FR Doc 2010-27541[Federal Register: November 3, 2010 (Volume 75, Number 212)]
[Proposed Rules]
[Page 67657-67662]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no10-22]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 180
RIN Number 3038-AD27
Prohibition of Market Manipulation
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission is proposing rules to
implement new anti-manipulation authority in section 753 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. The proposed
rules expand and codify the Commission's authority to prohibit
manipulation.
DATES: Comments must be received on or before January 3, 2011.
ADDRESSES: You may submit comments, identified by RIN number AD27, by
any of the following methods:
Agency Web Site, via its Comments Online process: Comments
may be submitted to: http://comments.cftc.gov. Follow the instructions
for submitting comments on the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the established procedures in
CFTC Regulation 145.9.\1\
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\1\ 17 CFR 145.9.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Robert Pease, Counsel to the Director
of Enforcement, 202-418-5863, [email protected] or Mark D. Higgins,
Counsel to the Director of Enforcement, 202-418-5864,
[email protected], Division of Enforcement, Commodity Futures Trading
Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington,
DC 20581.
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'')
\4\ to establish a comprehensive new regulatory framework for swaps and
security-based swaps. The legislation was enacted to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq. (2006).
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In addition, Title VII of the Dodd-Frank Act contains expanded and
clarified authority to prohibit manipulative behavior.
Section 753 of the Dodd-Frank Act amends section 6(c) of the CEA to
expand the authority of the Commission to prohibit fraudulent and
manipulative behavior. New CEA section 6(c)(1), which prohibits the use
or employment of any manipulative or deceptive device or contrivance,
requires the Commission to promulgate implementing rules within one
year of enactment of the Dodd-Frank Act. The Commission also proposes
to implement regulations pursuant to section 6(c)(3) of the CEA under
its general rulemaking authority in section 8(a)(5) of the CEA.\5\
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\5\ 7 U.S.C. 12a(5).
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Accordingly, the Commission is proposing rules to address
manipulative behavior. The Commission requests comment on all aspects
of the proposed rules, as well as comment on the specific provisions
and issues highlighted in the discussion below.
II. Manipulation Under Section 753
A. Section 753's Amendments to the CEA
Section 753 of the Dodd-Frank Act gives the Commission enhanced
``anti-manipulation authority'' as part of its expanded enforcement
powers. It does so by amending section 6(c) of the CEA in a number of
respects.
First, section 753 adds a new subsection (c)(1). Subsection (c)(1)
broadly prohibits fraud-based manipulative schemes as follows:
It shall be unlawful for any person, directly or indirectly, to
use or employ, or attempt to use or employ, in connection with any
swap, or a contract of sale of any commodity in interstate commerce,
or for future delivery on or subject to the rules of any registered
entity, any manipulative or deceptive device or contrivance, in
contravention of such rules and regulations as the Commission shall
promulgate by not later than 1 year after the date of enactment of
the Dodd-Frank Act, provided no rule or regulation promulgated by
the Commission shall require any person to disclose to another
person nonpublic information that may be material to the market
price, rate, or level of the commodity transaction, except as
necessary to make any statement made to the other person in or in
connection with the transaction not misleading in any material
respect.
[[Page 67658]]
In addition, section 753 adds subsections (c)(1)(A), (B), and (C).
Subsection (c)(1)(A) is a ``Special Provision for Manipulation by False
Reporting.'' This subsection provides that:
Unlawful manipulation for purposes of this paragraph shall
include, but not be limited to, delivering, or causing to be
delivered for transmission through the mails or interstate commerce,
by any means of communication whatsoever, a false or misleading or
inaccurate report concerning crop or market information or
conditions that affect or tend to affect the price of any commodity
in interstate commerce, knowing, or acting in reckless disregard of
the fact that such report is false, misleading or inaccurate.
Section 6(c)(1)(C) provides that ``Good Faith Mistakes'' in the
transmission of ``false or misleading or inaccurate information to a
price reporting service would not be sufficient to violate subsection
(c)(1)(A).''
Subsection (c)(1)(B), captioned: ``Effect on Other Law,'' provides
that nothing in Dodd-Frank shall affect, or be construed to affect, the
applicability of CEA section 9(a)(2). Section 9(a)(2) is a provision in
the CEA prohibiting, among other things, market manipulation and false
reporting.\6\
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\6\ 7 U.S.C. 13(a)(2) states that it shall be a felony
punishable by a fine of not more than $1,000,000 or imprisonment for
not more than 10 years, or both, together with the costs of
prosecution, for [a]ny person to manipulate or attempt to manipulate
the price of any commodity in interstate commerce, or for future
delivery on or subject to the rules of any registered entity, or to
corner or attempt to corner any such commodity or knowingly to
deliver or cause to be delivered for transmission through the mails
or interstate commerce by telegraph, telephone, wireless, or other
means of communication false or misleading or knowingly inaccurate
reports concerning crop or market information or conditions that
affect or tend to affect the price of any commodity in interstate
commerce, or knowingly to violate the provisions of section 4,
section 4b, subsections (a) through (e) of subsection 4c, section
4h, section 4o(1) or section 19.
