delivered the opinion of the Court.
The primary issue in these two separate cases is whether a “life settlement agreement” or “viatical settlement agreement” is , an “investment contract” and thus a “security” under the Texas Securities Act. We hold that the agreements at issue are investment contracts because they constitute transactions through which a person pays money to participate in a common enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise and the person’s realization of the expected profits, is at least predominately due to the entrepreneurial or managerial efforts of others. We decline to give today’s holding only prospective application,- and we decline to consider the merits of the “relief defendants’” evidentiary arguments. In short, we affirm the courts of appeals’ judgments in both cases.
I.
Background
In Arnold v. Life Partners, Inc., Michael and Janet Arnold and others
Since 1991, Life Partners has been engaged in the business of buying existing life insurance policies from those whose lives the policies insure, and then selling interests in those policies to others. • These types of transactions are generally referred to as “life settlements” when the insured is elderly or “viatical settlements” when the insured is terminally ill. We will refer to both' types collectively as “life settlement agreements.” According to Life Partners, many people with life insur-.anee desire to sell their, policies so that they or their family members can enjoy the .proceeds while the insured is still living. Life Partners purchases ■ the policy from the insured for a “cash settlement” that is less than the amount the policy will pay at the time of the insured’s death. To fund these purchases and its own business operations, Life Partners sells interests in the policies’ future benefits to “investors” or “purchasers.”
Life Partners advertises life settlement agreements as a “sure” investment. Its sales pamphlet asserts: .“There’s no need to worry about which way the wind is blowing. ■ The returns on life' settlements, unlike stocks, mutual funds and 'other investments, are unaffected by market fluctuations, 'business cycles," the economy or global unrest.” Life Partners assures purchasers that, “[n]ot only are your investments' safe from these -market risks, they have the opportunity to provide exceptional return on investment.”. If investments in a life settlement are indeed “safe from these market risks,” however, they are not free from all risks. In-particular, because Life Partners calculates a policy’s value
■ When selecting policies to purchase, Life ■Partners identifies insureds who are interested in selling their policies, evaluates their medical condition, predicts their life expectancy, and evaluates the policies’ terms and -conditions to ensure they are assignable. It then determines how much to pay for the policy based on the insured’s life expectancy, the amount of the benefit, and related factors. Life Partners acknowledges that those who purchase an interest in the policies “depend upon [Life Partners’] ability to predict life expectancies and set the appropriate prices.” If Life Partners accurately predicts the insured’s- life expectancy and negotiates a favorable purchase price, those who purchase an interest in the policy will receive a profit when the policy is paid. . But if Life Partners’ prediction is inaccurate or its negotiations ineffective, the purchasers can, end up having to pay more to cover premiums, than they will receive when the policy benefit is paid.
-. Life Partners uses the purchasers’ funds to (1) pay the insured for the policy, (2) create an escrow account from which to pay the policy’s future premiums as they come due, (3) pay fees to escrow agents and to any brokers who helped sell the interests to the purchasers, and (4) pay Life Partners an administration or brokerage fee. Life Partners does not disclose to the purchasers how much of their investment goes to each of these purposes, but instead gives them only a total “acquisition price.” Until the purchasers pay that price, they receive no information about the insureds or their policies. Once they have paid the acquisition price, the purchasers receive a “Confidential Case History” that contains information about the insured’s illness and life expectancy, the policy’s grade, value, and annual premium payment, and the amount Life Partners has escrowed to make those premium payments. The purchasers never learn the identities, addresses, or other personal information about the insureds.
When Life Partners purchases a policy, it becomes the legal owner but appoints a trustee to serve as the beneficiary. To cover the future premiums, Life Partners places what it projects to be a sufficient amount in escrow and then pays the annual premiums from that account. If the insured survives longer than projected, however, and the escrowed amount is depleted, Life Partners will require the purchasers to provide additional funds. If the purchasers fail to provide additional funds ■to cover the premiums, the policy will be
because the prepayment would be in excess of the cost of insurance, the amount paid in would pay the policy to a date farther in the future than if premiums were only paid on an annual basis. Thus, the necessity of a premium call would be reduced in the event the insured outlived his or her life expectancy because of the additional amount earned by prepayment. Finally, there would remain in escrow $250,000 which would not begin to be used until the value from the prepayment had been exhausted.
