Federal Register, Volume 74, Number 76, April 22, 2009, Pages 18285-18448 Page: 18,318
vi, 18448, iii p. ; 28 cm.View a full description of this periodical.
Extracted Text
The following text was automatically extracted from the image on this page using optical character recognition software:
Federal Register/Vol. 74, No. 76/Wednesday, April 22, 2009/Proposed Rules
reformate)-that are not specifically
identified in Section 811 only if there is
a sufficient nexus between conduct
involving those products and wholesale
petroleum markets for covered products.
Renewable fuels and blending
components are integral to the overall
supply of finished motor fuels; thus,
manipulating purchases or sales of these
products may have the requisite nexus
with wholesale petroleum markets.161
Under the revised proposed Rule, the
Commission would determine on a case-
by-case basis whether conduct in a
market for a non-covered product is "in
connection with" wholesale petroleum
transactions.
After reviewing the existing
rulemaking record, the Commission
clarifies that it does not plan to apply
its revised proposed Rule to
commodities whose predominant use is
in non-petroleum products, or to
commodities that are inputs for ethanol,
such as corn and sugar. The connection
between these commodities and
wholesale petroleum markets would
likely be too attenuated to satisfy the "in
connection with" requirement of
Section 811.
b. Section 317.3(a): General Anti-Fraud
Provision
Revised proposed Section 317.3(a) is
a general anti-fraud provision,
prohibiting any person from knowingly
engaging in conduct, including the
making of false statements of material
fact, that operates or would operate as
a fraud or deceit on any person. While
the Rule initially proposed enumerated
prohibited conduct in three separate
subsections, revised proposed Section
317.3(a) now addresses prohibited
conduct in a single provision that
subsumes the remaining subsections,
except for omissions of material facts,
which are separately addressed by
revised proposed Section 317.3(b).162
Revised proposed Section 317.3(a) is
substantially similar to Section
317.3(c)-and now also includes the
prohibition on false statements
previously contained in Section
317.3(b)-of the initial proposed Rule.
In short, Section 317.3(a) prohibits
market participants from lying in
connection with wholesale petroleum
transactions.
As revised, Section 317.3(a) would
prohibit fraudulent or deceptive
conduct that not only serves no
161 See NPRA (Drevna), Tr. at 225 ("[I]f you're
going to let potentially 35 percent of the market out
of the [regulation], what's the point?").
162 The Commission believes that, by treating
omissions separately, market participants can morereadily understand when alleged conduct violates
revised proposed Rule Section 317.3(a).legitimate purpose, but could also
impair the efficient functioning of
wholesale petroleum markets. Specific
examples include (1) false public
announcements of planned pricing or
output decisions; (2) false statistical or
data reporting; and (3) false statements
in the context of bilateral or multilateral
communications with any market
participant or other person-who may
serve as a conduit for the dissemination
of the information, or who might act on
the information-such as traders,
suppliers, brokers, or agents; federal,
state, or local governments; and
government or private publishers.163
Section 317.3(a) would also prohibit
individual transactions or courses of
business that constitute fraudulent or
deceptive conduct, such as wash sales,
that are intended to disguise the actual
liquidity or price of a particular asset or
market for that asset.164
(1) A Person Must "Knowingly" Engage
in Conduct That Operates or Would
Operate as a Fraud or Deceit
As noted above, the Commission has
modified the text of the revised
proposed Rule to articulate explicitly
the scienter standards which
respectively apply to revised proposed
Rule Section 317.3(a) and Section
317.3(b).165 In particular, the
163 See, e.g., SEC v. Rana Research, Inc., 8 F.3d
1358 (9th Cir. 1993) (seeking permanent injunctive
relief alleging that defendant's press release
contained materially false and misleading
statements); SEC v. Softpoint, Inc., 958 F. Supp. 846
(S.D.N.Y. 1997) (finding defendant liable under SEC
Rule 10b-5 when defendant disseminated false
information to the market through press releases
and SEC filings);In the Matter of CMS Mktg. Serv.
& Trading Co., Comm. Fut. L. Rep. (CCH) 1 29,634
(C.F.T.C. Nov. 25, 2003) (finding liability for the
submission of false information to private reporting
services); see also CFTC v. Delay, 2006 WL 3359076
(D. Neb. Nov. 17, 2006) (holding that the CFTC
failed to prove that defendant knowingly delivered
any false and misleading reports to the USDA on
cattle sales under a charge of manipulation and
attempted manipulation of the feeder cattle futures
markets).
