Certified Fraud Examiner Practice Exam 2025 – All-in-One Guide to Master Your Certification!

The Howey Test is primarily used to determine whether certain transactions qualify as investment contracts, thus categorizing them as securities under U.S. law. This test arose from a landmark Supreme Court case in 1946, SEC v. W.J. Howey Co., and it establishes criteria based on the nature of the investment and the expectations of the investors.

The main purpose of the Howey Test lies in assessing whether an investment involves an investment of money in a common enterprise with the expectation of profits to be derived from the efforts of others. If these criteria are met, the investment is classified as a security and is subject to regulatory oversight by the SEC. This classification is crucial because it determines the legal requirements for offering and selling the investment, ensuring investor protection.

The other options do not accurately reflect the purpose of the Howey Test. The test does not focus on the legality of financial institutions, regulation of insurance fraud, or the responsibilities of auditors. Instead, it specifically addresses investments and their classification as securities, which is vital in the context of securities regulation and investor protection.