1.
---------------------------------------------------------------------------

    Professor Greenberger states that section 6(c)(1) lowers the 
standard of manipulation from ``knowingly'' to ``reckless.'' \83\ 
Professor Greenberger states that CEA section 6(c)(1) was designed to 
empower the Commission with ``the same anti-manipulation standard 
employed by the [SEC] for more than 75 years, which has been upheld and 
defined in many court cases, including the Supreme Court.'' \84\
---------------------------------------------------------------------------

    \83\ Professor Greenberger at page 2.
    \84\ Professor Greenberger at page 2 (internal quotation marks 
and citation omitted). Professor Greenberger states that the 
Commission correctly proposes that judicial precedent interpreting 
and applying Exchange Act Section 10(b) and SEC Rule 10b-5 in the 
context of the securities markets should guide application of the 
scienter standard relevant to proposed Rule 180.1 given that 
proposed Rule 180.1 is modeled on SEC Rule 10b-5. Id. In Professor 
Greenberger's view, such judicial precedent ``will provide 
regulatory certainty and will not disrupt the market function.'' Id.
---------------------------------------------------------------------------

    The Air Transport Association (``ATA'') believes that the scienter 
standard should enable the Commission to police and punish a broader 
array of potentially manipulative conduct than is reachable under the 
CEA section 9(a)(2) anti-manipulation provision.\85\
---------------------------------------------------------------------------

    \85\ ATA Comment Letter at page 4.
---------------------------------------------------------------------------

2. Commission Determination
    Upon consideration of all the comments in this rulemaking record, 
the Commission clarifies that a showing of recklessness is, at a 
minimum, necessary to prove the scienter element of final Rule 
180.1.\86\ Consistent with long-standing precedent under the 
commodities and securities laws, the Commission defines recklessness as 
an act or omission that ``departs so far from the standards of ordinary 
care that it is very difficult to believe the actor was not aware of 
what he or she was doing.'' \87\ Proof of knowledge, however, is not 
required.\88\ Certain commenter requests for a scienter standard of 
``specific intent'' would unduly limit the scope of final Rule 180.1. 
Likewise,

[[Page 41405]]

in response to comments calling for a bifurcated approach to scienter 
under 6(c)(1) and final Rule 180.1, that is, specific intent to effect 
a price or price trend that does not reflect legitimate forces of 
supply and demand for non-fraud based manipulations, and ``extreme 
recklessness'' in fraud-based manipulations, the Commission states, as 
it did in the NOPR, that it will be guided, but not controlled by, 
judicial precedent interpreting and applying scienter under Exchange 
Act section 10(b) and SEC Rule 10b-5.\89\ At the same time, the 
Commission makes clear that final Rule 180.1 does not reach inadvertent 
mistakes or negligence. Final Rule 180.1 will not affect market 
participants engaged in legitimate market activity undertaken in good 
faith.\90\ Under final Rule 180.1, the plaintiff bears the burden of 
proving the violation by a preponderance of the evidence.\91\
---------------------------------------------------------------------------

    \86\ See, e.g., SEC v. U.S. Envtl., Inc., 155 F.3d 107, 111 (2d 
Cir. 1998) (finding allegation of reckless participation in a market 
manipulation sufficient to state a claim of violation of Exchange 
Act section 10(b)).
    \87\ Drexel Burnham Lambert Inc. v. CFTC, 850 F.2d 742, 748 (DC 
Cir. 1988); see also Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 
1033, 1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) 
(holding that recklessness under SEC Rule 10b-5 means ``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'') (internal quotation marks and citation omitted); SEC v. 
Platforms Wireless Int'l Corp., 617 F.3d 1072, 1093-94 (9th Cir. 
2010) (``scienter [under SEC Rule 10b-5] requires either deliberate 
recklessness or conscious recklessness, and [ ] it includes a 
subjective inquiry turning on the defendant's actual state of 
mind'') (internal quotation marks and citations omitted).
    \88\ See, e.g. Hollinger, v. Titan Capital Corp., 914 F.2d 1564, 
1568-96 (9th Cir. 1990) (en banc), cert. denied, 111 S. Ct. 1621 
(1991).
    \89\ 75 FR at 67659.
    \90\ Consistent with the Supreme Court's interpretation of 
Exchange Act section 10(b) in Ernst & Ernst v. Hochfelder, 425 U.S. 
185, 206 (1976), the Commission finds no indication in CEA section 
6(c)(1) that Congress intended anyone to be made liable for a 
violation of final Rule 180.1 unless he or she acted other than in 
good faith.
    \91\ See, e.g., Herman & Maclean v. Huddleston, 459 U.S. 375, 
387-90 (1983), citing SEC v. C. M. Joiner Leasing Corp., 320 U.S. 
344, 355 (1943).
---------------------------------------------------------------------------

    With respect to comments requesting clarification that scienter may 
not be premised on the collective knowledge of an entire company, the 
Commission notes that there is disagreement among the circuits on the 
collective knowledge theory--that is, the courts disagree on whether 
the conduct of one corporate agent can be aggregated with another 
corporate agent's state of mind in holding a corporation liable for 
fraud.\92\ The judicial decisions on the applicability of the 
collective knowledge theory under Exchange Act section 10(b) involve 
only private securities litigation; the Commission is unaware of any 
judicial decision applying the so-called collective knowledge theory 
under Exchange Act section 10(b) where the government is the plaintiff. 
Further, the Supreme Court has not spoken to the issue under Exchange 
Act section 10(b) or any other similar fraud-based prohibition.
---------------------------------------------------------------------------

