Today the Federal Trade Commission published a revised proposed rule to prohibit "market manipulation" in wholesale petroleum markets. Despite numerous FTC investigations into oil markets – which have uncovered no evidence of significant anticompetitive or illegal conduct – prodded by Congress, the FTC will add an overlay of federal "fraud" regulation on the U.S. oil industry. Based on the anti-fraud provisions of securities regulations, the new rule prohibits any person, in connection with a wholesale petroleum transaction, from making (a) knowingly fraudulent statements or actions or (b) intentionally misleading omissions that distort markets. The FTC may impose civil fines of $1 million per day for violations, in addition to any relief available under the FTC Act.
The 2007 Energy Independence and Security Act granted the FTC authority to write and enforce regulations on "market manipulation." In 2008, the FTC began a rulemaking to prohibit "any manipulative or deceptive device or contrivance" in connection with wholesale petroleum transactions. Today's publication of a revised proposed rule follows a period of public comment and an FTC workshop to hear from interested parties. Today's draft provides a more clear standard than did prior proposals, but still will lead to uncertainty and the need for petroleum companies to guard against statements and omissions that might be challenged as fraudulent or misleading.
The new rules cover conduct "in connection with" petroleum product "wholesale" transactions. The regulations specify that this includes gasoline and other refined product purchases and sales at the terminal rack level or upstream, except that it includes "all" (not just wholesale) purchases or sales of crude oil and jet fuel.
Subsection (a) of the proposed rule would prohibit any person from knowingly engaging in conduct – including making any untrue statement of material fact – that operates or would operate as a fraud or deceit on any other person. This would cover conduct such as wash trades that are intended to disguise the actual liquidity or price of a product or market. It would also prohibit untrue statements, such as false announcements of planned output decisions, false price data reporting, or even false communications during bilateral negotiations. The actor must have knowingly misled others, although recklessness is sufficient to violate the rule. It is not a requirement that anyone have been harmed.
Subsection (b) of the proposed rule would prohibit any person from intentionally failing to state a material fact where the omission both makes a given statement misleading under the circumstances and "distorts or tends to distort market conditions." This would cover anyone who, voluntarily or because of some legal obligation, has made a (true) statement, but then intentionally omitted other information to mislead other market participants, public officials, or the market at large. The actor must have intended to mislead, but it is not required that he actually have misled. The actor need not have intended to distort the market, and it is not required that there be any price effect or other actual market distortion. "Distort" is not defined, but the FTC has stated this is not an antitrust standard requiring proof of market power or a reduction in competition.
The FTC has invited further public comment, which must be submitted within 30 days. Once a final rule has been imposed, it will be seen how aggressively the Commission will pursue petroleum transaction misstatements and omissions, with fines of $1 million per day. And the FTC has declined to take a position on whether the underlying statute creates any private right of action. In the meantime, oil industry participants may feel compelled to respond by internally controlling or curtailing external statements, which could have the negative effect of keeping valuable information out of the market.
Read more on the Revised Notice of Proposed Rulemaking at the FTC's web site.