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Dodd-Frank Act section 753 also adds a new CEA section 6(c)(2),
which is a ``Prohibition Regarding False Information.'' A prohibition
regarding false information was previously in section 6(c) of the
CEA,\7\ but Dodd-Frank Act section 753 revises it to include not only
false statements made in registration applications or reports filed
with the Commission but now also any statement of material fact made to
the Commission in any context. New section 6(c)(2) reads as follows:
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\7\ 7 U.S.C. 9, 15; see also Section 9(a) of the CEA, 7 U.S.C.
13(a)(2).
It shall be unlawful for any person to make any false or
misleading statement of a material fact to the Commission, including
in any registration application or any report filed with the
Commission under this Act, or any other information relating to a
swap, or a contract of sale of a commodity, in interstate commerce,
or for future delivery on or subject to the rules of any registered
entity, or to omit to state in any such statement any material fact
that is necessary to make any statement of a material fact made not
misleading in any material respect, if the person knew, or
reasonably should have known, the statement to be false or
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misleading.
Finally, section 753 creates a new CEA section 6(c)(3), entitled
``other manipulation.'' \8\ This provision provides that ``[i]n
addition to'' the prohibition in section 6(c)(1):
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\8\ While this is a new statutory provision, the conduct
prohibited is generally prohibited by CEA section 9(a)(2).
it shall be unlawful for any person, directly or indirectly, to
manipulate or attempt to manipulate the price of any swap, or of any
commodity in interstate commerce, or for future delivery on or
subject to the rules of any registered entity.
B. Overview of the Commission's Proposed Rules Under Section 753
The Commission proposes two rules under section 753. The first rule
would be promulgated pursuant to new CEA section 6(c)(1), under which
rulemaking is mandatory and must be completed within one year after the
date of enactment of the Dodd-Frank Act (July 21, 2010). The second
rule would be promulgated pursuant to new section 6(c)(3), and is
proposed pursuant to the Commission's general rulemaking authority
under section 8(a)(5) of the CEA.
The remaining provisions of section 753, including provisions
prohibiting false reporting and information, are self-actuating; no
rulemakings are needed to implement them. These new provisions will be
automatically effective one year from the date of enactment of the
Dodd-Frank Act. The Commission's authority under CEA section 9(a)(2) is
not affected by new sections 6(c)(1) or (3).
1. Section 6(c)(1)
The text of CEA section (c)(1) is patterned after section 10(b) of
the Securities Exchange Act of 1934 (``Exchange Act'').\9\ Exchange Act
section 10(b) has been interpreted as a broad, ``catch-all''
prohibition on fraud and manipulation.\10\ Likewise, the Commission
proposes to interpret CEA section 6(c)(1) as a broad, catch-all
provision reaching fraud in all its forms--that is, intentional or
reckless conduct that deceives or defrauds market participants.
Subsection (c)(1) is also similar to the anti-manipulation authority
granted to the Federal Energy Regulatory Commission (``FERC'') in
sections 315 and 1283 of the Energy Policy Act of 2005, amending the
Natural Gas Act and the Federal Power Act, respectively,\11\ and the
Federal Trade Commission (``FTC'') in sections 811 and 812 of the
Energy Independence and Security Act of 2007.\12\
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\9\ 15 U.S.C. 78j(b).
\10\ Chiarella v. United States, 445 U.S. 222, 226 (1980)
(``Section 10(b) was designed as a catch-all clause to prevent
fraudulent practices'').
\11\ Energy Policy Act of 2005, Public Law 109-58, Sec. Sec.
315, 1283, 119 Stat. 594 (2005) (amending 15 U.S.C. 717c-1; 16
U.S.C. 824v).
\12\ Energy Independence and Security Act of 2007, Public Law
110-140, Sec. Sec. 811, 812, 121 Stat. 1492 (2007) (amending 42
U.S.C. 17301, 17302).
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The SEC promulgated Rule 10b-5 to implement section 10(b) of the
Exchange Act.\13\ The FERC and the FTC have promulgated rules based on
SEC Rule 10b-5 to implement their respective statutory anti-
manipulation authority, but have modified SEC Rule 10b-5 as appropriate
to reflect their distinct regulatory missions and responsibilities.\14\
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\13\ 17 CFR 240.10b-5.
\14\ 18 CFR Part 1c (FERC Rules prohibiting energy market
manipulation); 16 CFR Part 317 (FTC Rule prohibiting energy market
manipulation).
