Comments to the FTC’s Revised Notice of Proposed Rulemaking are due by May 20, 2009.

The Federal Trade Commission (FTC) issued a Revised Notice of Proposed Rulemaking (RNPRM) on April 16, 2009, seeking public comment on a revised anti-manipulation rule for the wholesale crude oil, gasoline and distillates markets. The FTC also has asked commenters to reply to several specific questions set forth in the RNPRM. The FTC promises to move quickly to conclude the rulemaking proceeding after a 30 day comment period, which closes on May 20, 2009.

The RNPRM is expected to be the last step in what has become an extended rulemaking in response to Congress’ grant to the FTC of anti-manipulation authority in the Energy Independence and Security Act of 2007 (EISA). The FTC first published an Advance Notice of Proposed Rulemaking (ANPR) on May 7, 2008, followed by a Notice of Proposed Rulemaking (NPRM) on August 19, 2008. FTC staff also held a one-day public workshop on the proposed rule in November.

The FTC’s rulemaking has generated a tremendous amount of interest, as indicated by the 155 comments filed by market participants, federal agencies and consumers in response to the ANPR, and the 34 comments filed in response to the NPRM. Many market participants commented, among other things, that:

  • the SEC’s anti-fraud model is not the most appropriate to police the physical, wholesale petroleum markets and may cause confusion as to what conduct is prohibited; and
  • the FTC should require proof of specific intent and market effects to find a violation of the rule.

The Commodity Futures Trading Commission (CFTC) also filed comments on both the ANPR and the NPRM asking the FTC to respect the CFTC’s exclusive jurisdiction over the futures markets and noting that, as drafted, the proposed rule would impose contradictory requirements on futures market participants.

The Revised Proposed Rule

In response to the comments it received, the FTC acknowledged that it should modify its SEC Rule 10b-5 approach to “better focus [the proposed rule] on wholesale petroleum markets, which differ significantly from securities markets.” It also noted that it believes that some provisions of the original proposed rule “could discourage legitimate business conduct.” As such, it revised the proposed rule to:

provide some additional insight into what conduct is prohibited;

  • clarify that the provision of the proposed rule prohibiting the omission of any material fact only applies to omissions that are both misleading and that distort or tend to distort market conditions;
  • include express scienter standards (i.e., knowingly and intentional);
  • define “knowingly” to require “actual or constructive knowledge such that the person knew or must have known that his or her conduct was fraudulent or deceptive”; and
  • note that although it will not treat renewable fuel (e.g., ethanol) as a separately covered product, it may be able to address potential manipulation of such products through the “in connection” with language of the rule.

The revised proposed rule prohibits any person from:

  • directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, from
  • knowingly engaging 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
  • intentionally failing 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.

What the FTC Did Not Revise in the RNPRM

Despite the urging of many commenters, the revised proposed rule still:

relies on the basic SEC Rule 10b-5 formulation;

  • applies a recklessness intent standard (although it expressly adopts the extreme recklessness standard articulated by the Seventh Circuit);
  • does not require proof of manipulative effect; and
  • has broad potential application to OTC and listed derivatives markets. In fact, the FTC expressly noted that it “does not intend to adopt a blanket safe harbor for futures market activities.”

While the FTC appears to have tried to carefully consider and address the many comments it received, many questions remain and it is still far from crystal clear exactly what conduct may be swept into this broad anti-fraud rule.

The RNPRM is available from the FTC’s website at http://www.ftc.gov.