    \92\ Compare, e.g., United States v. Bank of New England, N.A., 
821 F.2d 844, 856 (1st Cir. 1987) (holding in a corporate criminal 
liability action arising under the Currency Transaction Reporting 
Act, that ``[c]orporations compartmentalize knowledge, subdividing 
the elements of specific duties and operations into smaller 
components. The aggregate of those components constitutes the 
corporation's knowledge of a particular operation * * * [and the] 
corporation cannot plead innocence by asserting that the information 
obtained by several employees was not acquired by any one individual 
who then would have comprehended its full import''); City of Monroe 
Employees Retirement System v. Bridgestone Corp., 387 F.3d 468, 690 
(6th Cir. 2004) (finding that plaintiffs adequately pleaded 
securities fraud claims against a corporate defendant even though 
the complaint failed to allege that the corporate agent whose 
scienter was imputed to the corporation ``played any role in 
drafting, reviewing, or approving'' the allegedly false 
representations or ``that he was, as a matter of practice, or by job 
description, typically involved in the creation of such 
documents''); with Nordstrom Inc. v. Chubb & Son Inc., 54 F. 3d 
1424, 1435 (9th Cir. 1995) (``there is no case law supporting an 
independent `collective scienter' theory,'' i.e., the theory ``that 
a corporation's scienter could be different from that of an 
individual director or officer''); Southland Sec. Corp. v. INSpire 
Ins. Solutions Inc., 365 F.3d 353, 364-65 (5th Cir. 2004) (quoting 
In re Apple Computer Inc., 243 F. Supp. 2d 1012, 1023 (N.D. Cal. 
2002)) (`` `A defendant corporation is deemed to have the requisite 
scienter for fraud only if the individual corporate officer making 
the statement has the requisite level of scienter * * * at the time 
he or she makes the statement' * * * [T]he required state of mind 
must actually exist in the individual making the misrepresentation 
and may not simply be imputed to that individual on general 
principles of agency''), cited with approval in Makor Issues & 
Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 708 (7th Cir. 2008); 
United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1274-
75 (DC Cir. 2010) (holding a ``collective knowledge'' jury 
instruction inconsistent with the scienter requirement under the 
False Claims Act and expressing doubt, in dicta, regarding the use 
of ``collective knowledge'' to establish corporate scienter in non-
FCA cases).
---------------------------------------------------------------------------

    Given that the collective knowledge theory of alleging and proving 
scienter against corporate defendants is permissible in certain 
circuits, and because the Commission finds the policy rationale 
underlying the theory to be in the public interest (i.e., that it 
creates incentives for the corporate entity to create and maintain 
effective internal communications and controls to prevent wrongful and 
harmful conduct), the Commission declines to adopt comments requesting 
that the Commission foreclose the collective knowledge theory in any 
case. Rather, the Commission intends to follow the law of the various 
circuits and, in all cases, consider the totality of the facts and 
circumstances of a particular case before deciding whether enforcement 
action is appropriate and in the public interest.

G. The Scope of the Phrase ``In Connection With''

1. Comments
    In response to the NOPR, Better Markets requested the Commission 
interpret the ``in connection with'' language of Proposed Rule 180.1 
broadly to include not only the transaction giving rise to a swap 
agreement, but also all of the continuing performance obligations under 
such agreement.\93\
---------------------------------------------------------------------------

    \93\ Better Markets at page 2. Better Markets notes that the SEC 
employed the language in connection with the ``offer, purchase or 
sale'' of any security-based swap, and also targeted a specific 
characteristic of swaps--the ongoing payments or deliveries between 
the parties throughout the life of the security-based swap in 
accordance with their rights and obligations.
---------------------------------------------------------------------------

    CME Group states that the Commission should interpret the ``in 
connection with'' standard to require a ``nexus'' between transactions 
(or offers to transact) subject to CFTC jurisdiction and prohibited 
fraudulent or deceptive conduct.\94\ CEF expressed concern that a broad 
interpretation of the phrase ``in connection with'' may result in 
conflicting or duplicative regulation with other agencies, including 
the Federal Energy Regulatory Commission (``FERC''), SEC, Federal Trade 
Commission (``FTC'') and the Public Utility Commission of Texas.\95\
---------------------------------------------------------------------------

    \94\ CME Group at pages 9-10.
    \95\ CEF at pages 3-4.
---------------------------------------------------------------------------

    Senator Levin believes the Commission should employ its new 
authority under CEA section 6(c) to prevent manipulative and disruptive 
activities even where the impacts may only be felt in other markets--
including markets regulated by the SEC.\96\ Senator Levin expresses 
concern that, as currently drafted, the proposed rules may not allow 
the CFTC to effectively regulate market activity that is intended to or 
actually does artificially change prices in another market or 
product.\97\
---------------------------------------------------------------------------

    \96\ Senator Levin at pages 5-6.
    \97\ Senator Levin at pages 5-6.
    \98\ SEC v. Zandford, 535 U.S. 813 (2002).
---------------------------------------------------------------------------

2. Commission Determination
    Upon careful consideration of the entire rulemaking record, the 
Commission finds it unnecessary to alter the text of final Rule 180.1. 
The Commission interprets the words ``in connection with'' broadly, not 
technically or restrictively. Section 6(c)(1) and final Rule 180.1 
reach all manipulative or deceptive conduct in connection with the 
purchase, sale, solicitation, execution, pendency, or termination of 
any swap, or contract of sale of any commodity in interstate commerce, 
or contract for future delivery on or subject to the rules of any 
registered entity. Accordingly, final Rule 180.1 covers conduct 
including, but not limited to, all of the payment and other obligations 
arising under a swap.
    While broad, the elasticity of the ``in connection with'' language 
is not limitless. In this regard, the Commission finds the Supreme 
Court's decision in Zandford interpreting SEC Rule 10b-5's ``in 
connection with'' language particularly instructive.\98\ In its 
opinion, the Court gave the following example to

[[Page 41406]]

highlight the limits of SEC Rule 10b-5 applicability:

    If * * * a broker embezzles cash from a client's account or 
takes advantage of the fiduciary relationship to induce his client 
into a fraudulent real estate transaction, then the fraud would not 
include the requisite connection to a purchase or sale of 
securities. Likewise if the broker told his client he was stealing 
the client's assets, that breach of fiduciary duty might be in 
connection with a sale of securities, but it would not involve a 
deceptive device or fraud.\99\
---------------------------------------------------------------------------

