dissenting:
I believe that the majority opinion mistakenly assumes that the debt instruments — which Security Pacific terms “loan notes” — were sold in a “loan participation” and hence were not “securities.” In doing so, I fear that the majority opinion misreads the facts, makes bad banking law and bad securities law, and stands on its head the law of this circuit and of the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). Accordingly, I dissent.
For reasons that I will explain in detail, I agree with the Securities and Exchange Commission, which submitted a brief ami-cus curiae, a brief which is not mentioned in the majority opinion, that these so-called loan notes were purchased in investment transactions and are securities accordingly, and that the loan note program engaged in by Security Pacific, while bearing a superficial resemblance to traditional loan partic-ipations, differs from those traditional par-ticipations in several important respects, including (1) who the participants are; (2) what the purposes of the purchasers or participants are; and (3) what the promotional basis used in marketing the loan notes is. The participants, rather than being commercial lenders who engage in traditional loan participations, were instead in many cases non-financial entities not acting as commercial lenders but making an investment, and even though there were some banks that purchased the so-called loan notes, they generally did so not through their lending departments but through their investment and trading departments. These participants were motivated not by the commercial purpose of operating a lending business in which par-ticipations are taken as an adjunct to direct lending operations, but were motivated by an investment purpose. The promotional literature put out by Security Pacific advertised the so-called loan notes as competitive with commercial paper, a well-recognized security under the Securities Act, and on the basis of the return that they offered over that of other investments.
Beyond that, and importantly to the Securities Act aspect of the case, these loan notes differ from traditional loan partic-ipations in the scope of information available to the purchasers. In the traditional loan participation, participants generally engage in one-to-one negotiation with the lead lender, and at times with the borrower, and can inspect all information, public and non-public, that is relevant, and consequently are able to do their own credit analysis. Here, Security Pacific did not *57provide the participants with non-public information it had, provided only publicly-available documents or ratings, and the purchasers were not in a position to approach the hundred or more possible borrowers in the program and conduct their own examinations. This is important for, as emphasized in Reves, 494 U.S. at 60, 110 S.Ct. at 949, “[t]he fundamental purpose undergirding the Securities Acts is ‘to eliminate serious abuses in a largely unregulated securities market.’ United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849 [95 S.Ct. 2051, 2059, 44 L.Ed.2d 621] (1975).” It is for this reason — overlooked by the majority — that “because the Securities Acts define ‘security’ to include ‘any note,’ we begin with a presumption that every note is a security.” Reves, 494 U.S. at 65, 110 S.Ct. at 951.
I have said above that I believe the majority has misread the facts. Security Pacific is a California-based national banking association, a so-called money center bank, which through its division Security Pacific Merchant Bank (“Merchant Bank”) has since 1985 conducted what it calls a “commercial loan note program.” In that program, Security Pacific sells to a variety of financial and non-financial institutions and other entities its so-called loan notes. While these purchasers included foreign and domestic banks, 53 percent of them were not financial institutions; 23 percent were corporations; 18 percent were institutional investors; 4 percent were insurance companies; 2 percent were mutual funds; 2 percent were trust departments; and 4 percent were money managers, all of the above typically purchasing loan notes in a minimum amount of one million dollars. These notes are unsecured, have short-term maturities ranging from overnight to one year, with a concentration in the overnight to 30-day range. The program was conducted by Merchant Bank’s corporate debt department, situated in a room where several trading operations were conducted, including those involving government instruments, foreign currency, and Euro-dollar futures. That department was not part of the commercial loan operation of Security Pacific. The program was created to allow Security Pacific to compete with investment bankers who could place short-term commercial paper for corporations at a lower cost than traditional commercial bank loans, that commercial paper unquestionably being securities. Indeed, Security Pacific’s promotional literature advertised loan notes as follows: “Commercial Loan Notes yield 15 to 50 basis points more than their commercial paper equivalents.” The borrowers, to whom Security Pacific referred as “issuers,” were first analyzed by the bank’s credit officers, and once approved obtained an internal, uncommitted, unsecured credit line separate from the bank’s traditional commercial loan limits. This line established how much in advances to that issuer Security Pacific could hold at any one time, but did not impose a limit on the amount of loan notes that the Merchant Bank corporate debt department could sell to others. In this case, for example, the issuer’s credit line was 10 million dollars, but the participations sold to others at the time of default amounted to more than 80 million dollars.
