Over the last eight months, since proposing a rule to implement the Dodd-Frank amendments to the Commodity Exchange Act (CEA), the Commodity Futures Trading Commission (CFTC) has sought to expand its authority over market manipulation in the energy sector. The CFTC has arguably gone beyond the plain language of the Dodd-Frank Act to interpret its anti-manipulation authority broadly, without providing clear guidelines to participants in energy markets who stand to be affected by the CFTC's increasingly aggressive approach to policing perceived manipulation in energy markets.

Since 1936, the CFTC has drawn its authority to prohibit market manipulation from the CEA, which has traditionally focused on price manipulation caused by attempts to ‘squeeze” or “corner” the market for a commodity. The Dodd-Frank Act amendments to the CEA clarified and expanded the scope of unlawful conduct by adding a new subsection 6(c)(1) that prohibits fraud-based manipulation schemes. [1] Specifically, subsection 6(c)(1) prohibits “the use or employment of 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 entity registered with the CFTC.”

In November 2010, the CFTC proposed a rule, 17 C.F.R. 180, implementing the Dodd-Frank amendments to the CEA. [2] The CFTC proposed to interpret CEA section 6(c)(1) as a “broad, catch-all provision reaching fraud in all its forms.” Additionally, it proposed to interpret 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."

The CFTC stated that it will generally look to the Securities and Exchange Commission's (SEC) Rule 10b-5 as a guide for its understanding of “any manipulative or deceptive device or contrivance,” which has been interpreted as prohibiting all practices “that are intended to mislead investors by artificially affecting market activity.” However, it offered no attempt to resolve differences among federal courts of appeals over 10b-5 standards.

First, the CFTC proposed that—consistent with Rule 10b-5—subsection 6(c)(1) be given a broad, remedial reading, embracing the use or employment, or attempted use or employment, of any manipulative or deceptive contrivance for the purpose of impairing, obstructing or defeating the integrity of the markets over which the CFTC has jurisdiction.

Second, the new subsection would adopt a “scienter” requirement by proposing that “reckless”, in addition to intentional, conduct may violate subsection 6(c)(1). Despite having modeled its anti-manipulation rule on Rule 10b-5, the CFTC has explained that Rule 10b-5 precedent should only guide, but not control, its application of the scienter requirement. The CFTC's unclear language on the precedential value of Rule 10b-5 decisions is exacerbated by the fact that the CFTC has not clarified its understanding of “reckless” behavior in light of the varying interpretations among the federal courts of appeals. [3] In short, the CFTC gives the public little if any guideline on what constitutes the requisite scienter for market manipulation.

The Dodd-Frank Act's anti-manipulation amendments do not take effect until the CFTC promulgates a final rule. The Act, which passed on July 21, 2010, requires the CFTC to issue an implementing rule within a year, thus the CFTC was expected to have implemented final anti-manipulation rules by July. However, on June 12, 2011, the CFTC announced that it was pushing back the deadline for implementing final rules until December 31, 2011. Until the final anti-manipulation rules are in effect, the CFTC had stated that it will not grant relief from the anti-manipulation rules currently in force.

Despite the fact that CFTC will quite possibly not have final anti-manipulation rules in July, it has already shown that it will be taking a more assertive role in policing market manipulation. On April 22, 2011, Attorney General Eric Holder announced the formation of an inter-agency “Oil and Gas Price Fraud Working Group,” that will monitor oil and gas markets for wrongdoing that may be leading to increased gasoline prices. [4] The Working Group will include representatives from the CFTC, as well as the Department of Justice, the National Association of Attorneys General, the FTC, the Department of the Treasury, the Federal Reserve Board, the SEC, and the Departments of Agriculture and Energy. In the face of political pressures given the recent rise in gasoline prices, the CFTC will likely compete with other agencies in the Working Group to take a more aggressive approach to policing market manipulation than in the past. In light of the expected expansion of the CFTC's authority, which will now take effect on an uncertain date before early 2012, participants in energy markets must be mindful of developments at the CFTC in the coming months.