    \99\ Id. at 825 n. 4. The holding of Zandford is consistent with 
judicial interpretations of the phrase ``in or in connection with'' 
in the anti-fraud provisions of the CEA, particularly section 4b(a), 
which prohibits any person from defrauding another person ``in or in 
connection with'' a commodity futures transaction. For example, in R 
& W Tech. Servs. Ltd., v. CFTC, 205 F.3d 165 (5th Cir. 2000), cert. 
denied, 531 U.S. 817 (2000), the Fifth Circuit, in affirming the 
liability of a defendant for defrauding another person, refused to 
construe ``in or in connection with'' and 4b(a) narrowly. Id. at 
171-74. Rather, the court endorsed the Commission's position that 
fraud in the sale of investment advice will be ``in connection 
with'' the sale of a commodities futures contract ``if the fraud 
relates to'' the risk of trading and the primary purpose of the 
advice is to execute trades. Id. at 172-73. As a general matter, the 
Supreme Court has stated that anti-fraud and anti-manipulation 
provisions of the CEA are to be construed broadly. See, e.g., CFTC 
v. Schor, 478 U.S. 833, 836 (1986) (``The CEA broadly prohibits 
fraudulent and manipulative conduct in connection with commodity 
futures transactions.'').

    The Commission intends to be guided by this and other precedent 
interpreting the words ``in connection with'' in the securities 
context.\100\
---------------------------------------------------------------------------

    \100\ Zandford, 535 U.S. 813 (2002); see also Merrill Lynch, 
Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 85 (2006) 
(holding that the ``in connection with'' language of SEC Rule 10b-5 
requires a nexus between fraudulent conduct and a securities 
transaction).
---------------------------------------------------------------------------

    As to comments regarding cross-market manipulation, the Commission 
intends to apply final Rule 180.1 to the fullest extent allowed by law 
when determining whether conduct in one market is ``in connection 
with'' an activity or product subject to the jurisdiction of the 
Commission. Further, where the Commission's jurisdiction is not 
exclusive,\101\ the Commission will, to the extent practicable and 
consistent with its longstanding practice, coordinate its enforcement 
efforts with other federal or state law enforcement authorities.
---------------------------------------------------------------------------

    \101\ 7 U.S.C. 2(a)(1)(A).
---------------------------------------------------------------------------

H. Penalty, Procedure, Effect on Automated Trading Systems, and a 
Proposal To Define Manipulation

1. Comments
    With regard to the penalty for violating final Rule 180.1, API and 
NPRA state that if the Commission chooses to promulgate a catch-all 
anti-fraud rule without regard to whether the conduct had a 
manipulative purpose or effect (a proposal that API and NPRA submit 
would exceed the Commission's authority), then the Commission should 
clarify that the enhanced sanctions in section 753 of the Dodd-Frank 
Act apply only to cases of manipulation or attempted manipulation, and 
not to every alleged violation of the rule.\102\ CEF seeks 
clarification that, in a case of a false reporting violation under CEA 
section 6(c)(1)(A), the Commission is not permitted to impose a penalty 
of an amount equal to the greater of $1 million or treble damages 
pursuant to CEA section 6(c)(10)(C)(ii).\103\
---------------------------------------------------------------------------

    \102\ API and NPRA at pages 10-11.
    \103\ CEF at page 8.
---------------------------------------------------------------------------

    On the subject of implementation, API and NPRA ask that any final 
rule adopt a 180-day effective date to enable the industry to design 
and implement comprehensive compliance programs.\104\ EEI and CEF 
recommend that the CFTC implement its new authority in a cooperative 
manner with FERC and further recommend that it hold a workshop, before 
the final Rule is issued, on a variety of subjects related to 
interpretation and application of the final Rule.\105\ Professor 
Greenberger believes that the Commission correctly states in the NOPR 
that market participants should already have constructed and 
implemented procedures to guard against their employees' and agents' 
attempts at manipulation. As such, Professor Greenberger believes that 
there should not be any additional cost to the existing market 
participants.\106\
---------------------------------------------------------------------------

    \104\ API and NPRA at page 27.
    \105\ EEI at pages 2-4; CEF at pages 4-5.
    \106\ Greenberger at page 4.
---------------------------------------------------------------------------

    On the issue of use or employment of algorithmic or automated 
trading systems, the PMAA requests that the Commission establish 
standards governing the use of algorithmic trading technology by 
requiring internal controls such as logs and specific notification 
protocols, directed to the trading entity, when significant code 
modification of its algorithm takes place, including interpretation by 
the algorithm of digitized news and social networking sources.\107\
---------------------------------------------------------------------------

    \107\ PMAA at pages 1-2.
---------------------------------------------------------------------------

    Finally, the Brattle Group economists state that the Commission 
should adopt its proposed definition of manipulation: ``Manipulation is 
engaging in anomalous price-making behavior intended to alter a price 
in order to profit in affected price-taking transactions.'' \108\ The 
Brattle Group economists contend that manipulation thus defined can be 
interpreted as a form of fraud whereby anomalous behavior (non-
economic, stand-alone transactions for the actor) injects false or 
misleading information into a market and consequently impairs its 
integrity.\109\
---------------------------------------------------------------------------

    \108\ Brattle Group economists Comment Letter at page 6.
    \109\ Brattle Group economists at pages 6-7.
---------------------------------------------------------------------------