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Guided by section 6(c)(1)'s similarity to Exchange Act section
10(b), the Commission proposes an implementing rule that is also
modeled on SEC Rule 10b-5, with modification to reflect the CFTC's
distinct regulatory mission and responsibilities.
2. Section 6(c)(3)
Before enactment of the Dodd-Frank Act, the Commission charged
manipulation and attempted manipulation under CEA sections 6(c), 6(d),
and 9(a)(2).\15\ In Dodd-Frank, Congress provided a direct statutory
prohibition on manipulation of prices of swaps, futures contracts, and
commodities. The Commission proposes a rule under its general
rulemaking authority, section 8(a)(5) of the CEA that mirrors the text
of new CEA section 6(c)(3). The Commission proposes to continue
interpreting the prohibition on price manipulation and attempted price
manipulation to encompass every effort to improperly influence the
price of a swap, commodity, or commodity futures contract.
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\15\ As stated above, the amendments to CEA section 6 do not
affect the Commission's authority under section 9(a)(2).
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C. The Proposed Rule Under CEA Section 6(c)(1)
Pursuant to section 6(c)(1) of the CEA, as added by section 753(a)
of Dodd-Frank, the Commission proposes to add a new Part 180.
[[Page 67659]]
As stated in proposed Sec. 180.1 (as set forth in the regulatory
text of this proposed rule), the proposed rule is modeled, in part, on
SEC Rule 10b-5, with modification to account for the unique regulatory
mission of the CFTC. The discussion below is intended to give notice of
how the Commission intends to interpret the elements of the
Commission's proposed rule.
1. Manipulative or Deceptive Device or Contrivance
One purpose of the Commodity Exchange Act is to ``deter and prevent
price manipulation or any other disruptions to market integrity.'' \16\
The Commission has historically relied upon multiple provisions of the
CEA, including section 9(a)(2) and old section 6(c), to prevent and
deter price manipulation of commodities in interstate commerce or for
future delivery through administrative and civil enforcement
actions.\17\ Section 9(a)(2) makes it unlawful for any person ``to
manipulate or attempt to manipulate the price of any commodity in
interstate commerce, or for future delivery * * *'' \18\ The Dodd-Frank
Act preserves this purpose and the Commission's authority to pursue
instances of price manipulation and attempted price manipulation by
making clear in new section 6(c)(1)(B) that nothing in section 6(c)(1)
affects the applicability of section 9(a)(2), and by adding new section
6(c)(3), both of which are classified as anti-manipulation provisions.
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\16\ 7 U.S.C. 5(b) (2006).
\17\ In case law, ``[t]he Commission has long recognized that
the intent to create an artificial price is the sine qua non of
manipulation.'' In re Sumitomo Corporation, [1996-1998 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ] 27,327 at 46,499 (CFTC May 11,
1998), citing In re Indiana Farm Bureau Cooperative Assoc., Inc.,
[1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 21,796 at
27,282 (CFTC Dec. 17, 1982).
\18\ 7 U.S.C. 13(a)(2).
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The scope of new section 6(c)(1) differs from that of sections
9(a)(2) and 6(c)(3) in that it prohibits the use or employment of ``any
manipulative or deceptive device or contrivance'' in connection with
any swap, or a contract of sale of any commodity in interstate
commerce, or for future delivery. For example, this provision has been
interpreted in the SEC Rule 10b-5 context as prohibiting all practices
``that are intended to mislead investors by artificially affecting
market activity.'' \19\ Consistent with judicial interpretations of the
scope of SEC Rule 10b-5, the Commission proposes that subsection (c)(1)
be given a broad, remedial reading, embracing the use or employment, or
attempted use or employment, of any manipulative or deceptive
contrivance for the purpose of impairing, obstructing, or defeating the
integrity of the markets subject to the jurisdiction of the
Commission.\20\
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\19\ Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 494
(1977).
\20\ See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 202-
03 (1976) (holding section 10(b) of the Securities Exchange Act of
1934 [15 U.S.C. 78j(b)] and SEC Rule 10b-5 thereunder [17 CFR
240.10b-5], on which section 753(c)(1) and the proposed rule are
modeled, contain ``catch-all'' clauses that prohibit all fraudulent
securities trading schemes, whether typical or novel); SEC v.
