• FTC Proposes New Requirements Governing the Purchase and Sale of Petroleum Products
  • August 29, 2008
  • Law Firm: Vinson & Elkins LLP - Houston Office
  • On August 18, 2008, the Federal Trade Commission (the Commission) proposed regulations under the Energy Independence and Security Act of 2007 to prohibit the use of manipulative or deceptive devices or contrivances in wholesale petroleum markets. In its Notice of Proposed Rulemaking (NPRM), the Commission states that the regulations are narrowly tailored and will not lead to duplicative or costly compliance. It appears, however, that several provisions give the Commission authority over a broad array of petroleum trading activity.

    The proposed regulation would prohibit willfully, intentionally, or in some cases, recklessly (1) using a fraudulent device, scheme or artifice, (2) making a material misrepresentation or a material omission, or (3) engaging in any act, practice, or course of business that operates, or would operate, as a fraud or deceit upon an entity in connection with the wholesale purchase or sale of crude oil, gasoline, or petroleum distillates. The proposed rule borrows from Rule 10b-5 of the Securities Exchange Act of 1934, 17 C.F.R. 240.10b-5. Notably, the proposed rule does not impose an affirmative disclosure or record-keeping obligation on the parties and does not regulate supply decisions or require market participants to provide access to terminals or pipelines.

    There are several provisions that appear to expand the Commission’s authority in the petroleum sector. The proposed regulation applies to all wholesale transactions of petroleum products, not solely those related to established trading markets, like NYMEX. For example, the NPRM expressly covers wholesale sales at the terminal rack level. In addition, while the misrepresentations or omissions must be material in that there must be a substantial likelihood that a reasonable market participant would consider it in making decisions, the Commission does not have to prove actual reliance or that the material omission or misrepresentation actually influenced the actions of the counterparty. The Commission also does not have to prove that the manipulative or deceptive device had a market impact. Deceptive or manipulative practices may also violate the proposed regulation if they are not directly associated with a petroleum product transaction but directly or indirectly impact prices for crude oil, gasoline, or petroleum distillates.

    The FTC is seeking comments until September 18, 2008.