2. Commission Determination
    With respect to penalties, the Commission will follow CEA section 
6(c)(10)(C)(ii), which states that the Commission may assess ``in any 
case of manipulation or attempted manipulation in violation of [CEA 
section 6(c)] or section 9(a)(2), a civil penalty of not more than an 
amount equal to the greater of--(I) $1,000,000; or (II) triple the 
monetary gain to the person for each such violation.'' CEF's request 
that the penalties for manipulation not apply to violations of CEA 
section 6(c)(1)(A) is declined because such an outcome would conflict 
with the plain language of the statute. False or misleading or 
inaccurate reporting is a type of unlawful manipulation specifically 
prohibited by CEA section 6(c)(1)(A). Accordingly, where section 
6(c)(1)(A) applies, the Commission may assess a penalty of an amount 
equal to the greater of $1 million or treble damages under CEA section 
6(c)(10)(C)(ii) for each such violation.
    The Commission declines to adopt comments recommending that it 
conduct further technical conferences on this rulemaking. The 
Commission has provided notice and opportunity to comment and has met 
with numerous groups to discuss this rulemaking.\110\ Further, as noted 
above, there is extensive case law interpreting SEC Rule 10b-5 upon 
which final Rule 180.1 is modeled.\111\
---------------------------------------------------------------------------

    \110\ A list of all external meetings held on Dodd-Frank Act 
section 753 is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
    \111\ Similarly, the Commission has ample experience enforcing 
the predecessor provisions of final Rule 180.2.
---------------------------------------------------------------------------

    The Commission declines to adopt comments requesting heightened 
supervision of algorithmic and automated trading systems as beyond the 
scope of this rulemaking. Nevertheless, as a general matter, a 
supervisory failure may be one of the facts and circumstances that the 
Commission considers in determining whether a violation of the final 
Rule exists.
    The Commission declines to adopt comments proposing a new 
economics-based definition of manipulation. Instead, as stated above, 
all relevant

[[Page 41407]]

facts and circumstances must be considered in determining whether a 
violation of final Rule 180.1 exists.

V. Discussion of CEA Section 6(c)(3) and Final Rule 180.2

    The Commission proposed Rule 180.2 under its general rulemaking 
authority, CEA section 8a(5) and its statutory authority to prohibit 
manipulation under new CEA section 6(c)(3). Proposed Rule 180.2 mirrors 
the text of new CEA section 6(c)(3), by stating that ``[i]t shall be 
unlawful for any person, directly or indirectly, to manipulate or 
attempt to manipulate the price of any swap, or of any commodity in 
interstate commerce, or for future delivery on or subject to the rules 
of any registered entity.'' In the NOPR, the Commission proposed to 
continue ``interpreting the prohibition on price manipulation and 
attempted price manipulation to encompass every effort to improperly 
influence the price of a swap, commodity, or commodity futures 
contract.'' \112\
---------------------------------------------------------------------------

    \112\ 75 FR at 67658.
---------------------------------------------------------------------------

A. Comments

    The CME Group believes that the Commission should employ a bright-
line test under final Rule 180.2 that distinguishes prohibited 
manipulative conduct from legitimate competitive trading activities. To 
that end, CME Group urges the Commission to clarify what factors or 
types of activity the Commission considers to be ``intended to 
interfere with the legitimate forces of supply and demand.'' \113\ The 
CME Group believes the Commission's statement in the NOPR that ``an 
illegal effect on price can often be conclusively presumed from the 
nature of the conduct in question and other factual circumstances not 
requiring expert economic analysis'' \114\ is tantamount to a ``we-
know-it-when-we-see-it-approach'' that impermissibly collapses the 
third and fourth elements of the traditional framework for manipulation 
outlined in Cox.\115\
---------------------------------------------------------------------------

    \113\ CME Group at page 11. CME Group states that the Commission 
also should clarify how to determine whether a price has been 
affected by illegitimate factors. CME Group at pages 11-12.
    \114\ 75 FR at 67660-61.
    \115\ In the Matter of Cox, [1986-1987 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) P 23,786 at 34,060-61 (CFTC July 15, 1987).
---------------------------------------------------------------------------

    COPE and EEI believe that the provisions in proposed Rule 180.1 are 
the same as proposed Rule 180.2 and thus the latter should be 
deleted.\116\ EEI recommends that if the Commission chooses not to 
delete proposed Rule 180.2, it should carve this section out of the 
current rulemaking initiative and issue a separate and more detailed 
NOPR for public comment.\117\
---------------------------------------------------------------------------

    \116\ COPE at pages 6-7; EEI at page 6.
    \117\ EEI at page 6.
---------------------------------------------------------------------------

    EEI requests that the Commission affirm in regulatory text that the 
scienter requirement for proposed Rule 180.2 is specific intent under 
the Commission's four-prong test.\118\ This four-part test is described 
in subsection B below. Likewise, the Associations believe that the 
Commission should not use CEA section 6(c)(3) as a mechanism to lower 
the specific intent standard traditionally required in manipulation 
cases. Instead, the Commission should issue clarifying guidance that 
conforms to the traditional framework of enforcement, including the 
theory of liability set forth in the Di Placido matter.\119\
---------------------------------------------------------------------------

    \118\ EEI at page 7.
    \119\ Associations at page 10 referring to In re Di Placido, 
2008 WL 4831204 (CFTC 2008), affd in pertinent part, Di Placido v. 
CFTC, 364 Fed Appx. 657, 2009 WL 3326624 (2d Cir. 2009), cert. 
denied, 130 S. Ct. 1883 (Mar. 22, 2010).
---------------------------------------------------------------------------

    With respect to the scope of application of proposed Rule 180.2, 
CMC recommends the Commission clarify that CEA section 6(c)(3) does not 
confer any additional enforcement authority beyond the holding in the 
Di Placido matter.\120\
---------------------------------------------------------------------------

    \120\ CMC at pages 2-3.
---------------------------------------------------------------------------

    CMC and MFA recommend that the Commission make clear that proposed 
Rule 180.2 does not create a presumption that a price is artificial 
merely because one or more isolated transactions are deemed uneconomic 
without proof of a specific intent to move prices.\121\ The 
Associations and MFA believe that the Commission's statement in the 
NOPR ``that prices [are] affected by a factor not consistent with 
normal forces of supply and demand will often follow inescapably from 
proof of the actions of the alleged manipulator'' is an overly 
aggressive reading of judicial precedent like Di Placido. \122\ MFA 
believes that the Commission should not create a ``conclusive 
presumption'' that a price is artificial without proof of specific 
intent to move prices.\123\
---------------------------------------------------------------------------

