While guidance and commentary regarding the PPP continue to come from the Small Business Association (SBA) as well as the securities regulators, we wanted to share information on three issues affecting our industry.
Good Faith Certification and Safe Harbor
The SBA has expanded on the good faith certification language that was part of the PPP application by stating that both public and private borrowers must make a certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Borrowers who may have subsequently concluded that they do not “need” a PPP loan may return funds to the SBA by the extended Safe Harbor Deadline of May 14 and will be determined by the SBA to have made the certification in good faith. Additional guidance on how borrowers should make this determination has not yet been issued but is expected before May 14.
Disclosure clarification from FINRA for Registered Representatives
FINRA issued guidance that no disclosure on the Form U4, Question 14K, is required if the loan is forgiven consistent with the original terms of the loan. In other words, there would be no “compromise” with a creditor.
Disclosure clarification from SEC for Registered Investment Advisors
If you received PPP funds and you are the principal or owner of a separately registered investment adviser, we encourage you to consult with your consultant and/or legal counsel regarding disclosure in your Form ADV.
The SEC has issued less clear guidance through its FAQ that disclosure of receipt of funds would be disclosable in the ADV Part 2A Disclosure Brochure. Investment advisers are required to provide full and fair disclosure of all material facts related to the advisory relationship. If the investment adviser firm is experiencing conditions “that are reasonably likely to impair its ability to meet contractual commitments to its clients,” then receipt of the loans would be disclosed in response to Item 18 (Financial Condition) of Part 2A or in Appendix 1. The response in the FAQ also indicates that if the funds were needed to pay salaries of the employees who are primarily responsible for performing advisory functions for clients, then it would be disclosable. It is necessary when answering those questions to keep in mind the purpose of the PPP.
This disclosure is made at the investment adviser level, not the investment adviser representative level.
The Financial Services Institute (FSI) has requested that the SEC provide some clarity related to disclosure of the PPP since its view differs from that of FINRA. The SEC has not yet responded.
A recent article in Financial Advisor underscores considerations for those who receive the funds, including:
- Ability to certify in good faith that the PPP loan was necessary to withstand current economic uncertainty and to support the ongoing operations;
- Potential for scrutiny by the federal government or the public; and
- Potential adverse impact of the ADV disclosure on revenues or client relationships.
We will continue to monitor for new information from the regulators and FSI and will share that information when it is available.