Zandford, 535 U.S. 813, 819 (2002) (stating section 10(b) of the
Exchange Act, ``should be construed not technically and
restrictively, but flexibly to effectuate its remedial purposes'')
(internal citations and quotations omitted); Superintendent of Ins.
of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (1971)
(noting that section 10(b) of the Exchange Act ``must be read
flexibly, not technically and restrictively''); Dennis v. United
States, 384 U.S. 855, 861 (1966) (noting that fraud within the
meaning of a statute prohibiting conspiracy to defraud the United
States, 18 U.S.C.A. Sec. 371, need not be confined to the common
law definition of fraud: Any false statement, misrepresentation or
deceit. Instead, fraud ``reaches any conspiracy for the purpose of
impairing, obstructing or defeating the lawful function of any
department of Government'') (internal quotations and citations
omitted); United States v. Richter, 610 F.Supp. 480 (N.D. Ill.
1985), affirmed, United States v. Mangovski, 785 F.2d 312 (7th Cir.
1986), affirmed, United States v. Konstantinov, 793 F.2d 1296 (7th
Cir. 1986). See also FERC, Prohibition of Energy Market
Manipulation, 71 FR 4244, 4253 (Jan. 26, 2006) (``[f]inal rule
prohibits the use or employment of any device, scheme, or artifice
to defraud. The Commission defines fraud generally, that is, to
include any action, transaction, or conspiracy for the purpose of
impairing, obstructing or defeating a well-functioning market'')
(citations omitted).
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2. Scienter
The Commission proposes that, consistent with the Supreme Court's
interpretation of Exchange Act section 10(b) and SEC Rule 10b-5, a
person must act with ``scienter'' in order to violate subsection
6(c)(1) of the CEA and the Commission's implementing rule.\21\
``Scienter'' in this context refers to a mental state embracing intent
to deceive, manipulate or defraud, and it includes recklessness.\22\
Just as negligent conduct, even gross negligence, will not satisfy the
scienter requirement under Exchange Act section 10(b) and SEC Rule 10b-
5 (nor under the anti-fraud provision in CEA section 4b),\23\ the
Commission similarly proposes that only intentional or reckless conduct
may violate CEA subsection 6(c)(1) and the Commission's implementing
rule. Moreover, the Commission proposes that judicial precedent
interpreting and applying Exchange Act section 10(b) and SEC Rule 10b-5
in the context of the securities markets should guide, but not control,
application of the scienter standard under subsection 6(c)(1) and the
Commission's implementing rule. The Commission believes that sufficient
leeway must be given to permit application of the scienter standard
under subsection 6(c)(1) and the Commission's implementing rule in a
manner that comports with the purposes of the CEA and the functioning
of the markets regulated by the CFTC. Therefore, application of the
proposed scienter standard under subsection 6(c)(1) and the
Commission's implementing rule will be tailored to the facts and
circumstances of each case.
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\21\ Ernst, 425 U.S. at 192-93 (holding that scienter is
required for private actions for damages under Section 10(b) and SEC
Rule 10b-5); Aaron v. SEC, 446 U.S. 680, 691 (1980) (applying Ernst
to SEC action for injunctive relief under same provisions, and
holding that its rationale ``ineluctably leads to the conclusion
that scienter is an element of a violation of Sec. 10(b) and SEC
Rule 10b-5, regardless of the identity of the plaintiff or the
nature of the relief sought''); See also Drexel Burnham Lambert,
Inc. v. CFTC, 850 F.2d 742, 748 (DC Cir. 1988) (applying same
requirement to the general fraud provision in section 4(b) of the
CEA, 7 U.S.C. 6(b)).
\22\ See, e.g., Ernst, 425 U.S. at 193; Hoffman v. Estabrook &
Co., 587 F.2d 509, 516-17 (1st Cir. 1978); Grebel v. FTP Software,
Inc., 194 F.3d 185 (1st Cir. 1999); Novak v. Kasaks, 216 F.3d 300,
308 (2d Cir. 2000); In re Advanta, 180 F.3d 525, 535 (3d Cir. 1999);
Ottman v. Hangar, 353 F.3d 338, 343-44 (4th Cir. 2003); Nathenson v.
Zonagen Inc., 267 F.3d 400, 408 (5th Cir. 2001); In re Comshare,
Inc. Securities Litig., 183 F.3d 543, 550 (6th Cir. 1999);
Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th
Cir. 1977); Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270
F.3d 645, 654 (8th Cir. 2001); In Re Silicon Graphics Sec. Litig.,
183 F.3d 970, 977 (9th Cir. 1999); Howard v. Everex, 228 F.3d 1057,
1064 (9th Cir. 2000); City of Philadelphia v. Fleming Cos., 264 F.3d
1245, 1258, 1260 (10th Cir. 2001); Bryant v. Avardo Brands, Inc.,
187 F.3d 1271, 1282 (11th Cir. 1999); Rockies Fund v. SEC, 428 F.3d
1088, 1093 (DC Cir. 2005).
