To clear up any confusion, the Securities and Exchange Commission has advised that under certain circumstances, registered investment advisors must disclose forgivable loans they have received under the Paycheck Protection Program (PPP).
The guidance was provided by the SEC’s Division of Investment Management in an April 27 update to its Frequently Asked Questions (FAQs) addressing developments in relation to the COVID-19 pandemic.
“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,” the FAQ states.
The PPP was expanded April 24 to provide an additional $310 billion to the $349 billion that was originally allocated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27. The PPP was set up under the CARES Act to help small businesses affected by the COVID-19 crisis by covering their near-term operating expenses and providing incentives to retain employees. PPP loans will be fully forgiven when used for certain expenses, including payroll costs.
In addressing the disclosure obligations, the Division advises that if, for instance, an advisory firm requires such assistance to pay the salaries of its employees who are primarily responsible for performing advisory functions for its clients, the SEC staff takes the view that the firm would need to disclose this fact.
Additionally, the FAQ explains that if a firm is experiencing conditions that are “reasonably likely to impair its ability to meet contractual commitments to its clients,” the firm 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).
As to whether the SEC will view an advisor’s reliance on the temporary relief provided in response to COVID-19 as a risk factor for examining the advisor’s business continuity plans, the FAQ points to the OCIE’s recent statement that it is fully aware of the relief provided and that reliance on that relief will not be a risk factor in determining whether OCIE commences an examination.
One stipulation with the FAQs is a disclosure noting that the responses represent the views of the staff of the Division and are “not a rule, regulation or statement of the SEC,” and that, like all staff guidance, have no legal force or effect. Still, the FAQs generally provide an accurate marker of the agency’s positions, albeit in informal guidance.
FINRA’s Take
Regarding whether brokers regulated by FINRA would similarly have to report loan forgiveness under the PPP as a “compromise with a creditor,” the self-regulator says no, provided the PPP loan or part of the loan is forgiven consistent with the original terms of the loan.
In an FAQ issued in mid-April, FINRA explains that, 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. 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 FAQ advises, the forgiveness of a PPP loan will not be a “compromise with creditors” for purposes of Form U4 Question 14K, but any forgiveness beyond the original terms of the loan would be considered a “compromise with creditors.”