This “optimization” of premiums, however, can also reduce the purchasers’ return if the insurance company refuses to refund any unused premiums.
Life Partners is responsible for monitoring the insureds. Once an insured dies, Life Partners must obtain the death certificate, submit a claim to the life insurance company, and facilitate the payment of the benefits. When the insurance company pays the benefits to the trustee whom Life Partners has designated as the beneficiary, either the trustee or Life Partners then distributes the funds to the purchasers according to their fractional interests. Life Partners acknowledges that purchasers rely on Life Partners both before and after they purchase their interests. As its form entitled “Life Settlement Risk Factors — Read Before You Invest” explains:
You will be dependent upon LPI and the Escrow Agent for premium administration, tracking, and policy benefit collection services.
LPI and the Escrow Agent will administer the premium payments on the policies purchased, and you will be dependent upon them to • ensure timely payment of these premiums. If the funds that have been set aside in escrow to pay premiums are exhausted, you will be dependent upon LPI and the Escrow Agent to notify you of the premiums due, collect the additional premium payments from you and the other investors, and to pay the premiums promptly.
Additionally, as the Escrow agent will be named as beneficiary of the policy to collect the death benefit and distribute the death benefit proceeds upon death of the insured, you will be dependent upon LPI to notify the Escrow Agent of the death of the insured and facilitate the payout of the policy, and upon the Escrow. Agent to distribute the death benefits to you and the other, investors in the policy.
As with any administrative task, there is always a risk that some aspect of this administration could go awry for currently unknown reasons. If these administrative tasks ■ are notcompleted properly, a life settlement policy could lapse and you could lose your interest in the policy.
(Emphasis added.)
To facilitate Life Partners’ efforts on the purchasers’ behalf, each purchaser must execute a Power of Attorney that appoints
a. Enter into any agreements or contracts necessary for the purchase of life insurance policies ...[;]
b. Enter into all documents necessary to facilitate the purchase of the designated policy(cies) ...[;]
c. File, complete and record any document reflecting the transfer of ownership ...[;]
d. Notify the Purchaser of any amount necessary to replenish the Premium Escrow Account from which premium ■■ payments are made ...[;]
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f. Obtain proof of death of the insured and instruct Escrow Agent regarding the filing of death claims and the payment of death benefits of matured policies to the Purchaser or the Purchaser’s désignee ... [; and]
g. Advance, at the discretion of Agent, any funds which may be necessary to . replenish the Premium Escrow, Ac- : count from which premium payments are made —
Because the purchasers do not have legal title to the insurance policy and there is no secondary market for their interests, they must rely on Life Partners to cobrdi-nate a sale .to another interested purchaser if they need or decide to divest.
II.
“Securities”
We must decide whether Life Partners’ life settlement agreements are “securities” under the Texas Securities Act, Tex. Rev. Civ, Stat. art. 581-1, to -43.
Because this case requires us to construe a statute, we would normally follow our well-established text-based approach to interpret the meaning of “investment contract,” This Court, however, has previously considered and addressed the meaning of the term “investment contract” as it appears in the Texas Securities Act. See Searsy v. Commercial Trading Corp.,
Based on these authorities and our own reading of the statute’s language, we conclude that three key principles must guide our construction and application of the term “investment contract.” First, we must broadly construe the term to maximize the protection the Act is intended to provide to the investing public. Second, we must focus on the economic realities of the transaction at issue. And third, if the economic realities establish that a transaction is an investment contract, we must apply the statute regardless of any labels or terminology the parties may have used. In light of these principles, we conclude that an “investment contract” for purposes of the Texas Securities Act means (1) a contract, transaction, or scheme through which a person pays money (2) to participate in a common venture or enterprise (3) with the expectation of receiving profits, (4) under circumstances in which the failure or success of the enterprise, and thus the person’s realization of the expected profits, is at least predominately due to the entrepreneurial or managerial, rather than merely ministerial or clerical, efforts of others, regardless of whether those efforts are made before or after' the transaction. Applying this definition to the undisputed material facts, we conclude that Life Partners’ life settlement agreements are “investment contracts” and thus “securities” under the Texas Securities Act.