\23\ See, e.g., Ernst, 425 U.S. at 214; see also, Drexel Burnham
Lambert, Inc. v. CFTC, 850 F.2d at 742, 748 (DC Cir. 1988) (``mere
negligence, mistake, or inadvertence fails to meet [CEA] section
4b's scienter requirement * * * a degree of intent beyond
carelessness or negligence'' is necessary to violate CEA section
4b.) (citations omitted).
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3. In Connection With
Consistent with Supreme Court precedent interpreting the words ``in
connection with'' in the context of section 10(b) of the Exchange Act
and SEC Rule 10b-5, the Commission proposes that ``in connection with''
under (c)(1) be given the same meaning--that is, where the scheme to
defraud and the transactions subject to the jurisdiction of the
Commission ``coincide.'' \24\ Guided by securities law precedent, the
Commission proposes this requirement would be satisfied whenever
misstatements or other relevant conduct are made in a manner
[[Page 67660]]
reasonably calculated to influence market participants.\25\
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\24\ SEC v. Zandford, 535 U.S. at 822 (``It is enough that the
scheme to defraud and the sale of securities coincide.'').
\25\ See United States SEC v. Pirate Investor LLC, 580 F.3d 233,
249 (4th Cir. 2009) citing SEC v. Rana Research, Inc., 8 F.3d 1358,
1362 (9th Cir. 1993) (affirming the Second Circuit's holding in SEC
v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) that SEC
Rule 10b-5 is violated whenever assertions are made in a manner
reasonably calculated to influence the investing public).
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4. Reliance, Loss Causation and Damages
Like precedent under both SEC Rule 10b-5 and CEA section 4b, the
Commission proposes that the common law elements of fraud, reliance,
loss causation, and damages, are not needed to establish a violation of
subsection 6(c)(1) and the Commission's implementing rule in the
context of an enforcement action.\26\
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\26\ Berko v. SEC, 316 F.2d 137, 143 (2d Cir. 1963) (reliance,
loss causation and damages not relevant because ``the Commission's
duty is to enforce the remedial and preventive terms of the statute
in the public interest, and not merely to police those whose plain
violations have already caused demonstrable loss or injury'');
accord United States v. Davis, 226 F.3d 346, 358 (5th Cir. 2000);
United States v. Haddy, 134 F.3d 542 (3d Cir. 1998); Slusser v.
CFTC, 210 F.3d 783, 785-87 (7th Cir. 2000).
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Reliance, loss causation and damages are elements of private
claims, but not enforcement actions brought by the CFTC or SEC.\27\
This is so because the government's duty is to enforce the remedial and
preventative terms of the statute in the public interest, and not
merely to police those whose plain violations have already caused
demonstrable loss or injury.\28\ However, reliance, loss causation, and
damages may be relevant in any Commission determination of the
appropriate penalty or remedy for a violation.
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\27\ Id.
\28\ Berko, 316 F.2d at 143.
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5. Attempt
The Commission's proposed rule under (c)(1) explicitly prohibits
attempted fraud. The Commission proposes that an ``attempt'' here, as
elsewhere in the CEA, requires: (1) the requisite intent and (2) an
overt act in furtherance of that intent.\29\
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\29\ See, e.g., In re Hohenberg Bros. Co., [1975-1977 Transfer
Binder] No. 75-4, Comm. Fut. L. Rep. (CCH) ] 20,271 at 21,477. (CFTC
Feb. 18, 1977).
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6. Materiality
Sections (1)(b) and (2) of the Commission's proposed rule
incorporate the concept of materiality. In the securities context, the
Supreme Court has rejected the adoption of a bright-line rule to
determine materiality.\30\ Instead, the Supreme Court directed lower
courts to engage in a ``fact-specific inquiry'' in assessing
materiality in securities cases.\31\ The Commission proposes that the
determination of whether a fact is ``material'' be fact and
circumstance dependent.\32\ The Commission proposes that the standard
for materiality should be objective rather than subjective.\33\ That
is, the test is whether a reasonable person would have considered the
fact material. Further, as a general proposition, statements of
optimism alone (i.e., ``puffery'') are not material.\34\ Finally, with
respect to omissions, the Commission proposes that an omission be
considered material if there is a substantial likelihood that the
omitted fact would have been viewed by a reasonable person as having
significantly altered the total mix of information available.\35\
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\30\ Basic Inc. v. Levinson, 485 U.S. 224, 236 & n.14 (1988)
(``A bright-line rule indeed is easier to follow than a standard
that requires the exercise of judgment in the light of all the
circumstances. But ease of application alone is not an excuse for
ignoring the purposes of the Securities Acts and Congress' policy
decisions. Any approach that designates a single fact or occurrence
as always determinative of an inherently fact-specific finding such
as materiality, must necessarily be overinclusive or
underinclusive'').