    \121\ CMC at pages 2-3; MFA at pages 7-8.
    \122\ Associations at page 11; MFA at pages 7-8.
    \123\ MFA at pages 7-8.
---------------------------------------------------------------------------

    Professor Greenberger states that although the Commission has 
already interpreted the ``prohibition on price manipulation and 
attempted price manipulation to encompass every effort to influence the 
price of a swap, commodity, or commodity futures contract that is 
intended to interfere with the legitimate forces of supply and demand 
in the marketplace,'' it is important to reaffirm the relevance of that 
legal interpretation.\124\ Professor Greenberger believes that 
Commission precedent supports the position that illegal effect on price 
can often be conclusively presumed from the nature of the conduct in 
question and other factual circumstances not requiring expert economic 
analysis.\125\
---------------------------------------------------------------------------

    \124\ Professor Greenberger at page 4.
    \125\ Professor Greenberger at page 4.
---------------------------------------------------------------------------

    ATA believes that the Commission should consider whether its 
complete reliance on past precedent in interpreting manipulation under 
proposed Rule 180.2 needlessly narrows the potential reach of the 
amended anti-manipulation provision of section 6(c)(3), anchoring its 
interpretation to a past standard that has proven remarkably difficult 
to enforce.\126\ ATA notes that section 6(c)(3) as amended is broader 
than both its prior version and section 9(a)(2) by its inclusion of the 
word ``indirectly,'' making it unlawful to indirectly manipulate or 
attempt to manipulate prices.\127\
---------------------------------------------------------------------------

    \126\ ATA at page 1.
    \127\ ATA at page 4.
---------------------------------------------------------------------------

B. Commission Determination

    In response to the comments received regarding this matter, the 
Commission reiterates that, in applying final Rule 180.2, it will be 
guided by the traditional four-part test for manipulation that has 
developed in case law arising under 6(c) and 9(a)(2): (1) That the 
accused had the ability to influence market prices; (2) that the 
accused specifically intended to create or effect a price or price 
trend that does not reflect legitimate forces of supply and demand; 
\128\ (3) that artificial prices existed; and (4) that the accused 
caused the artificial prices.\129\
---------------------------------------------------------------------------

    \128\ In re Indiana Farm Bureau Cooperative Assn., Inc., [1982-
1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 21,796 (CFTC Dec. 
17, 1982), citing Volkart Bros., Inc. v. Freeman, 311 F.2d 52 (5th 
Cir. 1962); In re Hohenberg Bros. Co., [1975-1977 Transfer Binder] 
Comm. Fut. L. Rep. (CCH) ] 20,271 (CFTC Feb. 18, 1977).
    \129\ In re Cox [1986-1987 Transfer Binder], Comm. Fut. L. Rep. 
(CCH) ] 23,786, 1987 CFTC LEXIS 325, at *9, 1987 WL 106879, at *3 
(CFTC July 15, 1987). In cases of attempted manipulation under 
section 9(a)(2), the CFTC is required to show: (1) An intent to 
affect the market price; and (2) some overt act in furtherance of 
that intent. See In re Hohenberg Bros. Co., ] 20,271 at 21,477.
---------------------------------------------------------------------------

    The Commission reaffirms the requirement under final Rule 180.2 
that a person must act with the requisite specific intent. In other 
words, recklessness will not suffice under final Rule 180.2 as it will 
under final Rule 180.1. The Commission finds this level of intent 
necessary to ensure that legitimate conduct is not captured by final 
Rule 180.2, which covers non-fraud based manipulation. Given the

[[Page 41408]]

differences in scope of application between the final Rules, the 
Commission declines requests to consolidate them.
    The Commission declines requests to limit the application of final 
Rule 180.2 to the circumstances set forth in the commenters' analysis 
of particular cases, including the Di Placido matter. Likewise, the 
Commission's statement in the NOPR that an artificial price may be 
``conclusively presumed'' under certain facts and circumstances does 
not mean that an artificial price may be conclusively presumed in all 
cases. For example, where, as in Di Placido, a trader violates bids and 
offers in order to influence the volume-weighted average settlement 
price, an artificial price will be a ``reasonably probable 
consequence'' of the trader's intentional misconduct. Moreover, the 
Commission in the proposed Rule did not say that an artificial price 
will be conclusively presumed in the absence of any evidence, only that 
``extensive economic analysis may not be necessary'' to prove that an 
artificial price existed.\130\ To be clear, in some cases the 
conclusion that prices were affected by a factor not consistent with 
normal forces of supply and demand will require economic analysis, but 
in other cases, such a showing may, as the Commission stated in the 
proposed Rule, ``follow inescapably from proof of the actions of the 
alleged manipulator.'' \131\ This is unsurprising given the fact and 
circumstance specific nature of manipulation cases. Accordingly, the 
Commission is not, as some commenters state, collapsing the third and 
fourth elements of the traditional four-part test for manipulation 
under section 6(c)(3) and final Rule 180.2.
---------------------------------------------------------------------------

    \130\ 75 FR at 67660 (emphasis added).
    \131\ 75 FR at 67660.
---------------------------------------------------------------------------

    The Commission interprets the terms ``directly or indirectly'' as 
describing the level of involvement necessary to establish a violation 
of final Rule 180.2. In this context, the Commission interprets 
``indirectly'' to include the circumstance where a person uses a third 
party (e.g., an executing broker) to execute trades designed to 
manipulate, so it will be no defense that the person did not himself 
execute the transaction.
    Notwithstanding the fact that final Rule 180.2 mirrors the text of 
CEA section 6(c)(3), the Commission deems it appropriate and in the 
public interest to promulgate this rule and, in so doing, provide the 
above clarifications to the manner in which the Commission interprets 
and intends to apply final Rule 180.2.

