A number of regulatory agencies have long enforced prohibitions against manipulative behavior in the markets that they oversee. The Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Commodities Futures Trading Commission all have statutes or rules that ban manipulation. Recently, Congress granted authority to the Federal Trade Commission to promulgate a rule against market manipulation in wholesale petroleum markets, which it did in November 2009. Unlike the other agencies, the FTC is not a sector regulator; it is a law enforcement agency that enforces the antitrust and consumer protection laws across all industries. The Commission's new rule thus breaks new ground both for the agency and for entities that trade in covered products. A thorough understanding of the rule is necessary to comply with its strictures without diluting the incentives to engage in efficient business conduct. This article aids in that understanding by discussing the authorizing legislation, the rulemaking process, the breadth and scope of the final rule, the FTC's reasons for adopting the rule that it did, and the rule's place in the regulatory landscape facing companies in wholesale petroleum markets.
After a long period of relatively stable prices, U.S. retail gasoline prices experienced sharp increases beginning in 2005. By 2006, the average price for regular gasoline reached $2.59 per gallon, and by May 2007 it had risen to $3.13.' A number of observers attributed at least some part of the higher prices to market distortions caused by fraudulent or manipulative conduct in wholesale and futures markets.2 In response, Congress added language to a comprehensive energy reform bill, the Energy Independence and Security Act of 2007 (EISA),3 that authorized the Federal Trade Commission (FTC or Commission) to promulgate regulations to define and prohibit manipulative or deceptive conduct in wholesale petroleum markets.4 The Commission conducted a rulemaking proceeding under the Administrative Procedure Act (APA),5 which included receiving comments from interested parties and holding a workshop on alternative potential rules, and promulgated a rule that took effect on November 4, 2009.6 The final rule states that:
[i]t 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 fail 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.7
The final product of the proceeding is a fraud-based rule that draws heavily from similar rules in effect at the Securities and Exchange Commission (SEC), and the Federal Energy Regulatory Commission (FERC), and the anti-fraud enforcement efforts at the Commodities Futures Trading Commission (CFTC), though modified to reflect the unique features of wholesale petroleum markets.
The market manipulation rule has engendered substantial comment in the antitrust and energy communities.8 This article is designed to explain in detail the scope and reach of the final rule, and to provide some understanding of the Commission's rationale behind the rule. Section II sets out the rule and discusses the legislative history of the EISA and the earlier statutes and rulemakings that served as the models of this latest rule. Section III discusses the rulemaking process and the derivation of the final rule. Section IV delineates the scope of the rule and explains the Commission's jurisdictional reach. Section V discusses the practices prohibited by the final rule and the elements necessary for the Commission to prove a violation. …