Entities expressing an interest in participating as purchasers, sometimes contacted by the bank through “cold calls,” usually signed a Master Participation Agreement (“MPA”) before their first purchase, governing all subsequent purchases. The notes were sold with recourse against the borrower only and no recourse against Security Pacific, whose duty was simply to collect payments on the underlying note payable to it and pay collections to the participants. The MPA purported to relieve Security Pacific of liability for “any error in judgment or for any action taken or omitted to be taken by it, except for gross negligence or willful misconduct.” The MPA also relieved Security Pacific of any obligation as to any representation concerning the financial condition of a borrower or duty to inspect the books and records of a borrower or responsibility for the col-lectibility of any loan. In addition, the MPA required participants to acknowledge that they had “independently and without reliance upon” Security Pacific, made their *58own credit analysis and decision to purchase a participation.
According to Security Pacific’s promotional literature,
Security Pacific’s strong trading capabilities afford investors a large selection of issuers, maturities, and amounts from which to choose. Our traders and sales professionals work closely with investors in order to match their individual investment needs. (Emphasis supplied.)
It also promoted the liquidity of the instrument, stating that Security Pacific would “make a bid on a Security Pacific-originated loan note on a best efforts basis and represented that although it did not ‘fully commit to make a secondary market in loan notes,’ its ‘trading and distribution capabilities should afford [purchasers] liquidity in most cases.’ ” From 1986 through October 1990, a total of 843 entities purchased one or more loan notes in the program, and as of 1989 Security Pacific had approximately six to seven hundred investors and approximately one hundred to two hundred fifty active borrowers. Nor was this a program limited to Security Pacific. As pointed out in the SEC amicus brief, the 1980s, in addition to seeing the era of “junk bonds,” saw a vast expansion of sales by large money center banks of participations in short-term loans made to corporate buyers, sort of an evolution out of old-style banking into investment banking, in an effort to compete with the borrowing of money through debt instruments, such as commercial paper, rather than through traditional bank loans. The SEC estimates that the total market for these loan notes is considerable, with annual sales by all sellers estimated in excess of 100 billion dollars a year. This case, therefore, is not exactly about chicken feed.
We start off by looking at the broad definition of “security” within’the meaning of section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2) (1988).1 Section 2(1), 15 U.S.C. § 77b(l) (1988), defines “security” to mean “any note, ... evidence of indebtedness, ... or any certificate of interest or participation in ... any of the foregoing.”
The legal question we have before us is whether the notes issued by Integrated Resources, Inc. (“Integrated”) were securities within the meaning of section 12(2) of the Securities Act of 1933.
We start with the proposition as set forth in Justice Marshall’s opinion for the Court in Reves that Congress “recognized the virtually limitless scope of human ingenuity, especially in the creation of ‘countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.’ ” 494 U.S. at 60-61, 110 S.Ct. at 948-949 (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946)) and with the proposition that “Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.” 494 U.S. at 61, 110 S.Ct. at 949. The Court there adopted the Second Circuit’s “family resemblance” test as set forth in, e.g., Exchange Nat'l Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1138 (2d Cir.1976), 494 U.S. at 64-65, 110 S.Ct. at 950-951, with certain modifications, however. The first such modification is that the Second Circuit test provided that only notes with a term of more than nine months were presumed to be securities. Exchange Nat’l Bank of Chicago, 544 F.2d at 1137-38. The Supreme Court in Reves refused to express any view on whether the ’34 Act statutory exception for notes with a maturity of nine months or less affected the presumption that every note is a security. 494 U.S. at 65 n. 3, 110 S.Ct. at 951 n. 3. The Court did agree, however, that types of notes that are not “securities” include
the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a ‘character’ *59loan to a bank customer, short-term notes secured by an assignment of- accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized),
494 U.S. at 65, 110 S.Ct. at 951 (quoting Exchange Nat’l Bank of Chicago, 544 F.2d at 1138), and “notes evidencing loans by commercial banks for current operations,” id. (quoting 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)). But the Court added that “[m]ore guidance ... is needed,” especially since the Second Circuit list “is ‘not graven in stone.’ ” Id., 494 U.S. at 65-66, 110 S.Ct. at 951-952 (quoting Chemical Bank, 726 F.2d at 939).
