[Federal Register Volume 75, Number 212 (Wednesday, November 3, 2010)]
[Proposed Rules]
[Pages 67657-67662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27541]


-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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:
    <bullet> 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.
    <bullet> Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as mail above.
    <bullet> 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\
---------------------------------------------------------------------------

    \1\ 17 CFR 145.9.
---------------------------------------------------------------------------

    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, <a href="/cdn-cgi/l/email-protection#3143415450425471525745521f565e47"><span class="__cf_email__" data-cfemail="dba9abbebaa8be9bb8bdafb8f5bcb4ad">[email protected]</span></a> or Mark D. Higgins, 
Counsel to the Director of Enforcement, 202-418-5864, 
<a href="/cdn-cgi/l/email-protection#d0bdb8b9b7b7b9bea390b3b6a4b3feb7bfa6"><span class="__cf_email__" data-cfemail="9cf1f4f5fbfbf5f2efdcfffae8ffb2fbf3ea">[email protected]</span></a>, 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \5\ 7 U.S.C. 12a(5).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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 
---------------------------------------------------------------------------
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):
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \15\ As stated above, the amendments to CEA section 6 do not 
affect the Commission's authority under section 9(a)(2).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \27\ Id.
    \28\ Berko, 316 F.2d at 143.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \50\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \51\ 5 U.S.C. 601.
    \52\ Id.
---------------------------------------------------------------------------

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


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>