A. Guiding Principles & the How-ey/Forman Test
The United States Supreme Court first addressed the meaning of “investment contract,” as used in the federal Securities Act of 1933, over 70 years ago. S.E.C. v. C.M. Joiner Leasing Gorp.,
Three years later, the Supreme Court addressed the issue again in S.E.C. v. W.J. Howey Co.,
Drawing from these state court constructions, and based on its presumption that Congress was aware of these constructions when it adopted the federal act, the Court announced the following definition: “an investment contract for purposes of the [Federal] Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 298-99,
The Supreme Court has had occasions to apply and clarify the Howey test over the past 70 years. In United Housing Foundation Inc. v. Forman, for example, the Court considered.the-sales of “shares of stock” that entitled the purchasers to lease an apartment in a state subsidized and supervised nonprofit housing cooperative.
Addressing whether the purchase of a “share of stock” in the co-op was an “investment contract,” the Court “examine[d] the substance — the economic realities of the transaction — rather than the names that may have been employed by the parties.” Id. at 851,
The Supreme Court addressed the meaning of “investment contract?’ again in Reves v. Ernst & Young,
More recently, the Court addressed whether an investinent transaction that promises a fixed rate of return, rather than a variable or uncertain rate, can be an investment contract. S.E.C. v. Edwards,
including investment schemes promising a' fixed return among investment contracts conflicts with our precedent, [because] when we held [in Howey] that “profits” must “come solely from the efforts of others,” we were speaking of the profits that investors seek on their investment, not-- the profits of the scheme in which they invest. We used “profits” in the sense of income or return, to include, for example, dividends, other periodic payments, or the increased value of the investment.
Id. at 394-95,
■ When we addressed the meaning of “investment contract” in Searsy, we adopted the Supreme Court’s Howey test, as restated in Forman, as the basis for determining whether a transaction is an “investment contract,” and.thus.a “security,” under the Texas Securities Act. Searsy,
We derive from these cases three key principles to guide our application of the Howey/Forman test to any particular transaction. First, we must “broadly construct ]” the term’“investment contract” to maximize the protection the Act is intended to provide to the investing’ public. Howey,
B. “Profit from the Efforts of Others”
When the Supreme Court announced the Howey test, it stated that a transaction is an “investment contract” under the federal securities act only if the person investing in a common enterprise is led to expect profits “solely from the efforts of the promoter or a third party.” Howey,
1. “Solely” from the efforts of others
The federal Ninth Circuit Court of Appeals was one of the first courts to question whether the Howey test actually requires (or should actually require) that the profits the purchaser expects from the transaction come “solely” from the efforts of others. S.E.C. v. Glenn W. Turner Enters., Inc.,
Nevertheless, the court concluded that the transactions were investment contracts, holding that “the word ‘solely,’ ” as used in the Howey test, “should not be read as a strict or literal limitation on the definition of an investment contract, but rather must be construed realistically, so as to include within the definition those schemes which involve in substance, if not form, securities.” Id. Consistent with the three guiding principles we have identified, the court justified its modification of the Howey.test “in light of the remedial nature of the legislation, the statutory policy of affording broad protection to the public, and the Supreme Courtis admonitions that the definition of securities should be a flexible one.” Id. Otherwise, the court ■reasoned, the test, and thus the statute’s requirements, “would be easy to evade by adding a requirement that the buyer con-tributé a modicum of effort.” Id. Since that “would not serve the purpose of the
A year later, the Fifth Circuit Court of Appeals adopted the Ninth Circuit’s modified version of the Howey test when addressing a scheme involving “a multi-level network of independent distributors, purportedly engaged in the business of selling a line of cosmetics.” S.E.C. v. Koscot Interplanetary, Inc.,
The Fifth Circuit noted in Koscot that “a significant number of federal courts invoking the Howey test [had] either given it a broader more salutary application or endorsed such an application in principle.” Id. at 481. Other courts soon followed suit. See, e.g., McCown v. Heidler,
We adopted the same approach in Searsy, two years after the Supreme Court decided Forman. Searsy,
Since our decision in Searsy, numerous other courts have also adopted this “more realistic” version of the Hmvey/Forman test. See, e.g., S.E.C. v. Int’l Loan Network, Inc.,
2. “Efforts” of others
The “efforts” that the Supreme Court concluded met the test in Howey included the defendant’s work to cultivate and market the citrus crops and otherwise “manage, control and operate the enterprise.” Howey,
Several other courts have since expanded on the types of “efforts” that qualify as
Howey teaches that [a transaction] is a security only if the holder is relyinjg on the managerial skills of others- to generate his profit. By implication, if the holder is relying on his own entrepreneurial talents to generate his profit, his interest is not treated as a security because he does not fall within the class of persons Congress meant to protect when it included non-traditional securities'in'the coverage of the securities 'laws.
