Court Opinion

ID: 9489269
Source: CourtListenerOpinion
Date Created: 2023-08-05 13:10:44.191881+00
Date Added: 2024-06-11T17:53:25.909457
License: Public Domain

WALD, Circuit Judge,
dissenting.
I agree with the majority that viatical settlements are not exempt from the securities laws as insurance contracts, that notes issued under Life Partners, Inc.’s (“LPI”) IRA program are not securities, and also that LPI’s viatical settlements meet the first two requirements of the three-part test for an investment contract set out in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-03, 90 L.Ed. 1244 (1946). These two requirements are that investors in viatical settlements (1) expect profits from (2) a common enterprise. I part company with the majority, however, because I believe that the third requirement of the Hoivey test, that (3) the expected profits be generated solely from the efforts of others, is also met here.
Several background principles should guide our analysis of whether or not the fractional interests in viatical settlements marketed by LPI satisfy Howey’s third prong and therefore are securities. One such principle is that we should avoid imposing overly formal restrictions on what qualifies as a security and instead apply securities laws flexibly so as to achieve their remedial purposes. Pinter v. Dahl, 486 U.S. 622, 653, 108 S.Ct. 2063, 2081-82, 100 L.Ed.2d 658 (1988); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 284, 11 L.Ed.2d 237 (1963); Baurer v. Planning Group, Inc., 669 F.2d 770, 772 (D.C.Cir.1981). In Howey the Court stated that the definition of security “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who *550seek the use of the money of others on the promise of profits.” Howey, 328 U.S. at 299, 66 S.Ct. at 1103. It has repeated this mantra of flexibility in subsequent cases applying the Howey test, and has consistently underscored that “form should be disregarded for substance and the emphasis should be on economic reality.” Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967); United Housing Found., Inc. v. Forman, 421 U.S. 837, 848-49, 95 S.Ct. 2051, 2058-59, 44 L.Ed.2d 621 (1975).
A second principle, however, is that the securities laws do not grant federal protection to all investments, but only to that subcategory of investments that are securities. Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982) (“Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud”); Northland Capital Corp. v. Silver, 735 F.2d 1421, 1431 (D.C.Cir.1984). Hence, although the securities laws are to be interpreted flexibly and cover many arrangements that do not superficially resemble securities, they cannot be interpreted so flexibly as to cover every type of investment. The paradigmatic instance of an investment that is not a security is the mere purchase of land with the hope that its value will naturally increase. See, e.g., Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 10 (1st Cir.1993) (“La] simple sale of land, whether for investment or use, is not a ‘security’ ”).
The third and final principle is that the securities laws, and in particular the Securities Act of 1933 and the Securities Exchange Act of 1934 which are the statutes at issue here, embody the belief that information is the most important form of investor protection. The Court has remarked that “the design of the[se] statute[s] is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions,” and it has used this concern for ensuring adequate access to information to guide its application of the Acts. SEC v. Ralston Purina Co., 346 U.S. 119, 124-26, 73 S.Ct. 981, 984-85, 97 L.Ed. 1494 (1953); see also Capital Gains Research Bureau, 375 U.S. at 186, 84 S.Ct. at 280 (“[a] fundamental purpose, common to [the securities laws], was to substitute a philosophy of full disclosure for the philosophy of caveat emptor”); Louis Loss & Joel Seligman, 1 Securities Regulation 171-94, 391-94 (3d ed.1989) (describing the disclosure philosophy of the securities laws). A new security must be registered before it can be publicly offered, which means simply that information on the security, issuer and underwriter must be submitted to the Securities and Exchange Commission (“SEC”). If there has been adequate and complete disclosure, the SEC has no power to prevent a security from being marketed because it believes the security to be too risky. Loss, supra, at 227-29.
As the majority indicates, prior cases have established that in order for the third prong of the Howey test to be met the activities of the promoter must be of a managerial or entrepreneurial character, and not merely ministerial or clerical. Majority opinion (“Maj. op.”) at 545. In the words of the Ninth Circuit, the third prong of Howey is satisfied when “the efforts by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973); see also Forman, 421 U.S. at 852, 95 S.Ct. at 2060 (“touchstone of [the Howey test] is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”). Prior cases have also held that Howey’s third prong should be interpreted broadly to allow an investment contract to exist where the profits come “predominantly,” but not solely, from the efforts of others. See, e.g., SEC v. International Loan Network, Inc., 968 F.2d 1304, 1308 (D.C.Cir.1992).
