Q: I’m a dually registered investment advisor and registered representative. I’m registered with a broker-dealer but also have my own registered investment advisory firm. I’ve heard about the Paycheck Protection Program loan available for those affected by COVID-19 and the economic disruptions everyone is facing but my broker-dealer warned me against taking the loan saying that it might be a reportable event on my U4 since it’s a forgivable loan and could be seen as a compromise with creditors. Can you shed any light on this?
A: The U.S. Small Business Administration has made Paycheck Protection Program loans available to certain individuals and small businesses to offset some of the financial hardships they are experiencing during the coronavirus crisis. A PPP loan is eligible for forgiveness if the terms of the loan are satisfied. FINRA has recently issued some guidance on this topic and has indicated that if a registered person or their business obtains a PPP loan and the loan or part of the loan is forgiven, the registered person will not be required to report that forgiveness in response to Question 14K on their Form U4 as a “compromise with a creditor,” as long as the PPP loan is forgiven in accordance with the original terms of the loan.
FINRA’s Form U4 and U5 interpretive questions and answers section explains that “A compromise with one or more creditors generally involves an agreement between a borrower and a creditor in which a creditor agrees to accept less than the full amount owed in full satisfaction of an outstanding debt,” unless such an agreement is included in the original terms of the loan.’ (Emphasis added.)
In the agency's other FAQ, it states that “Because a PPP loan contemplates forgiveness of some or all of the loan as part of the original terms of the loan, such forgiveness will not involve a new agreement by the creditor, but will be an event consistent with the loan’s original terms. … In those circumstances, the forgiveness of a PPP loan will not be a ‘compromise with creditors’ for purposes of Form U4 Question 14K. Any forgiveness beyond the original terms of the loan would be considered a ‘compromise with creditors.’”
However, since you also own a registered investment advisory firm, you should be aware of possible disclosure requirements in Item 18 of the Form ADV Part 2A disclosure brochure. That section requires disclosure of any “financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.”
I disagree somewhat that taking a PPP loan by itself is an indication that the firm is in financial trouble necessitating an Item 18 disclosure. After the 2008 crash, TARP provided free government lines of credit for businesses that applied, and this was not seen as a disclosable item in most cases.
With that said, the loan requires that the signatory certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” I think this certification is relevant as to whether the firm has an adverse condition that is preventing it from meeting its obligations under the advisory agreement.
Tristan Markwell is program manager for data science and advanced analytics for Providence St Joseph Health.
Doug Duncan is the chief economist at Fannie Mae.
Allan Koltin, CPA, CGMA, is the CEO of Koltin Consulting Group, a Chicago-based consulting firm that specializes in working with professional and financial services firms in the areas of practice growth, practice management, human capital, and mergers and acquisitions. A nationally recognized speaker and industry analyst, Allan has appeared on the CNN, WGN and Fox Television networks and has been quoted frequently in such media as the Wall Street Journal, New York Times, Washington Post, Chicago Tribune, Los Angeles Times, USA Today and New York Post, as well as Bloomberg News, BBC World Service, Business Week, Forbes and Reuters. He has also spoken nationally and internationally at hundreds of conferences including those held by the AICPA, international CPA associations and state CPA societies.For twelve consecutive years, Allan has been named by Accounting Today as one of the Top 100 Most Influential People in the accounting profession. Koltin was also voted one of the 10 Most Recommended Consultants, for the seventh straight year, in the “Annual Survey of Firms” conducted by INSIDE Public Accounting. In 2012, Allan was named by CPA Practice Advisor as one of the Top 25 Thought Leaders in the profession. He was one of the first inducted into the Accounting Marketing Hall of Fame by the Association for Accounting Marketing (AAM). He has also been a recipient of the NACVA Instructor of the Year Award and winner of the Journal of Accountancy Literacy Award. Previously he was recognized by the Illinois CPA Society with the Distinguished Service Award for outstanding service and commitment to the profession. Koltin is the author-editor of three books for professional services firms: CPA Firm Merger Strategies That Work, CPAs That Sell and the AICPA’s Marketing a Consulting Niche. He is a founding member of The Advisory Board, a think tank for the accounting profession, and has served on various advisory boards, including Outsource Partners International (OPI), the Association for Accounting Marketing (AAM), the National Association of Certified Valuation Analysts (NACVA) and H&R Block (HRB Business Services). Previously, Allan was the President and CEO of PDI, Global, Inc. which was the largest publisher of marketing newsletters for professional services firms. Allan originally sold PDI Global to H&R Block in 1998, buying it back in 2008, and then selling it again to Thomson Reuters in 2011. Prior to that, Allan was a Senior Partner in the Chicago-based accounting and consulting firm of FERS, where he served as the leader of the Investment Banking Group, as well as the Law Firm Consulting Group. At age 27, Allan had the distinction of being named the youngest partner in the history of the firm and was also a member of the firm’s Executive Committee. FERS was acquired by H&R Block in 1998. Allan attended both the University of Wisconsin – Madison and the University of Wisconsin – Milwaukee and received degrees in accounting and marketing. He lives in Chicago with his wife, Sharon, and his three children, Jack, Brian and Julia. His passion is facilitating retreats and providing coaching for firm leadership and partners. His specialties include strategy, governance, profitability, compensation, growth, human capital, and mergers and acquisitions.
So I think the question of whether a disclosure is required would likely be based on whether the RIA is not in immediate financial trouble and simply takes the loan as a safety net or as a precautionary measure, as opposed to RIAs that are in financial trouble now and would be out of business or unable to meet their commitments absent the loans.
Additionally, if the loans are needed to meet payroll but would have no impact on the firm’s commitments to its clients, the argument could be made that no disclosure is therefore required. You should discuss these issues with your legal counsel before applying for a PPP loan.
Update 5/5/20: The SEC has published additional guidance concerning the Payroll Protection Program (PPP) and the disclosure requirements for advisors.
The commission now says that if you took the loan in order to pay employee salaries, you should disclose that in your Form ADV Disclosure Brochure. This is just an example that the commission gives in the FAQ. As I noted earlier, Item 18 of the Form ADV requires advisors to “disclose any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.”
My takeaway from the SEC’s FAQ is that they will likely consider any use of the loan for any sort of operational purposes as “likely to impair your ability to meet your contractual commitments to your clients.”
Think of it this way: If you have to furlough employees or even close your doors because of finances, that would likely impair your ability to meet your contractual commitments to your clients. Based on this guidance, I would suggest that investment advisors who have taken a PPP loan, should, in most cases, disclose it in Item 18 of the Form ADV Part 2A or, at a minimum, in a separate disclosure document delivered to all your clients.
You can read the SEC’s guidance here: https://www.sec.gov/investment/covid-19-response-faq
Please send your questions for compliance expert Alan Foxman to fpeditor@arizent.com.