Siebel v. Scott,
In some cases, the courts considered whether the purchaser retains the right to control the asset or enterprise. See, e.g., Williamson,
In light of the Supreme Court’s admonition to “broadly construe” the act in recognition of the “economic realities” of a transaction, we are not alone in this approach. For example, in Long v. Shultz Cattle Co.,
The cases thus indicate that, to constitute an investment contract under the “efforts” aspect of the Howey/Forman test,
Because the Howey/Forman test does not strictly require that the purchaser rely “solely” on the efforts of others, courts must apply the distinction between “managerial or entrepreneurial control” and “perfunctory or ministerial duties” to the activities of both the purchasers and the sellers in any given transaction. If, for example, both parties exert “efforts” to support the enterprise but the purchaser’s efforts are “purely ministerial,” those efforts are not “significant” and the “efforts” aspect of the Howey/Forman test will typically be met. See, e.g., Mitzner v. Cardet Int’l, Inc.,
C. Pre-purchase versus Post-purchase Efforts
Early cases applying the Howey/Forman test-generally focused on the efforts and'control- that the parties exercised after the transaction occurred. See, e.g., McConathy,
The court then addressed the SEC’s reliance on Life Partners’ pre-purchase efforts, which it described as efforts “to locate insureds and to evaluate them and their policies, as well as to negotiate an attractive purchase price.” Id. at 547. Although the court agreed that‘these efforts were “undeniably essential to the overall success of the investment,” the court expressed its “doubt that pre-purchase services should' ever count for much,” and concluded that, in this case, the “prepur-chase services cannot by themselves suffice to make the profits of an investment arise predominantly from the efforts of others.” Id. Asserting the lack of any authority finding an “investment contract” based solely on pre-purchase efforts, the court reasoned that such efforts do not justify the federal securities act’s disclosure requirements because
the value of the promoter’s efforts has already been impounded into the promoter’s fees or into the purchase price of the investment, and if neither the promoter nor anyone else is expected to make further efforts that will affect -the outcome of the investment, then the need for federal securities regulation is greatly diminished.
Id. Because “it is the length of the insured’s life that is of overwhelming importance to the value of the viatical settlements,” the court concluded, the SEC had failed to “show that the promoter’s efforts have a predominant influence upon investors’ profits.” Id. at 548.
One judge dissented from the D.C. Circuit’s decision. Id. at 549 (Wald, J., dissenting). The dissenting opinion began by describing three “background principles [that] should guide our analysis”: (1) “we should ... apply securities laws flexibly so as to achieve their remedial purposes,” (2) “the securities laws do not grant federal protection to .all investments, but only to that subcategory of investments that are securities,” and (3) the securities laws “em
The dissent vigorously disagreed with the majority’s assertion that no precedent supported her application of the Howey/Forman test, and cited to numerous eases in which lower courts had relied on the promoters’ pre-purchase activities to determine whether a transaction constituted an investment contract. Id. at 552-53. She noted, for example, that the Second Circuit had found in Glen-Arden Commodities that the “investors’ profits depended on the promoter’s expertise in selecting whiskey for [the] investors to purchase as well as on the promoter’s promise to buy back the whiskey in the future.” Id. (citing Glen-Arden Commodities,
Rejecting the majority’s conclusion that pre-purchase efforts “should be categorically excluded,” the dissent asserted that “the Howey test can be met by pre-pur-chase managerial activities of a promoter when it is the success of these activities, either entirely or predominantly, that determines whether profits are eventually
Following the D.C. Circuit’s Life Partners decision, courts in other jurisdictions reached different conclusions on the issue of whether life settlement agreements can be “investment contracts” based on the promoter’s pre-purchase efforts.
