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

§ 1A:4.3 BROKER-DEALER REGULATION
(vii) a note evidencing loans by commercial banks for current
operations. 275
In determining whether a note bears a strong resemblance to the
items on the list or whether another category of instrument should be
added to the list, courts consider four factors:
(i) motivation of seller and buyer;
(ii) plan of distribution of the instrument;
(iii) reasonable expectations of the investing public; and
(iv) presence of alternative regulatory regime. 276
It should be noted that section 3(a)(10) of the Exchange Act
expressly excludes from the definition of “note” “any note . . . which
has a maturity at the time of issuance of not exceeding nine
months.” 277 However, the SEC has taken the view that the only
instruments that qualify for this exclusion are those that fall under
section 3(a)(3) of the Securities Act which requires that the note arise
out of a current transaction or the proceeds of which have been or are
to be used for current transactions. 278
Bank certificates of deposit (CDs), which have been analyzed as a
type of “note,” have been the subject of considerable litigation both
before and after Reves. The presence or absence or risk reducing
factors, such as banking regulations and insurance, has typically
played a key role in the determination of whether a CD is a security.
In Marine Bank v. Weaver, the Supreme Court held that a federally
insured CD was not a security subject to regulation under the
Exchange Act. 279 Although the CD in Marine Bank had similarities
to other types of long-term debt instruments that are usually treated as
securities, the Supreme Court found it important that the CD was
issued by a federally regulated bank, which provided the purchaser of
the CD protection under federal banking laws and made payment in
full to the purchaser of the CD almost guaranteed. Thus, the Court
held that this risk reducing factor made it unnecessary to subject these
instruments to regulation under the Exchange Act. 280 However, the
Court stated that CDs could be securities subject to the Act in other
275. Id.; Exchange Nat. Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126,
(2d Cir. 1976), and Chem. Bank v. Arthur Andersen & Co., 726 F.2d 930
(2d Cir. 1984), cert. denied, 469 U.S. 884 (1984).
276. For a more detailed discussion of each factor, see Reves, 494 U.S. at 66.
277. Exchange Act § 3(a)(10).
278. See SEC Release No. 33-4412 (Sept. 20, 1961).
279. Marine Bank v. Weaver, 455 U.S. 551 (1982).
280. See id.
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