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.

The agency also said that if an RIA 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 [regarding brochure requirements], or as part of Part 2A, Appendix 1 of Form ADV [which regards wrap fee program brochure requirements].”

As fiduciaries under federal law, RIAs “must make full and fair disclosure” to clients of “all material facts relating to the advisory relationship.”

If, for instance, an RIA requires a PPP loan to pay the salaries of employees “who are primarily responsible for performing advisory functions … it is the [SEC] staff’s view that you would need to disclose this fact,” the agency said.

What about business continuity? Will the SEC staff see an advisor’s reliance on temporary Covid-19 relief as a risk factor for the advisor’s business continuity plans?

To this question, the agency repeated the recent statement by the Office of Compliance Inspections and Examinations that it “is fully aware of the regulatory relief that was provided to registrants in response to Covid-19” and that “reliance on regulatory relief will not be a risk factor utilized in determining whether OCIE commences an examination. We encourage registrants to utilize available regulatory relief as needed.”

The SEC’s new requirement for PPP loan disclosure runs counter to the Financial Industry Regulatory Authority (Finra). Earlier this month, Finra said that forgiveness of a PPP loan, or a part of it, would not trigger a disclosure event on a broker’s Form U4.

Such loans won’t trigger a U4 disclosure as long as “the PPP loan or part of the loan is forgiven consistent with the original terms of the loan,” Finra said in a frequently asked questions section on Covid-19.

According to the self-regulator, because forgiveness of PPP loans is “consistent with the loan’s original terms,” it would not constitute a compromise with a creditor, which is reportable.

According to 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,” the FAQ noted.

“Any forgiveness beyond the original terms of the loan would be considered a ‘compromise with creditors,’” thus, advisors would need to make the disclosure, the FAQ said.