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FTC Proposes Petroleum Products Markets Anti-Manipulation Rule

April 20, 2009

On April 16, 2009, the Federal Trade Commission (“FTC” or “the Commission”) issued a Revised Notice of Proposed Rulemaking (“RNPRM”) for the purpose of implementing Section 811 of Subtitle B of Title VIII of the Energy Independence and Security Act of 2007 (“EISA”). That statute grants the FTC jurisdiction over manipulation of wholesale petroleum products markets, including the reporting of false or misleading information related to these products. Any party violating an FTC rule promulgated under EISA may be assessed a civil penalty of up to $1 million per violation per day, in addition to any relief available to the Commission under the FTC Act.

The FTC began the rulemaking process in May of 2008 when it issued an Advanced Notice of Proposed Rulemaking and in August 2008 when it issued a Notice of Proposed Rulemaking. After receiving comments in that process, the FTC issued the RNPRM with comments expected to be due 30 days after publication in the Federal Register (the due date is expected to be approximately May 20, 2009).

As now proposed by the FTC, the RNPRM provides:

“It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, to: (a) knowingly engage in any act, practice, or course of business – including the making of any untrue statement of material fact – that operates or would operate as a fraud or deceit upon any person; or

(b) intentionally fail to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or tends to distort market conditions for any such product,”

Person means “any individual, group, unincorporated association, limited or general partnership, corporation, or other business entity,”

Knowingly means” with actual or constructive knowledge such that the person knew or must have known that his or her conduct was fraudulent or deceptive": and

Wholesale means: "(1) all purchases or sales of crude oil or jet fuel; and (2) all purchases or sales of gasoline or petroleum distillates (other than jet fuel) at the terminal rack or upstream of the terminal rack level."

The Commission has explained that the proposed rule retains the anti-fraud concept of SEC Rule 10b-5 (which has similar statutory text) but is tailored to wholesale petroleum markets. Its scope is broad with neither oil pipeline markets regulated by FERC nor futures markets regulated by the CFTC exempted. In addition, the FTC explicitly does not take a position as to whether EISA and violation of this rule create a private right of action. 

The RNPRM attempts to clarify some aspects of the proposed rule, but, generally, the concepts and regulatory approach to the issues remain similar. For example, while a prohibited omission must be such that it “distorts or tends to distort market conditions for any such product,” it “should not be read as requiring that the FTC show the market has actually been distorted.”  As explained by the FTC, “because there is no economic justification for fraudulent or deceptive conduct in any market, [r]equiring a showing of price effects – and imposing the concomitant additional evidentiary burden upon the Commission – would impose an unnecessary risk that conduct detrimental to the integrity of the market would escape successful challenge.”

As part of its request for comment on the RNPRM, the Commission has requested comment on approximately 40 questions. These questions address: issues of a general nature; specific provisions of the proposed rule; alternative language; and hypotheticals regarding application of the proposed rule.