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.