V. Administrative Compliance and Cost-Benefit Considerations

    CEA section 15(a) \132\ requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA. By its terms, CEA section 15(a) does not require the 
Commission to quantify the costs and benefits of a rule or to determine 
whether the benefits of the regulation outweigh its costs; rather, it 
requires the Commission to ``consider'' the costs and benefits of its 
actions. CEA section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of five broad areas of market and 
public concern: (1) Protection of market participants and the public; 
(2) efficiency, competitiveness and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. The Commission may in its 
discretion give greater weight to any one of the five enumerated areas 
and could in its discretion determine that, notwithstanding its costs, 
a particular rule is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or accomplish any of 
the purposes of the CEA.
---------------------------------------------------------------------------

    \132\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    In the NOPR, the Commission stated that the proposed rules would 
enhance the authority of the Commission to ensure fair and equitable 
markets, and that market participants and the public will substantially 
benefit from such enhanced prevention and deterrence of manipulation. 
With respect to costs, the Commission also stated that participants in 
the markets should already have policies and procedures in place to 
ensure that their employees, affiliates and agents will refrain from 
attempting to manipulate the markets. The Commission invited public 
comment on its cost-benefit considerations.\133\ Below, we summarize 
and respond to those comments.\134\ Both in the response to comments 
and in the preamble, we address the areas of market and public concern 
for consideration of costs and benefits under CEA section 15(a).
---------------------------------------------------------------------------

    \133\ 75 FR at 67661.
    \134\ See note 2 for access to public comment file.
---------------------------------------------------------------------------

    API and NPRA commented that the potentially significant compliance 
costs and legal uncertainty must be weighed against the limited 
benefits of the proposed rules. Specifically, API and NPRA believe that 
it is problematic to expand the scope of the Commission's enforcement 
authority to cover routine cash market transactions in all areas of the 
economy, as it would potentially create inconsistencies with existing 
statutory and common law standards and would place a tremendous burden 
on the Commission's resources.\135\ Further, API and NPRA comment that 
the risk of inconsistent standards with federal and state enforcement 
authorities may exacerbate market participants' regulatory and 
compliance risk and burden.\136\ API and NPRA also believe that a 
recklessness standard under Section 753 would increase the costs of 
complying with a market manipulation rule and deter market participants 
from engaging in legitimate business activities and disclosing relevant 
information that helps markets to function more efficiently as price 
discovery venues.\137\ API and NPRA contend that where market 
participants seek to comply with an omissions rule by disclosing more 
information, companies will have an incentive to exercise great caution 
to ensure that no affirmative statement may be subjectively considered 
misleading through any omission.\138\
---------------------------------------------------------------------------

    \135\ API and NPRA at pages 4 and 8.
    \136\ API and NPRA at page 8.
    \137\ API and NPRA at pages 12-17.
    \138\ API and NPRA at page 22.
---------------------------------------------------------------------------

    MFA is concerned that ambiguity with respect to legal standards 
would increase transaction costs and chill legitimate trading 
practices, in turn decreasing market depth and liquidity.\139\ The 
Associations state that no new duties of disclosure, inquiry, or 
diligence should be imposed between two sophisticated parties to a 
bilateral transaction. Any such new duties may discourage legitimate 
trading activities, increase transaction costs, and, as a result, 
reduce liquidity and market depth.\140\ CME and Argus make similar 
comments as to the potential effects on markets as a whole, but do not 
express their concerns in terms of costs. The CME comments that the 
Commission must provide greater clarity as to the scope of prohibited 
conduct to maintain and promote fair and efficient markets and to 
protect market liquidity, price discovery, and the risk management 
functions of futures markets.\141\ Argus states that absent 
clarification from the Commission, the proposed rules may unnecessarily 
chill the voluntary submission of transaction related data by market 
participants to compilers of price indices which, in turn, hinders the 
Dodd-Frank Act's goal of market transparency.\142\ CEF comments that

[[Page 41409]]

market participants will face substantially more uncertainty with 
respect to their activities in energy markets and significant costs in 
attempting to comply with multiple regulatory regimes, thereby likely 
reducing participation in energy markets.\143\ CEF also comments that 
jurisdictional overlap of agencies will result in increased litigation 
costs, depletion of scarce resources, and uncertainty for both the 
Commission and market participants.\144\ CEF states the false reporting 
provision will place a heavy burden on all market participants as they 
attempt to comply with the new reporting requirements proposed by the 
Commission pursuant to the Act.\145\
---------------------------------------------------------------------------

    \139\ MFA at pages 3-4.
    \140\ Associations at pages 1 and 4.
    \141\ CME at page 3.
    \142\ Argus at page 1.
    \143\ CEF at pages 2-3.
    \144\ CEF at page 4.
    \145\ CEF at page 7.
---------------------------------------------------------------------------

    In contrast, Barnard believes the implementation costs of the 
proposed rules should be minimal.\146\ Professor Greenberger believes 
that the Commission correctly states that market participants should 
already have constructed and implemented procedures to guard against 
their employees' and agents' attempts at market manipulation. As such, 
Professor Greenberger believes that there should not be any additional 
costs to existing market participants.\147\
---------------------------------------------------------------------------

    \146\ Barnard at page 2.
    \147\ Professor Greenberger at page 4.
---------------------------------------------------------------------------