\31\ Id. at 240. See also SEC v. Talbot, 530 F.3d 1085, 1097
(9th Cir. 2008) (quoting Arrington v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 651 F.2d 615, 619 (9th Cir. 1981) (``Questions of
materiality [under the securities laws] * * * involv[e] assessments
peculiarly within the province of the trier of fact'').
\32\ Dodd-Frank section 6(c)(1) makes clear that ``no rule or
regulation promulgated by the Commission shall require any person to
disclose to another person nonpublic information that may be
material to the market price, rate, or level of the commodity
transaction, except as necessary to make any statement made to the
other person in or in connection with the transaction not misleading
in any material respect.''
\33\ Cf. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445
(1976).
\34\ Cf. Raab v. General Physics Corp., 4 F.3d 286, 289-90 (4th
Cir. 1993).
\35\ Cf. TSC Indus., 426 U.S. at 449; Basic, 485 U.S. at 231-32.
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D. The Proposed Rule Under CEA Section 6(c)(3)
The Commission proposes a rule under new CEA section 6(c)(3) that
mirrors the statute, making it:
unlawful for any person, directly or indirectly, to manipulate or
attempt to manipulate the price of any swap, or of any commodity in
interstate commerce, or for future delivery on or subject to the
rules of any registered entity.
The Commission proposes to continue interpreting the prohibition on
price manipulation and attempted price manipulation to encompass every
effort to influence the price of a swap, commodity, or commodity
futures contract that is intended to interfere with the legitimate
forces of supply and demand in the marketplace.\36\ The Commission
reaffirms this broad reading of the term ``manipulation'' with respect
to new CEA section 6(c)(3), while also recognizing that manipulation
cases are fact-intensive and that the law in this area will continue to
evolve largely on a case-by-case basis.
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\36\ See Cargill, Inc. v. Hardin, Secretary of Agriculture, 452
F.2d 1154, 1163 (8th Cir. 1971) (``The methods and techniques of
manipulation are limited only by the ingenuity of man. The aim must
be therefore to discover whether conduct has been intentionally
engaged in which has resulted in a price that does not reflect basic
forces of supply and demand'').
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Early manipulation cases involving ``corners'' and ``squeezes''
produced an analytical framework that has since been applied in a wide
variety of other factual situations not involving ``market power.''
\37\ That framework requires that the Commission establish: ``(1) That
the accused had the ability to influence market prices; (2) that they
specifically intended to do so; (3) that artificial prices existed; and
(4) that the accused caused the artificial prices.'' \38\ The
Commission reaffirms this four-part test and, in the section to follow,
discusses the element of artificial price.
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\37\ See, e.g., In re DiPlacido, 2008 WL 4831204 (CFTC 2008),
aff'd in pertinent part, DiPlacido v. Commodity Futures Trading
Comm'n, 364 Fed.Appx. 657, 2009 WL 3326624 (2d Cir. 2009), Comm.
Fut. L. Rep. ] 31,434 (noting evolution of analytical framework and
applying it to scheme affecting settlement price); In re Henner, 30
Agric. Dec. 1151 (1971) (applying traditional framework sub silentio
to scheme involving uneconomic behavior); In re Soybean Futures
Litig., 892 F. Supp. 1025, 1047 (N.D. Ill. 1995) (While the
traditional framework derived from ``market power'' cases such as
corners and squeezes, market power is not a necessary element of
manipulation cases.).
\38\ In re Cox, [1986-1987 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ] 23,786 at 34,061 (CFTC July 15, 1987).
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1. Price Affected by Factors Outside of the Forces of Supply and Demand
The traditional framework for price manipulation has required
demonstrating the existence of an ``artificial price.'' In various
circumstances, extensive economic analysis may not be necessary to
demonstrate that this element has been met. The conclusion that prices
were affected by a factor not consistent with normal forces of supply
and demand will often follow inescapably from proof of the actions of
the alleged manipulator. For example, in one of the landmark
manipulation cases,\39\ the respondent placed an order well above the
price he needed to pay for egg futures so that the closing price would
influence the market to place a higher than expected value on futures
contracts for November 1968 eggs. The
[[Page 67661]]
Commission's predecessor agency sustained the finding of the judicial
officer that:
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\39\ In re Henner, 30 Agric. Dec. 1151.
[t]he inference is inescapable that the respondent paid more than he
had to * * * for the purpose of causing the closing price to be at
that high level. No further proof is needed to show that the
settlement price was artificial.\40\
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\40\ 30 Agric. Dec. 1151, 1194.