The key question for us is whether the third prong of the Howey test is met when the managerial activities of the promoter occur only before the investment is purchased.1 *551The district court took the position there is no need for post-purchase activities to be managerial activities, provided that there are some post-purchase activities and at some point the promoter has performed managerial activities. I agree with the majority that this approach fails. Insisting that some activity must occur after purchase but allowing any activity, no matter how trivial, to satisfy this requirement violates the principle that form should not be elevated over substance and economic reality.
The majority instead takes the position that in order for Howey’s third prong to be satisfied, the promoter must perform managerial and entrepreneurial activities after the investment is purchased. Maj. op. at 547-48. The net effect of the majority’s position is to incorporate a bright-line rule into Howey’s third prong: whatever the surrounding circumstances, an investment is not a security unless significant managerial activities by the promoter occur post-purchase. The advantage of this approach is that it offers a clear method for distinguishing between investment contracts that are securities and investment contracts that are simply investments. In that regard, it accords with the principle that the securities laws cannot be so broadly interpreted as to encompass all investments. But it does so at a substantial cost. Like the district court’s approach, it elevates a formal element, timing, over the economic reality of the investors’ dependence on the promoter. Even more troubling, the majority’s approach undercuts the flexibility and ability to adapt to “the countless and • variable schemes” that are the hallmarks of the Howey test. Howey, 328 U.S. at 299, 66 S.Ct. at 1103.
I agree that the requirement of Howey’s third prong is most clearly met where the promoter engages in post-purchase activities. But I do not believe that investments based on pre-purchase managerial activities only should be categorically excluded from the coverage of the acts. Rather, I would distinguish between investments that satisfy the Howey third prong and those which do not by focusing on the kind and degree of dependence between the investors’ profits and the promoter’s activities. I believe that the third prong of the Hoivey test can be met by prepurchase managerial activities of a promoter when it is the success of these activities, either entirely or predominantly, that determines whether profits are eventually realized. These pre-purchase activities must be directed at the sale of the investment opportunity; for example, efforts to build up a business are directed at making a business successful and therefore would not qualify, even if the ultimate aim is to sell the business to an investor. Cf. Emisco Indus. Inc. v. Pro’s Inc., 543 F.2d 38, 40-41 (7th Cir.1976). In practice, this requirement may impose a time element, as activities that do not occur around the time of sale are unlikely to be found to be directed at the sale of an invest*552ment opportunity. But provided the promoter’s activities are so directed, the fact that the activities occurred prior to purchase would not bar the investment from qualifying as an investment contract under Howey.
On the other hand, if the realization of profits depends significantly on the post-investment operation of market forces, preinvestment activities by a promoter would not satisfy Howey’s third prong. In such a situation, the realization of investor profits is fundamentally outside of the promoter’s control and the investor’s dependence on the promoter is more circumscribed. By the same logic, Howey’s third prong would not be satisfied whenever the promoter’s managerial activities occurred prior to purchase and the realization of profits depended significantly on outside forces, such as a lottery. See, e.g., SEC v. Energy Group of America, Inc., 459 F.Supp. 1234, 1240 (S.D.N.Y.1978). However, occasions where profits are determined by the operation of market forces will likely be the most common version of this situation.
The reason I focus on the degree of dependence between the investors’ profits and the promoter’s activities is twofold. First, I believe that this focus is more in keeping with the tenor of the Supreme Court’s opinions applying Hoivey and its concern that regulation be tied to underlying economic reality instead of form. Second, I believe that distinguishing between profits realized from the promoter’s activities and profits realized from the operation of market forces coheres with the belief that investors are protected by access to information. When profits depend on the intervention of market forces, there will be public information available to an investor by which the investor could assess the likelihood of the investment’s success. Thus, for example, a purchaser of silver bars has access to information on the trends in silver prices, an investor in paintings can get a sense, at least generally, of how the market for artwork is faring, and a purchaser of an undeveloped lot has access to information on growth trends in the area. Obviously, the degree to which this information is actually available to an investor depends on the sophistication and education of an investor, but that is true about investments generally. Moreover, where profits depend on the operation of market forces “registration ... could provide no data about the seller which would be relevant to those market risks.” SEC v. G. Weeks Securities, Inc., 678 F.2d 649, 652 (6th Cir.1982).
