The Securities and Exchange Commission announced recently that advisors must disclose whether they have taken a forgivable Paycheck Protection Program (PPP) loan to counter the economic impact of the Covid-19 pandemic.
If firms are experiencing conditions they believe could impair their ability to meet their contractual obligations to clients, they may have to disclose it on their Form ADV, the SEC said.
The PPP loan program is part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES), signed into law in late March, that provides loans aimed at small businesses. The loans are forgivable if they’re used largely to cover payroll.
Advisors like Walter Burns took advantage of the program before the original $349 billion slated for the PPP ran out on April 16. President Donald Trump approved a bill last week funding the program with an additional $310 billion.
For Burns, president of Family Steward Wealth Consulting in North Palm Beach, Fla., applying for a PPP loan was a “no-brainer,” and he said he has no problem disclosing it on his Form ADV. Burns received $31,000 in the first round of PPP loans.
“It adds a layer of capital for us,” Burns said. “Our AUM, like every advisor’s, has come down. It will come back, but it feels logical for us. My banker at Seaside Bank, Orlando, called me and asked me if I wanted to apply. My CPA did the calculations and we got $31,000. I’m all for 100% transparency, so I have no objection to disclosing the loan. Why would I?”
“It's a great idea that firms need to disclose PPP loans to their clients,” said Tom Balcom, the founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla. “While most firms are eligible for these loans, it may raise some eyebrows from other firms and even their clients whether or not these firms really need these loans to meet payroll, especially after the recent stock market recovery.
“With thousands of small businesses struggling these days, if advisory firms are receiving funds that could better help others, this may be an ethical as well as financial question,” Balcom added.
Material Facts
As fiduciaries, advisors are required “to disclose to clients all material facts related to their advisory relationships with clients,” including PPP loans, said the SEC’s Division of Investment Management in a recent update to its FAQs on Covid-19. The agency said that the circumstances leading advisors to seek PPP loans or other types of financial help are material facts. These disclosures should include “the nature, amounts and effects of such assistance.”
If an advisory firm needs the loans to pay the salaries of staff whose primary responsibilities are tied to advisory functions, the firm needs to disclose the fact, according to an SEC list of frequently asked questions.