The additional guidance consisted in applying a four factor test. The first factor is the motivations that would prompt a reasonable seller and buyer to enter into the transaction. If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is more likely to be a security, while if the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good or to correct for the seller’s cash flow difficulties or advance some other commercial or consumer purpose, the note is less sensibly described as a “security.” The second factor is the plan of distribution of the instrument. If it is an instrument in which there is “common trading for speculation or investment,” SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed.2d 88 (1943), then it is more likely to be a security. The third factor is the reasonable expectations of the investing public. Finally, the Court examines whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument. Reves, 494 U.S. at 66-67, 110 S.Ct. at 951-952.
Judge Wright, in his concurring opinion in Great Western Bank & Trust v. Kotz, 532 F.2d 1252 (9th Cir.1976), put the difference between lending banks (and hence real loan participants) and the investors here involved very well: •
While banks are subjected to risks of misinformation, their ability to verify representations and take supervisory and corrective actions places them in a significantly different posture than the investors sought to. be protected through the securities acts.
In an investment situation, the issuer has superior access to and control of information material to the investment decision. Rather than relying solely on semi-anonymous and secondhand market information, as do most investors, the commercial bank deals “face-to-face” with the promisor.
Id. at 1261-62 (Wright, J., concurring). Judge Wright’s “approach” ’ in using this language was referred to by Judge Friendly in Exchange Nat’l Bank of Chicago, 544 F.2d at 1136, as “rather appealing,” though his opinion for the court declined to accept Judge Wright’s suggestion that no note given to evidence a bank loan can be a “security.” Id. at 1137. In other words, Judge Friendly disapproved Judge Wright’s approach as carrying too far the exemption from the securities acts for commercial bank loans negotiated face-to-face. In Chemical Bank, 726 F.2d at 938 & n. 14, Judge Friendly noted the intervening approval (by way of a cf. cite) by the Supreme Court of the Wright Great Western concurrence in Marine Bank v. Weaver, 455 U.S. 551, 560 n. 10, 102 S.Ct. 1220, 1225 n. 16, 71 L.Ed.2d 409 (1982). Here, the originating bank, Security Pacific, had no commitment to transfer full credit information and eschewed any duty to the investors, providing only publicly-available information and not an independent credit analysis. The fact that the purchasers here were sophisticated entities does not exclude them from being considered a “broad segment of the public,” Reves, 494 U.S. at 68, 110 S.Ct. at 953. And that is all the Court has held to be necessary to establish the requisite “common trading” in an instrument. See, e.g., Landreth Timber Co. v. Landreth, 471 U.S. 681, 105 S.Ct. 2297, 85 *60L.Ed.2d 692 (1985) (stock of closely-held corporation); W.J. Howey Co., 328 U.S. at 295, 66 S.Ct. at 1101 (units of citrus grove and maintenance contract not traded on exchange).
Moreover, it is important to look at Security Pacific’s overall loan note program and not just at the sale of Integrated notes. Potential purchasers were not presented with one loan and asked if they wanted to participate in it, but were solicited, often on a daily basis, and offered a range of investment options involving different issuers with different maturities and interest rates. The investors were looking for short-term means to place excess cash and were motivated by the maximum return available from the investments offered. The bottom line is that the market closely resembles the commercial paper market which Judge Lasker once described as involving “a series of brief telephone conversations” between buyer and seller, University Hill Foundation v. Goldman, Sachs & Co., 422 F.Supp. 879, 885 (S.D.N.Y.1976), and, as he pointed out, “because of the large amounts involved buyers understandably desire to complete the transaction on the date of the sale to avoid losing a day’s interest,” id., which is the very case here. Whatever the language of the MPAs relied upon by the majority and the district court, the language of the promotional literature repeatedly referred to “investors” and “investments.”
Thus, I consider the four-part test of Reves applied to the facts here to make the so-called loan notes “securities” under section 12(2), and would reverse.*
. Section 12(2) by its terms applies whether or not the security is exempt under section 3(a)(3) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(3) (1988), which exempts notes and other paper, used for current operations, with maturity of not exceeding nine months.
While I think that the changes in the amended panel majority opinion do a lot to narrow the scope and, hence, the impact of its decision, even with those changes I think the decision wrong, for reasons previously stated. I therefore continue to dissent.