Foreside Insights Blog

Risk Alert - SEC Issues Guidance on PPP Loan Disclosure

Written by Kelli Haugh | Apr 30, 2020 8:50:40 PM

This week, the SEC published guidance stating that advisors who have taken a Paycheck Protection Program (PPP) loan should disclose the loan to clients in certain circumstances. The SEC’s guidance is addressed in Question II.4 of the Division of Investment Management Coronavirus (COVID-19) Response FAQs.

As fiduciaries, advisors are required to make full and fair disclosure to their clients of all material facts relating to the advisory relationship. In the SEC staff’s view, if the circumstances leading the advisor to seek the loan constitute material facts relating to its advisory relationship with clients, the advisor should disclose the nature, amounts, and effects of such assistance. For example, if an advisor requires the loan to pay the salaries of employees who are primarily responsible for performing advisory functions, in the SEC’s staff’s view, the advisor would need to disclose this fact.  This is the example provided by the SEC in the FAQ: however, there may be other reasons for taking the loan which could be material to the advisor’s relationship with clients.  Each advisor should consider its own situation to determine whether such disclosure is prudent.

Additionally, the Form ADV Part 2A and Appendix 1 (wrap fee program brochure) requires advisors with discretion or custody to disclose any financial condition that is reasonably likely to impair their ability to meet contractual commitments to clients. If an advisor is experiencing such a financial condition, related to taking a PPP loan or otherwise, the advisor must disclose this financial condition to its clients.

Although the SEC’s FAQs apply to federally-registered advisors, state-registered advisors should also consider the SEC’s guidance. Even though each state may adopt its own interpretation on disclosure requirements pertaining to PPP loans, state-advisors are subject to the same, or similar, fiduciary standards and Form ADV disclosure obligations as federally-registered firms. Therefore, it is likely that state regulatory authorities will adopt a similar approach to PPP loan disclosure. In addition, advisors who are subject to state net capital requirements should consider whether there is any impact from the PPP loan to their minimum net capital requirements.

If you have taken, or are considering taking, a PPP loan and have questions regarding disclosure obligations, contact your Foreside consultant.

 

 

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