Where profits depend on the success of the promoter’s activities, however, there is less access to protective information and the type of information that is needed is more specific to the promoter. Given the pivotal role of the promoter’s activities, what the investor needs to know is not generally how this type of activity has fared but what the specific risk factors attached to the investment are and whether there is any reason why the investor should be leery of the promoter’s promises. This need for information holds true in regard to investors prior to purchase as much as to investors who have committed their funds — indeed, more so, if they are to avoid over-risky investments. The majority argues that we need not be concerned about protecting investors where the profitability of an investment hinges on pre-purchase activities. Maj. op. at 548. Presumably this is because investors already have a potent weapon — they can refuse to invest in the policy. But the claim that investors need not be protected prior to committing funds has been rejected by Congress, which made the goal of ensuring that investors have adequate information before they commit their money or enter contracts the central concern of the Securities Acts. Capital Gains Research Bureau, 375 U.S. at 186, 84 S.Ct. at 280; Ralston Purina, 346 U.S. at 124-26, 73 S.Ct. at 984-85.
By far, most cases finding the Howey test to be met involve situations in which post-purchase managerial activities either occur or are promised. In Howey, for example, the promoter not only sold orchard lots but also contracted to manage the lots as an orchard after they were purchased. Howey, 328 U.S. at 299-300, 66 S.Ct. at 1103. But there is precedent supporting an approach that focuses on the degree and kind of dependence between the investors’ profits and the promoter, rather than on the timing of the promoter’s efforts. Contrary to the ma*553jority’s suggestion that pre-purchase activities may be altogether irrelevant, see Maj. op. at 548, courts frequently refer to prepurchase as well as post-purchase activities of the promoter in finding Howey’s third prong met. In Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027 (2d Cir.1974), for example, the Second Circuit noted that investors’ profits depended on the promoter’s expertise in selecting whiskey for investors to purchase as well as on the promoter’s promise to buy back the whiskey in the future. Id. at 1035; see also Gary Plastic, 756 F.2d at 240-41 (finding an investment contract where promoter both promised to maintain a secondary market for CDs — a post-purchase managerial activity— and used its market power to negotiate favorable CD rates with participating banks — -a pre-purchase activity); Gordon v. Terry, 684 F.2d 736, 740 n. 4, 742-43 (11th Cir.1982), cert. denied, 459 U.S. 1203, 103 S.Ct. 1188, 75 L.Ed.2d 434 (1983) (emphasizing promoter’s claimed expertise in locating bargain-priced Florida properties for investor to purchase, as well as promoter’s post-purchase activities of structuring leverage scheme and utilizing personal contacts to ease resale, in denying summary judgment on question of whether investment contract existed).
Indeed, there are occasions, albeit rare, when most of the promoter’s significant managerial activities occur before purchase and a court has found Howey’s third prong satisfied. One such instance is SEC v. Brigadoon Scotch Distribs., Ltd., 388 F.Supp. 1288 (S.D.N.Y.1975), in which a promoter both selected coins for purchase and offered post-purchase buy-back and accounting services. While it is true that the promoter’s post-purchase activities in this case qualify as managerial, the court specifically stated that the promoter’s selection activities alone were sufficient to satisfy Howey’s third prong because “[cjoins do not appreciate in value at the same rate and accordingly their selection is the most crucial factor in determining how much profit an investor in coins will make.” See id. at 1293. Another is Bailey v. J.W.K. Properties, Inc., 904 F.2d 918 (4th Cir.1990), where the promoter selected specially bred cow embryos for investors to purchase and then raised and marketed the cows. Although the promoter’s activities in raising and marketing the cows occurred post-purchase, the Fourth Circuit emphasized the promoter’s pre-purchase activity of selecting and crossbreeding embryos in finding that Howey’s third prong was met:
If the investment scheme had been merely to raise cattle for slaughter, the interests purchased by the plaintiffs may not have constituted investment contracts____
However, the Albemarle Farms program also involved the selection of embryos and crossbreeding. The plaintiffs had no expertise in making such selections and had an extremely limited range of alternative sources of such information.
