Opinion ID: 672857
Heading Depth: 2
Heading Rank: 1

Heading: The Reves Factors

Text: 14 We must determine whether the mortgage participations are regulated by the securities acts by applying the family resemblance test enunciated by the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). See Banco Espanol de Credito v. Security Pac. Nat'l Bank, 973 F.2d 51, 55 (2d Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 2992, 125 L.Ed.2d 687 (1993). Under the family resemblance test, a note is presumed to be a security unless the note resembles one of the several judicially-enumerated instruments that are not securities. Reves, 494 U.S. at 65, 110 S.Ct. at 951 (citing Exchange Nat'l Bank v. Touche Ross & Co., 544 F.2d 1126, 1138 (2d Cir.1976); Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir.), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984)). 4 In applying this test, we look to four factors. If the note is not sufficiently similar to one of the non-security instruments, then we must determine whether another category of such instruments should be judicially created by reference to the same four factors, identified in Reves as follows: 15 (1) the motivations that would prompt a reasonable buyer and seller to enter into the transaction; (2) the plan of distribution of the instrument; (3) the reasonable expectations of the investing public; and (4) whether some factor, such as the existence of another regulatory scheme, significantly reduces the risk of the instrument, thereby rendering application of the securities laws unnecessary. 16 Banco Espanol, 973 F.2d at 55 (citing Reves, 494 U.S. at 66-67, 110 S.Ct. at 951-52). In using this analysis, it is important to bear in mind that a participation in an instrument might in some circumstances be considered a security even where the instrument itself is not. Id. at 54; see also Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 240-42 (2d Cir.1985). 17 The district court recognized that notes secured by a mortgage on a home, in the traditional mortgage transaction, are among the enumerated categories of non-securities. See Exchange Nat'l Bank, 544 F.2d at 1138. The district court then examined the mortgage interests at issue by reference to the Reves factors and concluded that they were not notes within the scope of the 1933 and 1934 Acts. 18 We disagree, and we hold that the instruments here are notes within the meaning of the securities acts. 5 For reasons that will become clear as we address each of the four Reves factors, we believe that these instruments do not sufficiently resemble the traditional note secured by a home mortgage to be exempt from regulation under the securities laws. Nor do we believe that the Reves factors warrant the creation of an additional category of non-securities for these instruments.