The Commission recently cited this ``conclusive presumption'' with
approval in In re DiPlacido.\41\ In that case, DiPlacido placed
proportionately large orders, in an illiquid market, while ignoring
more favorable bids and offers, so that closing prices for electricity
futures would be inflated. These actions convinced the Commission and
the Second Circuit Court of Appeals that the resulting closing prices
were de facto illegitimate.\42\ Cases of this nature, where distorted
prices foreseeably follow from the device employed by the manipulator,
do not require detailed economic analysis of the effect on prices.\43\
As the Commission explained in In re Hohenberg Bros: \44\
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\41\ In re DiPlacido, 2008 WL 4831204 (CFTC 2008), aff'd in
pertinent part, DiPlacido v. Commodity Futures Trading Comm'n, 364
Fed.Appx. 657, 2009 WL 3326624 (2d Cir. 2009), Comm. Fut. L. Rep. ]
31,434, cert. denied, 130 S. Ct. 1883 (2010).
\42\ Id.
\43\ See, e.g., In re Eisler and First West Trading, Inc.,
[2003-2004 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 29,664 at
55,837, 2004 WL 77924 (CFTC Jan. 20, 2004) (involving direct
falsification of data input to calculation of settlement prices).
\44\ [1975-1977 Transfer Binder] No. 75-4, Comm. Fut. L. Rep.
(CCH) ] 20,271 at 21,477 (emphasis added); see also, United States
v. Reliant Energy Services, Inc., 420 F. Supp. 2d 1043 (N.D. Cal.
2006).
[T]o determine whether an artificial price has occurred one must
look at the aggregate forces of supply and demand and search for
those factors which are extraneous to the pricing system, are not a
legitimate part of the economic pricing system, are not a legitimate
part of the economic pricing of the commodity, or are extrinsic to
that commodity market. When the aggregate forces of supply and
demand bearing on a particular market are all legitimate, it follows
that the price will not be artificial. On the other hand, when a
price is affected by a factor which is not legitimate, the resulting
price is necessarily artificial. Thus, the focus should not be as
much on the ultimate price, as on the nature of the factors causing
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it. (emphasis added).
In keeping with the fact-intensive nature of manipulation cases,
the Commission recognizes that economic analysis may in some cases be
appropriate to determine whether the conduct in question actually
caused an artificial price. The Commission stresses, however, that an
illegal effect on price can often be conclusively presumed from the
nature of the conduct in question and other factual circumstances not
requiring expert economic analysis.
The Commission also emphasizes, consistent with the weight of
existing precedent, that the conduct giving rise to a manipulation
charge need not itself be fraudulent or otherwise illegal.\45\ The
actions of the respondents in Zenith-Godley,\46\ Henner,\47\ and
DiPlacido,\48\ for instance, were not intrinsically fraudulent or
otherwise illegal apart from violating the CEA, and the manipulation
charges were sustained in each of those cases.
2. Attempt
The Commission's proposed anti-manipulation rule under (c)(3)
explicitly prohibits attempted price manipulation. The Commission
proposes that attempt here, as elsewhere in the CEA, requires: (1) The
requisite intent and (2) an overt act in furtherance of that
intent.\49\
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\45\ See, e.g., Cargill, Inc. v. Hardin, 452 F.2d 1154 (8th Cir.
1971); G.H. Miller & Co. v. United States, 260 F.2d 286 (7th Cir.
1958).
\46\ In re Zenith-Godley Co., Inc. and John McClay, Jr., 6
Agric. Dec. 900 (1947) (extravagant purchases of butter for the
purpose of supporting milk prices).
\47\ In re Henner, 30 Agric. Dec. 1155.
\48\ In re DiPlacido, 2008 WL 4831204 (CFTC 2008), aff'd in
pertinent part, DiPlacido v. Commodity Futures Trading Comm'n, 364
Fed.Appx. 657, 2009 WL 3326624 (2d Cir. 2009), Comm. Fut. L. Rep. ]
31,434.
\49\ See, e.g., In re Hohenberg Bros., [1975-1977 Transfer
Binder] No. 75-4, Comm. Fut. L. Rep. (CCH) ] 20,271 at 21,477.
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III. Request for Comment
The Commission requests comment on all aspects of the proposed
rules.
IV. Administrative Compliance
A. Cost-Benefit Analysis
Section 15(a) of the CEA \50\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA. By its terms, section 15(a) does not require the
Commission to quantify the costs and benefits of a rule or to determine
whether the benefits of the regulation outweigh its costs; rather, it
requires that the Commission ``consider'' the costs and benefits of its
actions. Section 15(a) further specifies that the costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
efficiency, competitiveness and financial integrity of futures markets;
(3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations. The Commission may in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or accomplish any of
the purposes of the CEA.
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\50\ 7 U.S.C. 19(a).
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With respect to benefits, the proposed rules would enhance the
authority of the Commission to ensure fair and equitable markets. The
Commission has determined that market participants and the public will
benefit substantially from prevention and deterrence of manipulation.
Markets that are free of market manipulation will function better as
venues for price discovery and hedging.
