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As the COVID-19 pandemic continues to change the way many of us work and operate, Focus 1 continues to monitor the situation and stay abreast of any regulatory changes or the release of new information that can help inform your business decisions. A recent topic of discussion has been whether it is appropriate for your firm to have received funds from the Paycheck Protection Program (“PPP”) and/or whether or not you need to disclose the receipt of those funds.
Here are a few considerations if your firm has received funds from the PPP:
Returning the funds by the safe harbor deadline
On May 6, 2020, the Small Business Administration (“SBA”), in conjunction with the Department of the Treasury, released a Frequently Asked Questions (FAQs) stating that if a firm decides they no longer need the financial assistance from the PPP they will be able to return the funds up until May 14, 2020, a seven day extension over the previous safe harbor deadline of May 7, 2020. If an employer is able to pay back the funds by the new safe harbor deadline, they will be considered to not have received a loan and may be eligible for credit under the Employee Retention Credit.
A helpful resource for an RIA considering this option is a recent article written by Bruce L. Blasnik, CPA, CGMA, Partner, PKF O’Connor Davies, entitled “Certification of the Need for PPP Loan Funds.”
A brief excerpt:
“Neither the Act nor the SBA have defined “necessary” or “ongoing operations,” nor have they provided any meaningful guidance that would shed additional insight into the meaning of these terms. In this article, we share our thoughts on what this guidance means and how to apply it. We encourage all PPP borrowers to take action now to avoid the possibility of significant penalties in the future.”
Keep the funds from the PPP and include disclosure of a material fact in your Form ADV Part 2A
FAQ No. 31 (issued on April 23rd) of the Treasury Departments FAQs, states borrowers must certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Question II.4 of the SEC’s FAQ posted April 27th states “If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.”
If you are experiencing a financial hardship and require such assistance to help maintain normal business operations, such as covering payroll of essential employees, it is the staff’s view that the adviser would need to disclose such material matters in Item 2 (Material Changes) and Item 18 (Financial Information) of the Form ADV Part 2A.
The following is an example disclosure you might consider as you work to describe the material use of your PPP funds.
ABC Firm (“the Firm”) participated in the Paycheck Protection Program (“PPP”) loan program from the U.S. Small Business Administration. The firm determined, at the time of its application for the loan, that the results of COVID-19, including the many “shelter in place” orders, and the severe volatility in the marketplace, would result in a marked decrease in revenue. [Consider inserting any additional facts such as clients canceling agreements, additional costs incurred to ensure employees have resources to work from home, costs of disinfection of the workplace, etc.] Without the PPP loan [consider including the amount of the loan here], the firm would have had to consider laying off staff and/or reducing salaries until the situation became more stable. Although we believe that our current business continuity plan allows the Firm to continue to provide services to our clients without interruption, the PPP Loan allows us to maintain our current staff at pre-COVID-19 levels.
Remember, because this is considered a material change, an other-than-annual amendment needs to be filed, promptly (the typical rule of thumb is within 30 days) with a summary of material changes sent to all clients along with an offer to provide a full copy of your Form ADV Part 2A upon request.
Keep the funds from the PPP and include disclosure in your Form ADV Part 2A
If the circumstances leading you to seek a PPP loan does not constitute a material fact relating to your advisory relationship with your clients, rather the funds were obtained primarily due to the future economic uncertainty posed by COVID-19 and were not necessarily required, you may choose to still include disclosure in your Form ADV Part 2A, however an other-than-annual amendment would need to be filed, but not distributed to clients. This may, however, be in contradiction to the certification the firm previously made that the PPP loan was obtained given the “current” economic uncertainty. See FAQ No. 31 of the Treasury Departments FAQs.
You might consider using a variation of the example disclosure shown above in the previous scenario.
Keep the Funds from the PPP but you choose to not disclose
Given the FAQs from the Department of Treasury and the SEC, we believe those advisers who choose to not disclose the receipt of PPP loans may endure increased regulatory risk, however we also understand there are terms that have not been clearly defined within the program or by any current FAQs.
We encourage you to carefully weigh your options as you consider the best way forward for your firm. We hope the points above have provided some additional perspective on the options available to you, but as always, please give us a call with any questions. We will continue to update you with any new and relevant information that becomes available.