Addressing Life Partners’ pre-purchase efforts, “such as locating, researching, and evaluating the policies,” the court concluded that these actions were analogous to those of the land developer defendant that the Texarkana court had concluded did not promote “investment contracts” in McCo
The following year, however, the Eleventh Circuit Court of Appeals reached the opposite conclusion in S.E.C. v. Mutual Benefits Corp.,
The Eleventh Circuit went on to conclude that, in that case, the purchasers “relied heavily” on both pre-purchase and post-purchase “efforts of the promoters in making investments in-viatical settlement contracts profitable.” Id. at 744. Regarding pre-purchase efforts, the court found that the promoters “selected the insurance policies in which the investors’ money would be placed,” “bid on policies and negotiated purchase prices with the insureds,” “determined how much money would be placed in escrow to cover payment of future premiums,” and “undertook to evaluate the life expectancy of the insureds — evaluations critical to' the success of the venture.” Id. If the promoter “underestimated the insureds’ life expectancy,” the court noted, ■ “the chances increased that the investors would realize less of a profit, or no profit, at all.” Id. And regarding the promoter’s post-purchase efforts, the court concluded that these were also “important” and “managerial,” because, “[o]ften, life-expectancy evaluations were not completed'until after closing,” and the promoter “assumed the responsibility of making premium payments” and' “collectively managed [the payments] in such a manner that investors
By comparison, the court explained, the purchasers performed no managerial tasks other than selecting the terms of the policies in which they invested: they “had no ability to assess the accuracy of [the promoter’s] representations .,. or the accuracy of the life-expectancy evaluations,” and “[t]hey could not, by reference to market trends, independently assess the prospective value of their investments in [the] viatical settlement contracts.” Id. Because the “investors relied on both the pre- and post-purchase management activities of [the promoter] to maximize the profit potential of investing in viatical settlement contracts,” the court concluded that the promoter “thus offered what amounts to a classic investment contract.” Id.
D. The Texas Test, Clarified and Confirmed
As we have discussed, many courts throughout the country have addressed the meaning of “investment contract,” and several have even addressed whether life settlement agreements are investment contracts. In Texas, the Texarkana court held in 1976 that the purchase of an interest in a venture to hold a tract of land “for investment and capital appreciation” was not an “investment contract” because the “evidence shows only that the parties joined together to purchase land and hold it for possible appreciation in value.” McConathy,
After Searsy, a few Texas courts addressed the issue under facts similar to McConathy, where the purpose of the enterprise was to acquire and sell a tract of land, and those courts reached different results depending on the facts of each case.
Having reviewed both the statute’s language and the extensive authorities from Texas and throughout the country, we now confirm and clarify, first, that the Texas Securities Act’s definition of “securities” must be construed broadly to maximize the protection it provides to investors, while focusing on the economic realities of the transaction regardless of any labels or terminology the parties may have used. The Act itself expressly supports this approach. See Tex. Rev. Civ. Stat. art. 581-10-l.B (“This Act may be construed and implemented to effectuate its general purposes to protect investors_”); id. art. 581-10-1.A (“This Act may be construed and implemented to effectuate its general purpose to maximize coordination with federal and other states’ law and administration. ...”).
Second, in light of. these guiding principles and consistent with the uniform constructions of the precedents we have discussed, we confirm and clarify that an “investment contract” for purposes of the Texas Securities Act means a contract, transaction, or scheme through which a person pays money to participate in a common venture or enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise, and thus the person’s realization of the expected profits, is at least predominately due to the entrepreneurial or managerial, rather than merely ministerial or clerical, efforts of others.
