What is a Broker-Dealer? - Davis Polk & Wardwell

§ 1A:4.3 BROKER-DEALER REGULATION
at whether the promoter has induced prospective investors with
proposed or promised profits.
[E] Solely from the Efforts of the Promoter or a
Third Party
The Howey test requires that the profits of the investment be
derived “solely from the efforts of the promoter or a third party.”
The courts of appeals have uniformly declined to give literal meaning
to the word “solely,” and have adopted liberal interpretations, emphasizing
the economic reality of the transaction. 265 The interpretation by
the Ninth Circuit has been widely cited and adopted by other circuit
courts, and it requires that the efforts made by those other than the
investor be “undeniably significant” ones and be “essential managerial
efforts which affect the failure or success of the enterprise.” 266
§ 1A:4.3 Case Law on “Notes”
Under the definitions of “security” in the Exchange Act, “note” is
listed as a specific category of “security.” Therefore, a note can be a
security even if it does not meet the test for “investment contract.” 267
While the statutory definition of “security” includes “any note,” this is
not interpreted literally. 268 “Note” is a relatively broad term that
settlements market, which discusses the SEC staff ’s views regarding the
status of life settlements as securities. Life Settlements Task Force, Report
to the U.S. Securities and Exchange Commission (July 22, 2010), available
at www.sec.gov/news/studies/2010/lifesettlements-report.pdf.
265. SEC v. SG Ltd., 265 F.3d 42, 55 (1st Cir. 2001); SEC v. Aqua-Sonic Prods.
Corp., 687 F.2d 577 (2d Cir. 1982); Goodwin v. Elkins & Co., 730 F.2d 99,
103 (3d Cir. 1984), overruled on other grounds, Zosky v. Boyer, 856 F.2d
544 (1988); Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840
F.2d 236 (4th Cir. 1988); SEC v. Koscot, 497 F.2d 473 (5th Cir. 1974); SEC
v. Professional Assocs., 731 F.2d 349 (6th Cir. 1984); Kim v. Cochenour,
687 F.2d 210 (7th Cir. 1982); Fargo Partners v. Dain Corp., 540 F.2d 912
(8th Cir. 1976); SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476
(9th Cir. 1973); McCown v. Caldwell, 527 F.2d 204 (10th Cir. 1975).
266. Glenn W. Turner Enters., 474 F.2d 476. Some circuits have adopted the
Ninth Circuit’s interpretation, see SEC v. SG Ltd., supra, at 55; Turner
Enters., 474 F.2d at 482, accord Rivanna Trawlers Unlimited, 840 F.2d
at 240 n.4.
267. The fact that certain notes may not be “investment contracts” does not
necessarily mean that they are not “notes” and thus not securities. See
Reves v. Ernst & Young, 494 U.S. 56, 67 (1990).
268. Reves, 494 U.S. at 67. The name assigned to a transaction by the parties,
although not dispositive, is relevant in determining security status. There
may be associations when the use of a traditional name such as “stocks” or
“bonds” will lead a purchaser justifiably to assume that the federal
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