Id. at 924-25; see also Energy Group, 459 F.Supp. at 1241 (purchase of property in expectation that it will appreciate due to promoter’s expertise in selecting the property is one category of investment contract); 5B Arnold S. Jacobs, Litigation Under Rule 10b-5, § 38.03[b][I] at 2-212, § 38.03[b][v], at 2-258 (1996) (quoting Energy Group and arguing that promoter activities taking place concurrent with or after sale of security satisfy Howey’s third prong).
Notably, I have found no case which holds, as the majority here does, that pre-purchase activities alone cannot satisfy Howey’s third prong. Even the cases cited by the majority in support of its position do not argue that the pre-purchase/post-purchase line has determinative significance. Rather, the decisions in these cases appear to turn on the role that market forces as opposed to the promoter’s activities play in the realization of profits. For example, Noa v. Key Futures, Inc., 638 F.2d 77 (9th Cir.1980), held that the purchase of silver bars, even with the promoter’s offer to store and repurchase the silver, was not an investment contract. In reaching this decision the Ninth Circuit emphasized that “the profits to the investor depended upon the fluctuations of the silver market, not the managerial efforts of [the promoter].” Id. at 79. On the other hand, in McCown v. Heidler, 527 F.2d 204 (10th Cir.1975), the Tenth Circuit held that sales of real estate parcels constituted investment contracts because the price of the parcels reflected the value of the promoter’s develop*554ment activities. Id. at 211; see also SEC v. Belmont Reid & Co., Inc., 794 F.2d 1388, 1391 (9th Cir.1986) (Howey’s third prong not met where primary purpose of prepayment plan involving purchase of gold coins was “to profit from the anticipated increase in the world price of gold”); Jenson v. Continental Financial Corp., 404 F.Supp. 792, 803 (D.Minn.1975) (Howey third prong is not met by commodity futures contracts because “[t]he profitability of the investment is solely dependent on the operation of the commodities market and the investors [sic] own investment decisions”). Although in Rodriguez the First Circuit focused on Howey’s second prong, the existence of a common enterprise, it found the question of whether the value of the investment derives from the operation of the market or the actions of the promoters to be of critical importance. The First Circuit maintained that the sale of real estate could not constitute an investment contract where the promoter did not promise to develop the land and instead it was expected to appreciate by “natural forces,” specifically economic growth spurred by the presence of Disney World. Rodriguez, 990 F.2d at 11-12.
The approach I advocate — allowing Howey’s third prong to be met by pre-purchase managerial activities of a promoter when the eventual realization of profits depends predominantly on these activities and not on the market — is also supported by the line of cases applying Howey’s third prong to general partnerships. The investment in these cases is a contribution of capital in return for an interest in an ongoing partnership, and thus they do not address the specific question of whether pre-purchase activities alone can create an investment contract. But these cases are relevant because they demonstrate that other courts have been concerned to apply Howey’s third prong flexibly and with an eye to protecting passive investors who are at an informational disadvantage in regard to a promoter or who must rely on a promoter for some unique expertise. Since the terms of general partnership agreements usually grant all partners authority to participate in decisionmaking, investments in general partnerships would appear to fail the requirement of Howey’s third prong that profits must come predominantly from the
efforts of others. Instead, several courts have adopted an approach that focuses not on the terms of the partnership agreement but on the relationship between the investor and the promoter. Under this approach, a general partnership can constitute an investment contract if the agreement grants the partner little control, “the partner ... is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership ... powers,” or “the partner ... is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager.” Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981); see also Koch v. Hankins, 928 F.2d 1471, 1476-78 (9th Cir.1991)(adopting Williamson test); Matek v. Murat, 862 F.2d 720, 728 (9th Cir.1988)(“access to information about the investment, and not managerial control, is the most significant factor” in applying the securities acts).
