SEC Guidance for Paycheck Protection Program Related Considerations

June 10, 2020 by ACA Compliance Group


Investment advisers and broker-dealers may have obtained assistance under the Paycheck Protection Program (PPP), or other federal or state assistance programs, to mitigate the economic impact of Coronavirus (COVID-19). The U.S. Securities and Exchange Commission (“SEC”) recently issued guidance to financial institutions regarding some of the disclosure requirements and other obligations related to these assistance programs and the impact of COVID-19.

What is the Paycheck Protection Program?

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 to provide fiscal relief to U.S. individuals and businesses as a result of the economic hardship caused by the COVID-19 pandemic. One of the main components of the CARES Act is the PPP, a loan program designed to provide a direct incentive for small businesses to keep their employees on payroll. The Small Business Administration (“SBA”), which administers the PPP, will forgive loans to PPP recipients if all employees are kept on payroll at their current compensation levels for eight weeks after the loan is made and the money is used for payroll, rent, mortgage interest, or utilities.1

SEC Guidance

On April 27, 2020, the SEC’s Division of Investment Management (“IM”) published a series of FAQs regarding the COVID-19 pandemic. In one of the FAQs, IM reminded advisers that as fiduciaries, they “must make full and fair disclosure to [their] clients of all material facts relating to the advisory relationship.” The FAQ specifically noted that if the circumstances leading an adviser to seek a PPP loan or other type of financial assistance “constitute material facts relating to its advisory relationship with clients,” the firm should provide disclosure about the assistance, including the nature, amounts, and effects of such assistance. IM also reminded advisers that if their firm is experiencing “conditions that are reasonably likely to impair [their] ability to meet contractual commitments” to their clients, the firm may be required to disclose their financial conditions in response to Item 18 of Part 2A of Form ADV.2

In addition, SEC Chairman, Jay Clayton, and William Hinman, the SEC’s Director of the Division of Corporation Finance (“Corp. Fin.”), made a joint public statement (“Public Statement”) about the importance of disclosure by public companies and financial institutions during the pandemic. The Public Statement noted that company actions and policies around the impact of COVID-19 “may be of material interest to investors”, and companies are encouraged to make disclosures to address that interest. The Public Statement went on to say that companies and financial institutions may receive financial assistance under the CARES Act, or other similar COVID-19 related federal and state programs, and if the “financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the affected companies should provide disclosure of the nature, amounts and effects of such assistance.”

Government Oversight of Loan Compliance

It has been reported that the SEC has begun sending requests for documents to recipients of loans provided under the PPP in addition to looking into how PPP funds are being used. Presumably, the SEC is reviewing disclosures by SEC registrants and issuers and evaluating compliance with the terms of their PPP applications.

The U.S. Department of Justice (“DOJ”) has also brought criminal charges against a number of individuals for fraud in connection with PPP loans. In the first criminal prosecution of PPP fraud, the DOJ filed actions against two individuals who are alleged to have misrepresented that their respective businesses had employees when, in fact, there were no employees working for any of the businesses. Another action involved an individual who is alleged to have used PPP funds for personal purposes, including the purchase of a luxury car and jewelry.

ACA Guidance

Investment advisers, broker-dealers, and other SEC-regulated entities receiving PPP funds should carefully consider whether they are required to make any public disclosures regarding their financial condition, including the impact of PPP loan proceeds on the entity’s operations and the circumstances that necessitated the loan in the first place. SEC registrants should also ensure they are complying with any undertakings that were required in connection with the any government loan or relief. Firms that decided to make disclosures about PPP or other COVID-19 relief, should ensure that the disclosure is consistent with any disclosures made on loan applications.

How ACA Can Help

ACA provides the following services to assist with the concerns voiced by the SEC:

  • Assistance preparing firm disclosures
  • Expense allocation reviews
  • Preparation and submission of regulatory filings
  • Support during SEC inspections

Contact us to find out how ACA can help your firm maintain compliance.

Contact Us

1 On April 24, 2020, the SBA released its fourth Interim Final Rule providing additional guidance regarding the PPP which states that hedge funds and private equity firms are not eligible to receive PPP loans. The SBA guidance states, however, that a portfolio company of a PE fund may be eligible for a PPP loan.

2 In addition to Item 2A of Form 2A, IM also cited reference to Part 2A, Appendix 1 of Form ADV (wrap fee program brochure) for advisers to wrap programs In addition, advisers that are public issuers may also have a reporting obligation on their Forms 8-K, 10-Q and 10-K regarding the loans.