And third, we hold that the entrepreneurial or managerial efforts that are relevant to this inquiry, whether those of the purchasers or of others, include those that are made prior to the transaction as well as those that are made after. We. reach this conclusion in light of the guiding principles we have identified, because we agree that the “bright-line rule” dismissing the relevance of pre-purchase efforts “elevates a formal element, timing, over the economic reality of the investors’ dependence on the promoter [and] undercuts the flexibility and ability to adapt to ‘the countless and variable schemes’ that are the hallmarks of the Howey test.” Life Partners,
In reaching this conclusion, we are not persuaded by the argument that the Act’s protections are unnecessary when the entrepreneurial or managerial efforts occur before the transaction because the value of those efforts is incorporated into the purchase price. See, e.g., id. at 545-47. The Act protects investors against a promoter’s harmful conduct before a sale of securities, as well as after. See, e.g., Tex Rev. Civ. Stat. 'art. 581-7.A (requiring permit and registration before offering to sell a security), art. 581-7.B(2)(c) (authorizing Commissioner to 'act against misleading facts “at any time, before or after registration of securities); art. 581-9 (providing protection in response to an offer to sell securities); art. 581-22 (regulating offers to sell securities); art. 581-33 (imposing liability for misleading offers to sell a security). We reject the argument that only post-purchase conduct should determine whether these pre-purchase protections apply. We agree that the Act’s disclosure requirements provide protection if the purchaser relies predominately on the entrepreneurial or managerial efforts of others to receive the anticipated profit, rather than on market forees or on the purchaser’s own efforts, even if those efforts occur before the sale. See Life Partners,
We are also not persuaded by the concern that the consideration of pre-purchase efforts will- transform every traditional
The State suggests that we add additional requirements to this test, allowing, for example, for the consideration of pre-purchase efforts only if the. promoter or third party also retains some continuing post-purchase obligations, such as an obligation to assist the purchaser in selling or redeeming the investment in the future. See, e.g., Glen-Arden,
E. Life Partners’ Life Settlement Agreements
Applying this definition to Life Partners’ life settlement agreements, we conclude based on the undisputed material facts that they are investment contracts, and thus securities, under the Texas Securities Act. The parties do not dispute that the agreements are a transaction through which the purchasers pay money to participate in a common enterprise with the expectation of receiving profits. Life Partners contends, however, that the failure or success of the enterprise, and thus the purchaser’s realization of the expected profits, does not depend on the entrepreneurial or managerial efforts of Life Partners or others.
We disagree. Life Partners is the facilitator and administrator of the investments in life settlements through its Power of Attorney. It identifies the insured, negotiates the discount for the policy, evaluates the policy’s terms and conditions, and evaluates the health of the insured. It purchases the policy and finds purchasers to buy an interest in the policy until all interests are sold. These pre-purchase efforts require Life Partners to accurately evaluate the insured’s life expectancy and to set the correct purchase price (the discount) to yield a profit based on the insured’s life expectancy, future premiums, and end-value of the policy’s benefits. If Life Partners’ prediction is accurate, the purchaser will receive a profit. Life Partners acknowledges that its purchasers “depend upon [Life Partners’] ability to predict life expectancies and set the appropriate prices,” and even the D.C. Circuit’s majority agreed that Life Partners’ pre-purchase entrepreneurial efforts are “undeniably essential to the overall success of the investment.” Life Partners,
Moreover, Life Partners’ significant managerial efforts do not end when the sale transaction occurs. We do not agree with Life Partners’- characterization of its
Here, after the purchase, Life Partners exercises complete control and discretion over the investment and the investment’s success. It holds legal title to the policy, monitors the insured and the policy premium payments, and collects and 'distributes the necessary funds. It uses its discretion to project the amount necessary to place in escrow to cover the premiums, and is responsible for notifying purchasers if -additional premiums are required because-an insured survives beyond Life Partners’ predicted life expectancy. In-its discretion, Life Partners advances premiums if the purchaser cannot make-the additional payments, and may optimize premiums to protect and maximize the value of the es-crowed funds. Life Partners’, failure to properly project and maintain premiums will result in forfeiture of the policy, and therefore, the investor’s profits.