With respect to costs, the Commission has determined that
participants in the markets should already have mechanisms in place to
ensure that their employees and agents will refrain from attempting to
manipulate the markets.
The Commission invites public comment on its cost-benefit
considerations. Commenters are also invited to submit any data or other
information that they may have quantifying or qualifying the costs and
benefits of the proposed rules with their comment letters.
B. Anti-Trust Considerations
Section 15(b) of the CEA, 7 U.S.C. 19(b), requires the Commission
to consider the public interests protected by the antitrust laws and to
take actions involving the least anti-competitive means of achieving
the objectives of the CEA. The Commission believes that the proposed
rules will have a positive effect on competition by improving the
fairness and efficiency of the markets through reducing the adverse
effects of manipulation and disruptive practices.
C. Paperwork Reduction Act
The provisions of the proposed Commission Regulation [17 CFR Part
180] would not result in new recordkeeping requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \51\ requires that
agencies consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact.\52\ The rules proposed by the
[[Page 67662]]
Commission will not have a significant economic impact on a substantial
number of small entities. As explained above, legitimate market
participants should already have procedures in place to prevent their
employees and agents from manipulating the markets. Accordingly, the
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5
U.S.C. 605(b), that the proposed rules will not have a significant
impact on a substantial number of small entities.
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\51\ 5 U.S.C. 601.
\52\ Id.
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E. Congressional Review Act
The Congressional Review Act establishes certain procedures for
major rules, defined as those rules that would result in an annual
effect on the economy of $100 million or more, or have other
substantial impacts. These proposed rules are not subject to any of
those requirements because they would not have any of these substantial
impacts; rather, they should result in significant economic benefits.
List of Subjects in 17 CFR Part 180
Commodity futures.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to add a new 17 CFR Part 180 as set forth
below:
PART 180--PROHIBITIONS AGAINST MANIPULATION
Sec.
180.1 Prohibition against manipulation.
180.2 Other manipulation.
Authority: 7 U.S.C. 6c(a), 9, 12(a)(5) and 15, as amended by
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. 111-203, 124 Stat. 1376 (June 16, 2010); 5
U.S.C. 552 and 552(b), unless otherwise noted.
Sec. 180.1 Prohibition against manipulation.
(a) It shall be unlawful for any person, directly or indirectly, in
connection with any swap, or contract of sale of any commodity in
interstate commerce, or contract for future delivery on or subject to
the rules of any registered entity, to intentionally or recklessly:
(1) Use or employ, or attempt to use or employ, any manipulative
device, scheme, or artifice to defraud;
(2) Make, or attempt to make, any untrue or misleading statement of
a material fact or to omit to state a material fact necessary in order
to make the statements made not untrue or misleading;
(3) Engage, or attempt to engage, in any act, practice, or course
of business, which operates or would operate as a fraud or deceit upon
any person; or,
(4) Deliver or cause to be delivered, or attempt to deliver or
cause to be delivered, for transmission through the mails or interstate
commerce, by any means of communication whatsoever, a false or
misleading or inaccurate report concerning crop or market information
or conditions that affect or tend to affect the price of any commodity
in interstate commerce, knowing, or acting in reckless disregard of the
fact that such report is false, misleading or inaccurate.
Notwithstanding the foregoing, no violation of this section shall exist
where the person mistakenly transmits, in good faith, false or
misleading information to a price reporting service.
(b) Nothing in this section shall be construed to require any
person to disclose to another person nonpublic information that may be
material to the market price, rate, or level of the commodity
transaction, except as necessary to make any statement made to the
other person in or in connection with the transaction not misleading in
any material respect.
(c) Nothing in this section shall affect, or be construed to
affect, the applicability of Commodity Exchange Act section 9(a)(2).
Sec. 180.2 Other manipulation.
It shall be unlawful for any person, directly or indirectly, to
manipulate or attempt to manipulate the price of any swap, or of any
commodity in interstate commerce, or for future delivery on or subject
to the rules of any registered entity.
Issued in Washington, DC, on October 26, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
Statement of Chairman Gary Gensler
Prohibition of Market Manipulation
October 26, 2010
I support the proposed rulemaking to enhance the Commission's
ability to protect against manipulation. Today's rule builds upon
important new authorities that Congress granted the Commission to
protect market participants in the commodities, futures and swaps
markets. Together with the authority granted by Congress to prohibit
disruptive trading, this proposed rule gives the Commission the broad
new ability to effectively combat fraud and manipulation. The proposed
rulemaking promotes fair and efficient markets, for the first time
allowing the Commission to protect against fraud-based manipulation. I
thank Senator Cantwell for her leadership in bringing this important
new authority to the Commission.
[FR Doc. 2010-27541 Filed 11-2-10; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 3, 2010