It is true that there is no clear line distinguishing when a promoter’s pre-purchase activities predominate in the realization of profits and when market forces play a significant role. But I expect that in practice this distinction would not be a difficult one to make, and that the background principles of federal securities regulation would help decide close cases. I also expect that the occasions where investment profits depend predominantly on an investor’s pre-purchase activities are extremely rare. As the cases above illustrate, the most common pre-purchase managerial activity is the use of some special expertise to select items for purchase. Usually, however, the purpose of this selection is to identify items “within a particular class of items which will appreciate at a faster rate than will the particular class in general.” Bailey, 904 F.2d at 924 (quoting J. Long, Blue Sky Law § 2.03[2][d][iii], at 2-45 to 2-46 (1986)). Since in these cases the realization of profits depends significantly on what happens in the market for that type of item, the investment would not constitute a security.
Given the paucity of cases where pre-purchase managerial activities of the promoter alone are likely to create a security, my fear *555that the majority’s approach mil unduly restrict the flexibility of the Howey test might appear exaggerated. On the other hand, the difficulty with illustrating the restrictive effects of the majority’s bright-line approach could be seen as a very good reason to preserve flexibility, for flexibility is what allows us to adapt our existing securities laws to address “novel schemes,” schemes that we cannot easily anticipate ahead of time. At the very least, surely we should heed the concerns of the SEC, which bears primary responsibility for administering the securities laws. In its brief the SEC has urged us not to draw “a sharp line between those efforts occurring at or around the time of the investment of money, and those occurring thereafter” for fear that such a line would create a loophole in the securities laws that promoters could exploit. Appellee Br. at 41; see also Forman, 421 U.S. at 858 n. 25, 95 S.Ct. at 2063 n. 25 (noting that the views of the SEC would have been given considerable weight had the agency’s position been consistent); SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1132 n. 7 (9th Cir.1991)(“[w]hile the SEC’s view is not conclusive, it is entitled to substantial weight”).
LPI’s viatical settlements represent one of the rare instances where investor profits depend predominantly on the pre-purchase managerial activities of a promoter. As the district court found, whether investors realize the profits they expect depends on whether LPI’s estimation of the insured’s life span is accurate. The longer the insured remains alive, the lower the investors’ profits, particularly if premiums must continue to be paid. Moreover, the record clearly supports the district court’s finding that investors rely on LPI’s evaluation of the insured’s life expectancy. LPI emphasizes the detailed assessment of the insured’s medical condition that it performs in its promotional materials. LPI, Commonly Asked Questions (January, 1993), reprinted in JA-II 1342^13. While the T-cell count of a person with AIDS is an important indicator of life expectancy, LPI’s reviewing physician testified that he bases his life expectancy estimates on several other factors as well, such as incidence of opportunistic infection, platelet count, pulmonary studies, etc. Testimony of Dr. John Kelly, reprinted in JA-II 1361. Potential advances in the treatment of AIDS must also be taken into account. Id., reprinted in JA-II 1360-61. Although investors can ask for a copy of the report on the insured’s medical condition filed by LPI’s reviewing physician, they can only review the medical information supplied by the insured and the insured’s physician in LPI’s offices. Testimony of Brian Pardo, reprinted in JA-IIIB 3088-89 (“Pardo Testimony”). Nor do they have any access to medical information on the insured beyond that obtained by LPI. Under a recently adopted Texas regulation, which governs LPI’s viatical settlements, only a viatical settlement company or broker can contact an insured about the insured’s health status. Tex. Admin. Code tit. 28, § 3.10012 (1996); see also 21 Tex. Reg. 1124 (1996)(noting adoption of new regulations on viatical settlements). In any event, given the technical and complicated nature of this medical information, few investors are likely to be able to assess the reliability of LPI’s life expectancy estimate.
Two other key variables affecting investor profits are the price that LPI negotiates for the sale of the policy and whether the policy is freely assignable. LPI’s former president, Brian Pardo, testified that investors do not participate in price negotiations because the policy is not offered to investors for purchase until the seller and LPI have agreed on a price. Pardo Testimony, reprinted in JAIIIB 3079. Investors thus rely on LPI, with its familiarity with going rates and prominence as a major viatical company, to obtain a favorable purchase price. Any delay in obtaining benefits after the insured dies, for example if a former beneficiary or the insurance company challenges the assignment, cuts into profits. Hence, LPI’s services of investigating policies, drafting valid assignment contracts, and arranging if necessary for former beneficiaries to agree to the assignment, is also very important. Commonly Asked Questions, reprinted in JA-II, 1343-44; Report of Compliance Efforts, reprinted in JA-S 4124. In addition, policy sellers in some states may have enhanced protections and revocation rights, and some states may not recognize the purchase of policies by *556persons without an insurable interest. LPI, Draft Private Placement Memorandum for Life Partners Ltd, reprinted, in JA-IIIB 3019. As a result, investors must rely on LPI’s knowledge of insurance laws in the different states and LPI’s tracking of proposed legislation affecting viatical settlements.