    The Commission has carefully considered the concerns expressed by 
some of the commenters that the final Rules could substantially 
increase costs on market participants, reduce market liquidity or chill 
legitimate market activity. However, commenters provide no 
quantification of the potential costs or reliable data as a basis for 
conclusions that substantial costs will be incurred as a result of the 
final Rules. Furthermore, commenters have not shown how such rules have 
negatively impacted comparable markets that trade comparable 
instruments and operate under comparable anti-manipulation rules.
    Specifically, regarding the comments received by API, NPRA, MFA, 
CME, Argus, and the Associations as to how the new rules may directly 
increase transaction costs, reduce market liquidity and depth, and 
hinder risk management functions of markets subject to the Commission's 
jurisdiction, the Commission notes that final Rule 180.1 is modeled on 
SEC Rule 10b-5. Many derivatives products in securities markets are 
traded on national securities exchanges under SEC regulation (e.g., 
equity options, stock index options, and stock index exchange-traded 
funds (``ETFs'')) and are therefore subject to the SEC anti-
manipulation rule.
    Many of these SEC-regulated derivatives products exhibit high and 
growing volumes, narrow bid-ask spreads, and high levels of market 
depth. SEC-regulated stock index ETFs and stock-index options are 
economically similar to CFTC-regulated stock index futures and options 
on those futures and, like these CFTC-regulated derivatives, serve 
primarily as risk-shifting instruments rather than instruments for 
capital formation. Any argument that the SEC's anti-fraud and anti-
manipulation regime has negatively affected the growth of SEC-regulated 
derivatives lacks a basis in fact and contradicts the generally 
accepted purpose of the SEC's anti-fraud and anti-manipulation rules, 
which is to protect investors and to promote market integrity.\148\ 
Moreover, the FERC also promulgated a rule modeled on SEC Rule 10b-5 
for FERC-jurisdictional markets in natural gas and electricity 
following the enactment of the Energy Policy Act of 2005. The FTC 
promulgated a comparable prohibition for petroleum markets. In the 
absence of any facts that anti-fraud and anti-manipulation rules 
negatively affect markets, the Commission does not find such assertions 
persuasive.
---------------------------------------------------------------------------

    \148\ See, e.g., Chemical Bank v. Arthur Andersen & Co., 726 
F.2d 930, 943 (2d Cir. 1984) (``The purpose of Sec.  10(b) and Rule 
10b-5 is to protect persons who are deceived in securities 
transactions--to make sure that buyers of securities get what they 
think they are getting * * *.'') (Friendly, J.); Laird v. Integrated 
Res., 897 F.2d 826, 831 at n.10 (5th Cir. 1990), quoting 3 Fletcher 
Cyclopedia of Corporations, section 900.3 (perm. ed. 1986) (``The 
general purpose and intent of the broad anti-fraud provisions of 
Section 10(b) and Rule 10b-5 is to protect investors, to prevent 
inequitable and unfair practices and to insure fairness in 
securities transactions generally * * *'').
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    As to the concerns of API and NPRA regarding increased costs from 
the Commission's purported expansion of its authority to cover a 
plethora of routine cash market transactions in all areas of the 
economy, with respect to the scope of final Rule 180.1, as discussed 
above, the Commission intends to exercise its authority under 6(c)(1) 
to cover transactions related to the futures or swaps markets, or 
prices of commodities in interstate commerce, or where the fraud or 
manipulation has the potential to affect cash commodities, futures, or 
swaps markets or participants in these markets. Thus, concerns about 
purported increased costs are misplaced in that they rest on an 
incorrect assumption about the scope of the Commission's expanded 
authority.
    In response to comments from CEF, the Commission re-iterates that 
the final Rules do not contain any requirement to create, retain, 
submit, or disclose any information. The final Rules impose no 
recordkeeping or related data retention or disclosure requirements on 
any person, including small businesses. Given that the final Rules 
impose no affirmative duties, it is unlikely that the final Rules will 
impose any additional ongoing costs beyond the existing costs 
associated with ensuring that behavior and statements are not 
fraudulent or manipulative. In that regard, the Commission believes 
that it will not be necessary for firms that currently have adequate 
compliance programs to hire additional staff or significantly upgrade 
their systems to comply with the new Rules. Firms may incur some one-
time costs such as costs associated with training traders and staff in 
the new Rules.
    The Commission believes the comments from API, NPRA, and CEF 
regarding increased costs pertaining to compliance, litigation, and 
uncertainty with respect to inconsistent standards with other 
regulatory agencies are misplaced. To the contrary, the Commission 
believes that market participants and the public will benefit from 
enhanced regulatory certainty that will arise from the Commission's 
adoption of an anti-manipulation rule that is more harmonized with 
existing anti-manipulation rules of the SEC, FERC, and FTC.
    In the NOPR, the Commission stated, and re-iterates here, that with 
respect to benefits, the proposed rules would enhance the authority of 
the Commission to ensure fair and equitable markets. The Commission 
stated, inter alia, that market participants and the public will 
benefit substantially from enhanced prevention and deterrence of 
manipulation. In light of public considerations under CEA section 15(a) 
in promulgating this rule, the Commission concludes that market 
participants and the public will benefit substantially from increased 
protection through the prevention and deterrence of fraud and 
manipulation. The final Rules will help ensure the efficiency, 
competitiveness, and financial integrity of derivatives markets. 
Markets free from fraud and manipulation function better as venues for 
price discovery and risk management.

A. Paperwork Reduction Act

    As discussed above, the provisions of Commission Regulations Part 
180 would not result in new recordkeeping

[[Page 41410]]

requirements within the meaning of the Paperwork Reduction Act of 1995.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \149\ requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting such impact.\150\ 
The final Rules will not have a significant economic impact on a 
substantial number of small entities. As explained above, legitimate 
market participants should already have procedures in place to prevent 
their employees and agents from manipulating the markets. The Chairman, 
on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the final Rules will not have a significant impact on a 
substantial number of small entities.
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    \149\ 5 U.S.C. 601.
    \150\ Id.
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C. Effective Date

    API and NPRA ask the Commission to adopt a 180-day delay in the 
effective date of the final Rules to enable the industry to design and 
implement comprehensive compliance programs.\151\ The Commission 
declines this request. A 180-day delayed effective date would unduly 
limit the Agency's responsibility to protect market participants and 
promote the integrity of the markets. Rather, consistent with Dodd-
Frank Act section 753(d) and Administrative Procedure Act section 
553(d), 5 U.S.C. 553(d), the final Rules will take effect 30 days after 
they are published in the Federal Register.
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    \151\ API and NPRA at page 27.
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List of Subjects in 17 CFR Part 180

    Commodity futures.

