SEC Says Advisory Firms May Have to Report PPP Loans

FINRA previously addressed reporting of Paycheck Protection Program loan forgiveness in its FAQs related to COVID-19.

The U.S. Securities and Exchange Commission (SEC) says advisory firms that receive Paycheck Protection Program (PPP) loans may have regulatory reporting obligations under the Investment Advisers Act of 1940.

Section 1102 of the Coronavirus Aid, Relief and Economic Security (CARES) Act established the PPP, through which businesses may take a Small Business Association (SBA) loan to help keep their workforce employed during the COVID-19 crisis. The loans may be forgiven in full or in part depending on the percentage of employees’ pay maintained by employers.

In its COVID-19 Response FAQs, the SEC notes that, as a fiduciary under federal law, advisory firms must make full and fair disclosure to clients of all material facts relating to the advisory relationship. “If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.”

As an example, if a firm requires the assistance of a PPP loan to pay the salaries of its employees who are primarily responsible for performing advisory functions for clients, the SEC says it is its view that the firm would need to disclose this fact.

The agency adds, “If your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you may be required to disclose this financial condition in response to Item 18 (Financial Information) of Part 2A of Form ADV (brochure), or as part of Part 2A, Appendix 1 of Form ADV (wrap fee program brochure).”

The Financial Industry Regulatory Authority (FINRA) previously addressed reporting of PPP loan forgiveness in its FAQs related to COVID-19. Asked, “If a registered person or a business they control obtains a PPP loan and the loan or part of the loan is forgiven, will the registered person be required to report that forgiveness in response to Question 14K on their Form U4 as a ‘compromise with a creditor?’” FINRA responded as follows:

“No, provided the PPP loan or part of the loan is forgiven consistent with the original terms of the loan. For purposes of Form U4 Question 14K, a compromise with one or more creditors ‘generally involves an agreement between a borrower and a creditor in which a creditor agrees to accept less than the full amount owed in full satisfaction of an outstanding debt, unless such an agreement is included in the original terms of the loan.’ Because a PPP loan contemplates forgiveness of some or all of the loan as part of the original terms of the loan, such forgiveness will not involve a new agreement by the creditor, but will be an event consistent with the loan’s original terms. In those circumstances, the forgiveness of a PPP loan will not be a ‘compromise with creditors’ for purposes of Form U4 Question 14K. Any forgiveness beyond the original terms of the loan would be considered a ‘compromise with creditors.’”