Federal Register, Volume 74, Number 76, April 22, 2009, Pages 18285-18448 Page: 18,320
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Federal Register/Vol. 74, No. 76/Wednesday, April 22, 2009/Proposed Rules
recklessness requires evidence from
which it can reasonably be inferred that
the violator both acted with an extreme
departure from standards of ordinary
care (using a reasonable market
participant standard) and either knew or
must have known that its conduct
created a danger of misleading buyers or
sellers. Although the Commission
recognizes that wholesale petroleum
markets are not characterized by the
same degree of regulation as the
securities markets, the Commission
believes that the obligation on market
participants not to engage in any
fraudulent or deceptive act, practice, or
course of business in an extremely
reckless manner- regardless of other
defined duties that may exist in other,
more extensive regulated markets-is
Articulating the required intent
standard in the text of revised proposed
Rule Section 317.3(a) should provide
greater certainty to the business
community as to the application of any
final rule, making it less likely to
inadvertently chill beneficial conduct.
Moreover, the revised proposed Rule
would not reach inadvertent conduct or
mere mistakes. Thus, the Commission
does not believe that prohibiting
fraudulent or deceptive conduct is
likely to reduce voluntary reporting and
disclosures.179 As there is no legitimate
basis for engaging in conduct that would
operate as a fraud or deceit upon any
person, the Commission tentatively
concludes that requiring a showing of
"knowing" conduct is the appropriate
scienter standard for revised proposed
Rule Section 317.3(a).
(2) Materiality Standard
Section 317.3(a) of the revised
proposed Rule prohibits conduct that
operates or would operate as a fraud or
deceit, specifically "including the
making of any untrue statement of
material fact." The NPRM set forth a
standard for materiality under the
proposed Rule, providing that,
"[c]onsistent with securities law, a fact
is material if there is a substantial
likelihood that a reasonable market
participant would consider it in making
its decision to transact because the
material fact significantly alters the total
mix of information available."180 NPRA
was the only commenter to address the
SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir.
1992) (citing Sundstrand Corp., 553 F.2d at 1045);
73 FR at 48329.
179 Although the Commission never stated that
the initially proposed Rule would reach such
conduct, comments as well as discussion at the
public workshop revealed significant confusion on
180 73 FR at 48326.
concept of materiality specifically, and
it recommended defining the term
"material fact" to clarify that only facts
that a reasonable market participant
would consider important in making a
decision to transact are material.1'" The
Commission agrees and anticipates
using a materiality standard that focuses
on a fact that a reasonable market
participant would consider important in
making a decision to transact because
such information significantly alters the
total mix of information available.182
(3) Other Language in Section 317.3(a)
As discussed above, revised proposed
Rule Section 317.3(a), like the proposed
Rule, prohibits misrepresentations of
fact because such misrepresentations are
a clear example of fraudulent or
deceptive conduct. The Commission has
therefore added the phrase "the making
of any untrue statement of material fact"
in revised proposed Section 317.3(a) to
make this prohibition clear.183 Many
commenters and workshop participants
agreed that such conduct harms the
marketplace and should be prohibited.
Prohibiting misrepresentations of
material fact is further supported by the
enforcement approach of other agencies;
thus, for example, the CFTC challenges
and seeks to prohibit such
misrepresentations in commodities
181 NPRA at 28-29 (citing TSCIndus., Inc. v.
Northway, Inc., 426 U.S. 438, 450 (1976)). NPRA
also recommends that the rule "specify that the
materially false or deceptive information must be
about important aspects of supply or demand."
NPRA at 20-21. This change, NPRA argues, would
provide useful compliance guidance to industry,
without being "overly restrictive, because many
types of information may involve important aspects
of supply or demand." NPRA at 21.
182 See Basic, Inc. v. Levinson, 485 U.S. 224, 231-
32 (1988) ("'[A]n omitted fact is material if there is
a substantial likelihood that a reasonable
shareholder would consider it important in
deciding how to vote."') (quoting TSC Indus., Inc.
v. Northway, Inc., 426 U.S. 438, 449 (1976)).
183 The NPRM noted that this provision of the
proposed Rule would provide a clear ban on "the
reporting of false or misleading information to
government agencies, to third-party reporting
services, and to the public through corporate
announcements." 73 FR at 48326. Congress gave the
Commission authority under Section 812, a separate
provision from Section 811, to prohibit any person
from reporting information related to the wholesale
price of petroleum products only if it is required by
law to be reported to a federal department or
agency. The prohibitions embodied in Section 812
became effective with the enactment of EISA on
December 19, 2007. See 42 U.S.C. 17302.
184 See, e.g., In the Matter of CMS Mktg. Serv. &
Trading Co., Comm. Fut. L. Rep. (CCH) 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
The Commission received comments
on the meaning of the phrase "would
operate as a fraud or deceit."185 The
Commission clarifies that the phrase
"would operate as a fraud" means only
that the revised proposed Rule prohibits
conduct that would defraud or deceive
another person, whether or not the
impact of the prohibited conduct had
yet been manifested.186
c. Section 317.3(b): Omission of
Material Information Provision
Revised proposed Rule Section
317.3(b) addresses fraudulent or
deceptive statements that are misleading
as a result of the intentional omission of
material facts, where that omission
distorts or tends to distort market
conditions for a covered product.
Specifically, revised proposed Section
317.3(b) would make it unlawful for any
person to "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 tends to
distort market conditions for any such
product." Material omissions from a
statement that is otherwise literally true
may, under the circumstances present at
the time the statement is made, render
that statement misleading.187 Thus, the
Commission believes that prohibiting
intentional omissions of material facts
that distort or tend to distort market
conditions is consistent with the intent
of EISA and with the Commission's
larger mandate to protect consumers
and to preserve competition.188
markets); 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).
185 In the NPRM, the Commission also sought to
clarify that the language "operates as a fraud" did
not negate the requirement, present in securities
law precedent, that a showing of scienter was
necessary to prove a violation of this subsection. 73
FR at 48327.
186 73 FR at 48327.
187 See McMahan & Co. v. Wherehouse Ent., Inc.,
900 F.2d 576, 579 (2d Cir. 1990) ("Some statements,
although literally accurate, can become, through
their context and manner of presentation, devices
which mislead investors.").
188 In addition, any omission that is part of a
fraudulent or deceptive act, practice, or course of
business would violate revised proposed Section
317.3(a). See, e.g., In the Matter of A.J. White & Co.,
File No. 8-11962, 1975 SEC LEXIS 2564, at *61-63
(Jan. 21, 1975) (finding defendants liable under SEC
Rule 10b-5 for, inter alia, engaging in a course of
conduct that operated as a fraud on purchasers of
a stock offering by means of untrue statements and
material omissions). This is consistent with the
more general principle that any otherwise lawful
act, if part of an unlawful course of business,
nevertheless may be actionable. See Illinois ex rel.
Madigan v. Telemarketing Assocs., Inc., 538 U.S.
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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.. (digital.library.unt.edu/ark:/67531/metadc132938/m1/42/: accessed September 24, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.