In addition, Life Partners has complete control over all efforts ,to monitor the insureds and their health status, and the purchasers are unable to do so because of privacy requirements.. When the insured dies, Life Partners must obtain the death certificate, complete required insurance forms, and ensure that the purchasers receive their pro-rata share of the benefits. Life Partners (or its designated trustee) is the only party that, may cash out the policy and is responsible for timely filing the insurance forms. Additionally, Life Partners solely manages the policy payout by dividing and distributing it according to eaeh investor’s pro-rata share, using information that only Life Partners can access.
The purchasers have neither the power to complete these tasks nor the information necessary to do so, yet they can lose some or all of their anticipated profits if Life Partners fails to perform as it has agreed. Even Life Partners acknowledges that purchasers rely oh it both before and after the interest is purchased. Life Partners’ efforts are not merely ministerial efforts like paying taxes to preserve an investment, see McConathy,
III.
“Retroactive” Application
Conditionally and alternatively, Life Partners requests that-we give our holding only prospective effect, and thus alleviate Life Partners from any liability to the Arnolds or the State in these cases based on its prior conduct. In support, Life Partners notes that the Waco court’s 2004 decision in Griffitts was the'only relevant Texas case until the Dallas Court of Appeals’ 2013 decision in Arnold, and contends it should not be' subjected to the Securities Act’s strict liability when it was reasonably relying on that decision. In addition, Life Partners suggests that a “retroactive” application of our decision would violate the Texas Constitution’s prohibition against retroactive laws and several provisions of the federal Constitution.
In support, of its request, .Life Partners relies on the Supreme Court’s decision in Chevron Oil Co. v. Huson,
-T- . First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on. ■ ‘ which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed.
— Second, [the court] must ... weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation.
— Finally, [the court must] weig[h] the inequity imposed by retroactive application, for where a decision of [the court] could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the injustice or hardship by a holding of nonre-troactivity.
We adopted the Chevron test in Edgewood III and elected to apply our decision in that case declaring the State’s public school finance system unconstitutional prospectively only.
Applying the Chevron factors here, we reach the opposite result. First, our decision in this case does not “establish a new principle of law” by “overruling clear past precedent on which .litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed.” - The Texas Securities Act has existed since 1957, and in 1977 we announced in Searsy that we must look to federal cases and other authorities, which “broadly construe” the term “investment contract.”
Moreover, although the Waco Court of Appeals held to the contrary the prior year, we do not agree that the Griffitts decision makes today’s decision “new.” As a rule, court decisions apply retroactively, and the Chevron test provides only an exception to that rule. See State Farm Fire & Cas. Co. v. Gandy,
Considering the remaining factors of the Chevron test, we believe that retroactive application of our holding furthers the operation and enforcement of the Securities Act, and in light of the decades of precedent on which we-rely,- the results impose no inequities on Life Partners; . See, e.g., Bowen v. Aetna Cas. & Sur. Co.,
IV.
“Relief Defendants”
Finally, we address the arguments of Advance Trust & Life Escrow Services, L.T.A., and Purchase Escrow Services, ' LLC, two Petitioners in State v. Life Part
Y.
Conclusion
We hold on this record that Life Partners’ life settlement agreements are investment contracts, and thus securities, under the Texas Security Act. We decline to apply this holding prospectively only, and in light of our holding, we agree that the trial court should consider the relief defendants’ arguments on remand. We affirm the judgments of the Third and Fifth District Courts, of Appeals.
Notes
. The "others” include Steve South as Trustee and on behalf of South Living Trust, John S. Ferris, M.D., and Christine Duncan.
. The "others” include Milkie/Ferguson Investment, Inc.
. The "others” include Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, Advance Trust & Life Escrow Services, L.T.A., and Purchase Escrow Services, LLC.
