On April 27, 2020, the Division of Investment Management of the Securities and Exchange Commission (“SEC”) updated its Coronavirus (COVID-19) Response FAQs to address the disclosure obligations of investment advisers that seek or receive a loan pursuant to the Small Business Association’s (“SBA”) Paycheck Protection Program (“PPP”).
Under the SEC’s new guidance, an investment adviser seeking a PPP loan, or an investment adviser that has already received a PPP loan, is urged to consider whether the circumstances leading the adviser to seek or receive a PPP loan constitute material facts relating to the adviser’s relationship with its clients. If such circumstances do constitute material facts relating to the investment adviser’s relationship with its clients, the SEC would expect the adviser to disclose to its clients the nature of, amounts, and effects of the PPP loan and surrounding circumstances.
The SEC provided the following two examples of when the circumstances leading to an investment adviser seeking or receiving a PPP loan would constitute material facts relating to the adviser’s relationship with its clients:
- If the investment adviser requires the PPP loan to pay the salaries of employees primarily responsible for performing advisory functions for clients, the adviser should disclose this fact.
- If the investment adviser is experiencing conditions reasonably likely to impair its ability to meet contractual commitments to its clients, the adviser should disclose this financial condition within Part 2A of its Form ADV.
The first bullet point above will likely implicate any adviser that received a PPP loan. As part of its certification with the SBA for a PPP loan, an adviser would have been required to certify that the loan was necessary to support the ongoing operations of the adviser and that the loan would be used to retain workers and maintain payroll. An adviser who takes the position that its PPP loan was not needed to pay the salaries of its employees who provide advisory services may face questions during an SBA audit about its eligibility for the PPP loan.
The two examples provided by the SEC should not be construed as the only situations in which an investment adviser would be required to disclose the adviser’s circumstances leading it to seek or receive a PPP loan—but each advisor should carefully consider its particular circumstances.
The Division of Investment Management’s Coronavirus (COVID-19) Response FAQs are available at this link.