Market forces, however, do not play a significant role in determining whether profits are realized. Their only effect is indirect, in that market forces determine whether investment in policies is profitable compared to other investments. An investment in a life insurance policy might yield a less favorable rate of return than an alternative investment keyed to interest rates if interest rates were to rise dramatically. But this effect on profits is insignificant compared with the effect that LPI’s life expectancy evaluation and other services have, and it is also in no way unique to viatical settlements. Every investment is subject to becoming less profitable because of background economic developments. In addition, while the course of the insured’s illness determines when the insured dies, the realization of expected investor profits depends not on the timing of the insured’s death per se but rather on whether the death occurs within the period estimated by LPI.
All of the activities performed by LPI occur pre-purchase, and as a result the majority holds that LPI’s viatical settlements do not create an investment contract. Under my approach, since the investors’ profits depend entirely on managerial activities of the promoter, the Howey test is met and LPI’s viatical settlements should be subject to the securities laws. The fact that no investor appears to have been “defrauded, misled, or is in any way dissatisfied with an LPI viatical settlement,” Maj. op. at 539, does not make this result unreasonable. The securities laws are intended to be prophylactic and prevent abuses before they arise. Even if LPI’s practices are legitimate there is no guarantee
that those of other viatical settlement brokers will be similarly above board. Moreover, there are indications that the viatical settlement industry will grow substantially in coming years, as companies begin to purchase policies from individuals terminally ill from cancer as well as AIDS. See Pamela Sherrid, Enriching the Final Days, U.S. News & World Rep., Aug. 21, 1995 at 56, reprinted in JA-IB 483; Keith Stone, Brokers, Terminally III Turning Death Into Cash, L.A. Daily News, Oct. 25, 1992 at Nl, reprinted in JA-II 1287-91. A significant jump in viatical sales is also expected to occur if Congress enacts legislation to clarify that the income from the sale of a life insurance policy is not taxable to the insured, as it is currently considering doing. See Albert B. Crenshaw, Tackling an Issue of Agony, Wash. Post, Sept. 1,1995, at Cl, C3, reprinted in JA-4145. The securities laws are the only currently existing regulatory scheme by which investors in viatical settlements can be protected. Although several states have enacted laws dealing with viatical settlements, these laws only protect the insured who is selling the policy and not the investor who is purchasing it. See, e.g., N.Y. Ins.Law §§ 7801-7810 (McKinney’s Supp.1996); see generally Viatical Settlements Model Act, reprinted in JA-II 1073-88.
