Last month, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing Americans with $2+ trillion of emergency fiscal stimulus funding in response to the economic damage caused by the Coronavirus pandemic. Part of the Act included the Paycheck Protection Program (PPP), which initially authorized up to $349 billion in forgivable loans intended to be used by small business owners to pay their employees during the crisis. However, the overwhelming demand for PPP loans depleted funds in a matter of just a few weeks, leading to an additional round of funding of $310B made available in late April 2020.
Accordingly, small business owners still have the opportunity to apply for funding, leaving many financial advisors faced with the decision over whether to apply for a PPP loan themselves. As while loans are intended for small businesses (with 500 or fewer employees) experiencing economic uncertainty resulting from COVID-19 who need the funding to continue business operations, advisors who receive loans also need to determine whether their loans are disclosable events.
For brokers regulated by FINRA, PPP loans are not considered disclosable events for purposes of Form U4 Question 14K, as FINRA determined that forgiveness of the PPP loan does not constitute a “compromise with creditors” because the potential for loan forgiveness is part of the original terms of the loan.
On the other hand, RIAs must disclose their PPP loans on Item 18 of the ADV Part 2A if the loan constitutes a “material fact” pertinent to the advisory relationship. In most cases, if PPP loans are used for the intended purposes of covering payroll expenses for persons performing primarily advisory functions, the loan would be considered a material fact relating to the advisory relationship. Accordingly, RIAs should be prepared to disclose their PPP loans on their ADVs.
However, while PPP loans should likely be disclosed in most circumstances, RIAs may be able to avoid such disclosure in limited situations. For example, a firm could try to avoid disclosure by claiming that the funds were obtained primarily due to the economic uncertainty posed by COVID-19, but not necessarily because they were “required”. This argument, however, may be difficult to make given the Small Business Administration’s requirement of certifying a PPP loan as necessary due to the current economic uncertainty cause by the COVID-19 crisis.
Another way that an RIA may be able to justify not disclosing receipt of a PPP loan on their ADV Part 2 would be by claiming that funding was used for the payroll of employees who were not directly involved in advisory functions (e.g., staff involved in marketing, events, receptionist duties).
Ultimately, the key point is that because RIA firms and brokers have different criteria for disclosure events, the requirements to disclose PPP loans are different for each. For brokers, the principal question is whether a compromise with a creditor has been made, whereas for RIAs the question is whether the event has a financial impact that materially (or potentially) impacts the ability to fulfill obligations to the client. As such, FINRA brokers are not required to disclose PPP loans on their U4 Forms (assuming they are used according to the original terms of the loan) but RIAs, regulated by the SEC, should lean heavily towards disclosing their PPP loans on Part 2A of their Form ADV.
