Most registered investment advisors, if not all, are very aware that the federal government, through the U.S. Small Business Administration, implemented a $659 billion relief package that provides small businesses with fewer than 500 employees, sole proprietors, independent contractors and self-employed individuals with funds in the form of forgivable loans during the COVID-19 crisis (the Paycheck Protection Program or “PPP”).

In order for the loan to be forgiven, the proceeds need to be used to cover payroll costs, rent, mortgage interest and utility costs for an eight-week period and all full-time employees must be retained by the advisor. The SBA has capped loans at $10 million. More details on the PPP can be found here.

Perhaps unsurprisingly, many advisors quickly applied and received PPP funds because they met the small business qualifications under the PPP to do so. For the reasons set forth below, advisors who accepted PPP funds should carefully consider whether to return said funds to the federal government.

Recent Guidance Set Forth By The SBA
Since April 16, 2020 when the PPP exhausted its initial $349 billion in funding, the SBA, the Treasury Department and the public at large have been scrutinizing companies that applied for and received funding. Of course, the big, well-known names are making headlines. For example, Shake Shack, Ruth Chris Steakhouse and large restaurant groups, who have been some of the hardest hit, have publically announced they will be giving their loans back. But, as the dust settles, the Treasury Department has made clear that the scrutiny will continue.

The SBA and Treasury Department released further guidance encouraging some borrowers to give the money back. If they do so by May 7, 2020, the federal government has promised they will not hold companies liable for originally applying for and accepting the loan. The Treasury Department has further warned that they will investigate companies who did not properly certify on their PPP application in good faith that “current economic uncertainty [made the] loan request necessary to support the ongoing operations” of the company. Thus, advisors who cannot make this certification in good faith, but who have accepted PPP funds, should consider returning PPP funds by May 7 to avoid significant legal consequences and potential public censure by the federal government or otherwise.

Disclosure Of The PPP Loan On Form ADVs
On April 27, 2020, the Securities and Exchange Commission issued FAQs specific to advisors experiencing Covid-19 issues. In these FAQs, the SEC addressed whether an advisor who has received a PPP loan has to disclose the loan to its clients through an ADV filing. While the SEC does not directly answer this question in the affirmative, its guidance indicates that advisors are strongly urged to make the disclosure, and we agree. First, the SEC points out that advisors have a fiduciary duty requiring them to “make full and fair disclosure” to clients of “all material facts.” The SEC further states that “if the circumstances leading [the advisor] to seek a PPP loan or other type of financial assistance constitute material facts relating to [the advisor’s] advisory relationship with clients, it is the staff’s view that [the advisor] should provide disclosure of, for example, the nature, amount and effects of such assistance.” While the SEC lists two specific examples of situations requiring ADV disclosures (paying advisory personnel salaries and meeting contractual commitments to clients), we believe there are very few scenarios, if any, in which the acceptance of the PPP loan would be immaterial and not disclosable in an advisor’s ADV. Given that the PPP loan requires certification that the loan is necessary to support ongoing operations and can only be used for limited crucial expenses associated with the advisor, such as rent payments and utilities, the SEC would likely deem the acceptance of PPP funds as a material fact for purposes of the ADV. The reason why is because acceptance of the PPP funds is relevant to the financial condition of the advisor. If an advisor returns the PPP loan by the May 7 deadline, ADV reporting would likely be unnecessary.

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