. The State had previously sued Life Partners for violations of the Texas Deceptive Trade Practices Act in a case based on different underlying facts and presenting different legal ■ issues than those presented here. See State v. Life Partners, Inc.,
.Although even Life Partners- refers to those who buy. interests in its insurance policies as “investors,” we will .use the term "purchasers” to avoid .confusion, since the issue here is whether their agreement to buy the interests is an "investment contract.”
. Since 2011, the Texas Insurance Code has specifically regulated transactions between a "provider” of life settlement agreements, like Life Partners, and the insureds from whom the providers purchase the insurance policies. See Tex. Ins. Code §§ 1111A.001-.026 (the Texas Life Settlements Act). Among other requirements; this Act requires providers or ' their brokers to be licensed by the State, id. § 111 1A.003; to use forms and disclosures approved by thé State, id. § 111 1A.005; to submit annual statements to the State, id. § 1111A.006; to make certain, disclosures to the insured, id. § 1111A.007; and with limited exceptions, to avoid any disclosure of "the identity of an insured ... or the insured’s financial or medical information to any other person,” id. § 111 lA.006(d). The Life Settlements Act, however, regulates only the transaction between the insured and the provider; it does not regulate the relationships or transactions between the providers and those to whom they sell interests in the policies they purchase.
. The Texas Securities. Act prohibits selling or offering for sale "any securities ... until the issuer of such securities or a dealer registered under the provisions of this Act shall have been granted a permit by the Commissioner.” Id., art. 581-7,A(1). The Act also prohibits any person from offering or selling "a security ... by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to . make the statements made, in the light of the circumstances under which they are made, not misleading." Id. art. 581-33.A(2). Any person who offers or sells “a security" -in violation of either of these provisions "is hable to the person buying the security ,, who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the security.” Id. art. 581 — 33.A(1), (2). In addition, the Act obligates the Attorney General "to take such measures and to make such investigations as will prevent or detect the violation of any provision thereof." Id. art. 581-3. The Ar-nolds and the State sued Life Partners for violating these provisions, and they concede that Life Partners has no liability under these provisions unless its life settlement agreements are “securities."
. We do not mean to suggest that we can or will ignore the statutory language at issue. When we construe and apply statutes, it is always “our goal ... 'to ascertain and give effect to the Legislature’s intent,”, which we draw "from the plain meaning of, the words chosen by the Legislature when it is possible to do so.” Tex. Mut. Ins. Co. v. Ruttiger,
. See, e.g., Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 10 (1st Cir.1993) (observing that "the Supreme Court cases mark out a concept, not a precise definition,” and require that the term "securities” be "flexibly applied to capture new arrangements comprising the essence of securities, however they may be named") (citing Joiner Leasing,
. See also Bailey,
. The distinction between “entrepreneurial or managerial” efforts and “ministerial and clerical” efforts grows out of and accommodates courts’ acceptance of the idea that the purchaser need not rely “solely” on the efforts of others. See, e.g., Slevin v. Pedersen Assocs., Inc.,
. The dissent cited several additional cases as support for her reliance on pre-purchase activities. Id. at 553 (citing S.E.C. v. Brigadoon Scotch Distributors,. Ltd.,
. The dissent agreed that “Howey's third prong would not be satisfied whenever the promoter's managerial activities occurred pri- or to purchase and the realization of profits depended significantly on outside forces, such as a lottery.” Id. at 552.
. In Ohio, for example, a state court of appeals concluded that the viatical settlements at issue were not investment contracts because the promoter’s post-purchase efforts "cannot increase the value of the investor’s interests” and the only variable that can impact the profitability of the viatical settlements at issue is.the timing of the death of the insured. Glick v. Sokol,
. Like the D.C. Circuit’s dissenting judge, the Eleventh Circuit disagreed that there was no precedent in which courts relied on. “the pre-purchase exercise of expertise by promoters in selecting or negotiating the price of an asset in which investors would acquire an interest.” Id. at 743-44 (citing S.E.C. v. Eurobond Exch., Ltd.,
. See, e.g., Cross v. DFW S. Entry P'ship,
. Life Partners cites Landgraf v. USI Film Products,