FTC Seeks Comments on Proposed Rule Prohibiting Petroleum Market Manipulation

The Federal Trade Commission today issued a Notice of Proposed Rulemaking (NPRM) seeking public comments on a proposed rule prohibiting market manipulation in the petroleum industry. The NPRM will assist the Commission in determining whether, and in what ways, it should develop a final rule. The Commission expects to conclude the rulemaking process by the end of the year.

“The Federal Trade Commission is committed to exercising its authority to determine whether crude oil, gasoline, or petroleum distillates price increases at wholesale are a result of illegal market manipulation,” Chairman William E. Kovacic said. “The proposed rule announced today brings us one step closer to defining, identifying, and stopping fraudulent and deceptive conduct in wholesale petroleum markets that may contribute to higher gasoline prices.”

The Proposed Rule

In issuing the proposed rule, the Commission is exercising authority provided by the Energy Independence and Security Act of 2007 (EISA), enacted in December of last year. The rulemaking process began with the publication of an Advance Notice of Proposed Rulemaking (ANPR) announced on May 1, 2008. In response to the ANPR, the Commission received 155 comments, most of which were submitted by consumers, with the rest coming from industry members, trade and bar associations, academics, and other federal and state government agencies.

The NPRM issued today seeks public comments regarding the proposed rule the FTC has developed pursuant to Section 811 of EISA. EISA gives the FTC new authority to promulgate regulations prohibiting “market manipulation” in wholesale petroleum markets. Specifically, Section 811 states that it is against the law for any person, in connection with the wholesale purchase or sale of certain petroleum commodities to use any “manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Federal Trade Commission may prescribe as necessary or appropriate in the public interest or for the protection of United States citizens.”

The proposed rule focuses on fraudulent or deceptive conduct that threatens the integrity of wholesale petroleum markets. Consistent with the plain language of Section 811, the FTC has modeled its proposed rule on Securities and Exchange Commission (SEC) Rule 10b-5, promulgated by the SEC pursuant to that agency’s long-standing market manipulation authority. The FTC’s proposed rule would make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale:

1. To use or employ any device, scheme, or artifice to defraud,
2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
3. To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person.

Thus, fraudulent or deceptive acts, including false reporting to private reporting services or misleading announcements by refineries, pipelines, or investment banks, may be covered by the proposed rule. Similarly, trading practices in physical or futures markets may also be covered. By focusing the proposed rule on fraudulent and deceptive conduct, the Commission seeks to avoid discouraging pro-competitive or otherwise desirable market behavior that benefits consumers.

The proposed rule would not impose affirmative duties or obligations or record-keeping requirements. EISA subjects anyone violating a FTC rule promulgated under Section 811 to civil penalties of up to $1 million per violation per day, in addition to any relief available to the Commission under the FTC Act.

Questions for Commenters

The Commission is seeking public comments on the proposed rule. Such comments must be received no later than September 18, 2008. Without seeking to limit comment on other areas of concern to the public, the agency specifically requests comments addressing the proposed rule’s likely effects on consumers and the industry. A complete list of questions on which the Commission seeks comment can be found in the NPRM. Instructions for submitting comments are found in the Addresses section of the NPRM.

The Commission vote to issue the NPRM was 4-0. It will be available on the FTC’s Web site and likely will be published in the Federal Register on August 19, 2008.

Copies of the Notice of Proposed Rulemaking are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, click: http://www.ftc.gov/ftc/complaint.shtm or call 1-877-382-4357. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad. For free information on a variety of consumer topics, click http://ftc.gov/bcp/consumer.shtm.

(FTC File No. P082900)
(NPRM final.wpd)