Authority and Issuance

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission adds a new 17 CFR Part 180 as set forth below:

PART 180--PROHIBITION AGAINST MANIPULATION

Sec.
180.1 Prohibition on the employment, or attempted employment, of 
manipulative and deceptive devices.
180.2 Prohibition on price manipulation.

    Authority:  7 U.S.C. 6c(a), 9, 12(a)(5) and 15, as amended by 
Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010); 5 U.S.C. 552 
and 552(b), unless otherwise noted.


Sec.  180.1  Prohibition on the employment, or attempted employment, of 
manipulative and deceptive devices.

    (a) It shall be unlawful for any person, directly or indirectly, in 
connection with any swap, or contract of sale of any commodity in 
interstate commerce, or contract for future delivery on or subject to 
the rules of any registered entity, to intentionally or recklessly:
    (1) Use or employ, or attempt to use or employ, any manipulative 
device, scheme, or artifice to defraud;
    (2) Make, or attempt to make, any untrue or misleading statement of 
a material fact or to omit to state a material fact necessary in order 
to make the statements made not untrue or misleading;
    (3) Engage, or attempt to engage, in any act, practice, or course 
of business, which operates or would operate as a fraud or deceit upon 
any person; or,
    (4) Deliver or cause to be delivered, or attempt to deliver or 
cause to be delivered, for transmission through the mails or interstate 
commerce, by any means of communication whatsoever, a false or 
misleading or inaccurate report concerning crop or market information 
or conditions that affect or tend to affect the price of any commodity 
in interstate commerce, knowing, or acting in reckless disregard of the 
fact that such report is false, misleading or inaccurate. 
Notwithstanding the foregoing, no violation of this subsection shall 
exist where the person mistakenly transmits, in good faith, false or 
misleading or inaccurate information to a price reporting service.
    (b) Nothing in this section shall be construed to require any 
person to disclose to another person nonpublic information that may be 
material to the market price, rate, or level of the commodity 
transaction, except as necessary to make any statement made to the 
other person in or in connection with the transaction not misleading in 
any material respect.
    (c) Nothing in this section shall affect, or be construed to 
affect, the applicability of Commodity Exchange Act section 9(a)(2).


Sec.  180.2  Prohibition on price manipulation.

    It shall be unlawful for any person, directly or indirectly, to 
manipulate or attempt to manipulate the price of any swap, or of any 
commodity in interstate commerce, or for future delivery on or subject 
to the rules of any registered entity.

    Issued in Washington, DC, on July 7, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Prohibition on the Employment, or Attempted Employment, 
of Manipulative and Deceptive Devices; Prohibition on Price 
Manipulation--Commission Voting Summary and Statements of Commissioners

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

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, 
Sommers, O'Malia and Chilton voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rulemaking to enhance the Commission's 
ability to protect against manipulation. Effective regulation 
requires an effective enforcement program. The Dodd-Frank Act 
enhances the Commission's enforcement authorities in the futures 
markets and expands them to the swaps markets. This rule implements 
new Dodd-Frank authorities to police against fraud and fraud-based 
manipulative schemes, based upon similar authority that the 
Securities and Exchange Commission, Federal Energy Regulatory 
Commission and Federal Trade Commission have for securities and 
certain energy commodities.
    In the past, the CFTC had the ability to prosecute manipulation, 
but to prevail, it had to prove the specific intent of the accused 
to create an artificial price. Under the new law and one of the 
rules before us today, the Commission's anti-manipulation reach is 
extended to prohibit the reckless use of fraud-based manipulative 
schemes. This closes a significant gap, as it will broaden the types 
of cases we can pursue and improve the chances of prevailing over 
wrongdoers.
    The rule also implements the Dodd-Frank Act's price-based 
manipulation authority to police against corners and squeezes. These 
new authorities expand the CFTC's arsenal of enforcement tools and 
strengthen the Commission's ability to effectively deal with threats 
to market integrity. We will use these tools to be a more effective 
cop on the beat, to promote market integrity and to protect market 
participants.
    I thank Senator Maria Cantwell for her work to secure this 
important authority for the CFTC. As Senator Cantwell explained in 
proposing that this authority be included in the Commodity Exchange 
Act, ``It is a strong and clear legal standard that allows 
regulators to successfully go after reckless and manipulative 
behavior.''

Attachment A

    Parties filing comments:

Air Transport Association (ATA)

[[Page 41411]]

American Bar Association, Derivatives and Futures Law Committee, 
Business Law Section (ABA Derivatives Committee)
American Petroleum Institute (API) and National Petrochemical and 
Refiners Association (NPRA)
Argus Media, Inc. (Argus)
Barnard, Chris (Barnard)
Better Markets
Brattle Group Economists (Brattle Group)
Carini, Peter*
CME Group, Inc. (CME Group)
Coalition of Physical Energy Companies (COPE)
Commodity Markets Council (CMC)
Council of Institutional Investors (Council)
Edison Electric Institute (EEI)
Freddie Mac
Futures Industry Association, International Swaps and Derivatives 
Association, Inc. (ISDA) and Securities Industry and Financial 
Markets Association (SIFMA) (together, the Associations)
Managed Funds Association (MFA)
Pen Fern Oil Co., Inc.*
Petroleum Marketers Association of America (PMAA)
Platts
Scullin Oil Co.*
Townsend, Clarence (Townsend)
U.S. Senator Carl Levin (Senator Levin)
University of Maryland School of Law, Professor Michael Greenberger 
(Professor Greenberger)
Weir, Bix
West Virginia Oil Marketers & Grocers Association (OMEGA)*
Working Group of Commercial Energy Firms (CEF)
Zwack, Joseph

    * Denotes commenters filing identical comments which were 
consolidated.

[FR Doc. 2011-17549 Filed 7-13-11; 8:45 am]
BILLING CODE 6351-01-P