164 See, e.g., SEC v. U.S. Envtl., Inc., 155 F.3d 107
(2d Cir. 1998) (finding that the SEC's complaint
sufficiently alleged that the defendant manipulated
the market for a stock in violation of SEC Rule 10b-
5 by engaging in wash sales and other deceptive
conduct); In the Matter of Michael Batterman, 46
S.E.C. 304 (1976) (finding by consent that the
defendant engaged in wash sales in violation of the
securities laws); Wilson v. CFTC, 322 F.3d 555 (8th
Cir. 2003) (affirming the CFTC's order finding that
the defendant engaged in wash sales and imposing
sanctions).
165 This represents a change from the initially
proposed Rule, which, like SEC Rule 10b-5, lacked
any specific reference to scienter in the rule text.
In the NPRM, the Commission proposed to require
scienter as one of three required elements of proof.
73 FR at 48328. The other proposed required
elements were: (1) a showing of a manipulative or
deceptive act; and (2) a showing that the conduct
was undertaken "in connection with" the purchaseor sale of a covered commodity at wholesale. 73 FR
at 48327-29.Commission has retained the scienter
standard of extreme recklessness in the
initially proposed Rule for revised
proposed Rule Section 317.3(a). Section
317.3(a) of the revised proposed Rule
now expressly provides that a person
must engage in the proscribed conduct
"knowingly" in order to violate subpart
(a) of the Rule, and the term
"knowingly" has been defined in the
Rule to be coextensive with the extreme
recklessness standard.166 Thus,
consistent with its position in the
NPRM, the intent requirement in
revised proposed Section 317.3(a)
would be satisfied by showing that the
defendant acted with extreme
recklessness; that is, specifically, that
the violator both acted with an extreme
departure from standards of ordinary
care in the petroleum industry and
either knew or must have known that
his or her conduct created a danger of
misleading buyers or sellers.167 The
revised proposed Rule, including
Section 317.3(a) of the Rule, would not
extend to inadvertent conduct or mere
mistakes.168
As a threshold matter, nearly every
commenter who addressed the issue
supported requiring some level of
intent.169 However, most commenters
166 See Section IV.C.3. for a definition of the term
"knowingly." For purposes of the Rule, the
Commission has chosen the term "knowingly" to
denote extreme recklessness.
167 Recognizing that "the Courts of Appeals have
adopted a number of different formulations as to
precisely what constitutes reckless," the
Commission proposed in the initial NPRM the
recklessness standard articulated by the Seventh
and District of Columbia Circuits. 73 FR at 48329
& n.131. See Sundstrand Corp. v. Sun Chemical
Corp., 553 F.2d 1033, 1045 (7th Cir. 1977) (defining
reckless conduct as a '"highly unreasonable
omission, involving not merely simple, or even
inexcusable negligence, but an extreme departure
from the standards of ordinary care, and which
presents a danger of misleading buyers or sellers
that is either known to the defendant or is so
obvious that the actor must have been aware of it"'
(citing Franke v. Midwestern Oklahoma
Development Authority, CCH Fed. Sec. L. Rep.
1 95,786, at 90,850 (W.D. Okl. 1976)); SEC v.
Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992)
(adopting Sundstrand's recklessness standard).
168 As the Commission noted in the NPRM, FERC
adopted a similar approach in its interpretation of
its rule, noting that "[t]he final rule is not intended
to regulate negligent practices or corporate
mismanagement, but rather to deter or punish fraud
in wholesale energy markets." 73 FR 48328 n. 123
(quoting 71 FR at 4245-4246).
169 See, e.g., NPRA at 19-20 (suggesting that a
specific intent requirement be incorporated into the
text of any rule); CAPP at 1 (supporting a scienter
requirement); API at 3 ("API supports the
Commission's proposal to make scienter a
requirement of any rule adopted under Section
811."); CA AG at 2-3 (supporting a scienter
requirement); CFDR at 3 ("Relevant legal authorities
characterize market manipulation as a species of
fraud that connotes fraudulent conduct specifically
intended to corrupt the integrity of market pricingprocesses through rigged prices or fictitious trading
...."); Muris at 2 (observing that the statutory18318
Upcoming Pages
Here’s what’s next.
Search Inside
This issue can be searched. Note: Results may vary based on the legibility of text within the document.
Tools / Downloads
Get a copy of this page or view the extracted text.
Citing and Sharing
Basic information for referencing this web page. We also provide extended guidance on usage rights, references, copying or embedding.
Reference the current page of this Periodical.
United States. Office of the Federal Register. Federal Register, Volume 74, Number 76, April 22, 2009, Pages 18285-18448, periodical, April 22, 2009; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc132938/m1/40/?rotate=90: accessed April 23, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.