It is also important to bear in mind that the majority’s bright-line rule will apply to all investments, not just viatical settlements. An illustration of the restrictive effect that this rule could have in other contexts can be drawn from the recent problems associated with derivatives. A derivative is a financial contract, arranged through a dealer, that derives its value by reference to an underlying asset, interest rate, exchange rate or index.2 See Geoffrey B. Goldman, Crafting a Suitability Requirement for the Sale of Over-the-Counter Derivatives: Should Regulators “Punish the Wall Street Hounds of Greed”?, 95 Colum. L.Rev. 1112, 1116-19 (1995). Some derivatives are traded on the *557organized exchanges, such as the stock and commodities exchanges, but a growing portion are not; the total outstanding amount of these non-exchange derivatives, denominated “over-the-counter” derivatives, was $43.2 trillion at the end of 1995, up 17% from the $36.9 trillion outstanding at the end of 1994. See Samer Iskandar, Survey — International Capital Markets ’96: A Blip in the Growth Trend, Fin. Times, June 10, 1996, at 7. The growing prominence of over-the-counter derivatives and the spectacular losses suffered by some investors, such as Orange County, have sparked concern that derivatives may be insufficiently regulated. See Goldman, supra, at 1119-25; J. Christopher Kojima, Product-Based Solutions to Financial Innovation: The Promise and Danger of Applying the Federal Securities Laws to OTC Derivatives, 33 Am. Bus. L.J. 259, 261-63 (1995). What regulatory options are currently available in regard to derivatives is a source of debate, and commentators disagree in particular as to whether derivatives meet the common enterprise and expectation of profits from the efforts of others requirements of the Howey test so as to qualify as investment contracts. Compare Procter & Gamble Co. v. Bankers Trust Co., 925 F.Supp. 1270, 1278 (S.D.Ohio 1996) urith Kojima, supra, at 298-304. But it is at least possible to imagine a type of derivative arrangement that would meet the Howey requirements as they have existed up to now. For example, a dealer could organize a complex set of derivative transactions for a group of investors with the aim of adopting offsetting positions in different markets that would generate a certain percentage of return. The realization of profits in this situation depends predominately on the dealer’s expertise in balancing positions in different markets against one another rather than on what happens in a particular market. Consequently, this type of derivative arrangement could qualify as an investment contract under the approach I have outlined, but it could not so qualify under the majority’s. Since the significant managerial activity of the derivative dealer — the selection and structuring of the derivative instrument and the investigation of the parties’ financial status — usually occurs before the parties enter into the transaction, the majority’s approach would prevent most derivative transactions from ever constituting investment contracts. As a result, the majority’s approach could seriously hamper regulators as they seek to determine how best to treat this burgeoning class of financial instruments.
I believe that the majority’s position, precluding pre-purchase managerial activities of a promoter from ever satisfying the third prong of the Howey test, is unwarranted and will serve to undercut the necessary flexibility of our securities laws. An approach that allows pre-purchase activities of the promoter to satisfy the third prong when the realization of investors’ profits depends predominantly on these activities offers a means of distinguishing between ordinary investments and securities that both better conforms to precedent and has a less restrictive effect on the securities laws. Therefore, I respectfully dissent.

. I agree with the majority's characterization of LPI’s post-purchase activities — holding the policy, monitoring the insured's health, paying premiums, converting a group policy into an indi*551vidual policy if required, and collecting and distributing the death benefit — as ministerial, but with two caveats. First, unlike the majority, I consider LPI’s promise to assist in the resale of policies combined with its emphasis on the availability of resale opportunities to constitute a managerial post-purchase activity. Lifetime Funding Newsgram (January 1994), reprinted in Joint Appendix (“JA”) IIIB 3182-83; Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 240-41 (2d Cir.1985) (stressing Merrill Lynch's promise to maintain a secondary market for resale of certificates of deposit ("CD”) in finding Howey test satisfied). I agree with the majority, however, that LPI does not in general highlight the resale option but on the contrary warns investors that "[l]ife insurance policies purchased through viatical transactions are not liquid assets.” LPI, Report of Compliance Efforts, reprinted in JA-S 4123; Maj. op. at 546-47. Although LPI did emphasize the possibility of resale in regard to policies with longer terms (24-36 months and 36-48 months), LPI indicated in its reply brief that it has stopped doing so and now includes the same warning about the lack of liquidity in this context as well. Reply Br. at 13 n.8.
Second, I attach greater significance than the majority does to the fact that in Version I LPI often appeared as the owner of record of the policy and not the investors. As the district court noted, this meant that creditors of LPI might be able to reach the policies were LPI to encounter financial difficulties. Consequently, the investors' profits were dependent on LPI's efforts to remain a financially viable company and not simply, as the majority claims, on LPI's " 'efforts' not to engage in criminal or tortious behavior." Maj. op. at 545. But LPI no longer appears as the record owners of the policies, and therefore my disagreement with the majority on this point is not material.

. An example of a derivative contract is when two parties enter into an interest-rate swap: one party agrees to pay the other a fixed rate of interest applied to some dollar amount while the other agrees to pay a variable interest rate on the same amount. Depending on whether interest rates rise or fall, one party will pay the other the difference between the two measures when payments are due, but there is no exchange of the underlying dollar amount. See John C. Hull, Options, Futures, and Other Derivative Securities 111-16 (1993).