On August 6, 2009, the US Federal Trade Commission (FTC) issued a Final Rule intended to proscribe market manipulation in the petroleum industry. The Final Rule prohibits fraud or deceit in the wholesale petroleum markets and also includes a separate provision prohibiting omissions of material information that may distort the market. According to FTC Chairman Jon Leibowitz, the goal is to allow the FTC to “crack down” on fraudulent and manipulative conduct that drives up prices. The Final Rule was promulgated pursuant to Section 811 of Subtitle B of Title VIII of the Energy Security and Independence Act of 2007 (ESIA).  

Specifically, Section 317.3 of the Final Rule, titled “Prohibited Practices,” states:

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 mislead by failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.

Essentially, the Final Rule targets practices that introduce false information into petroleum market transactions and forbids fraudulent and deceptive practices that effectively manipulate the market. Violations of the Final Rule are punishable with civil penalties of up to $1 million per violation per day, in addition to any relief available to the Commission under the FTC Act. The Final Rule becomes effective on November 4, 2009. 

In certain respects, the Final Rule departs significantly from the initially proposed Rule and the revised proposed Rule. First, the initially proposed Rule had a three-part conduct prohibition. Those parts were consolidated as the Final Rule’s subparagraphs (a) and (b), as it was believed by the FTC to more clearly describe the prohibited conduct. Second, paragraphs 3(a) and 3(b) each have a “tailored” scienter standard whereas in the initially proposed Rule, only a single “knowingly” scienter standard had been used. This revision was in response to public comments that the single standard could undermine some legitimate business conduct, particularly with respect to the paragraph 3(b) prohibition on omissions of material fact. Third, the Final Rule also prohibits only omissions of material facts that “distort or are likely to distort market conditions,” whereas paragraph 3(a) covers conduct that “operates or would operate as a fraud or deceit.” This revision was also in response to public concern that legitimate business activity may be implicated. 

Not all the FTC commissioners agreed with the Final Rule: it was issued on a 3-1 vote with Commissioner William E. Kovacic dissenting. In a separate statement, Commissioner Kovacic stated that, at minimum, an acceptable Final Rule would have incorporated into paragraph 3(a) “the requirements that the conduct be intentional and either actually or likely distorts market conditions.” Paragraph 3(b), dealing with omissions, would have been eliminated altogether. According to Commissioner Kovacic, the Final Rule will touch upon too many routine transactions in petroleum products and may ultimately impede otherwise benign and procompetitive conduct that move petroleum products to end users. Further, paragraph 3(b), has the potential of encouraging competitors to disclose more private information to rivals than necessary, which could actually threaten competition, or have the effect of limiting procompetitive marketplace information gathering, which helps prices accurately reflect the supply and demand conditions. 

The FTC's press release, with links to the text of the Federal Register Notice and Commissioner statements, is available at http://www.ftc.gov/opa/2009/08/mmr.shtm.

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