"If I were an advisor, I would almost certainly disclose any PPP loan," Jeff Levine says.
Registered investment advisors taking Paycheck Protection Program loans must disclose such information on their Form ADVs if the circumstances leading the firm to seek a PPP loan or other type of financial assistance "constitute material facts relating to your advisory relationship with clients," the agency said Monday.
What exactly the SEC means by "material" is unclear, but advisors should err on the side of disclosure, according to two experts who educate advisors and clients on PPP loans.
In an update to its COVID-19 frequently asked questions guidance, the SEC's Division of Investment Management states in Question II.4 that RIAs "should provide disclosure of, for example, the nature, amounts and effects of such assistance" as securing a PPP loan.
Also, IM states that if an RIA firm is experiencing conditions "that are reasonably likely to impair its ability to meet contractual commitments to its clients," the firm "may be required to disclose this financial condition in response to Item 18 (Financial Information) of Part 2A of Form ADV (brochure), or as part of Part 2A, Appendix 1 of Form ADV (wrap fee program brochure)."
As fiduciaries under federal law, RIAs "must make full and fair disclosure" to clients of "all material facts relating to the advisory relationship."
If, for instance, an RIA requires a PPP loan to pay the salaries of employees "who are primarily responsible for performing advisory functions …, it is the staff's view that you would need to disclose this fact," the SEC said.
Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Michigan, told ThinkAdvisor in an email on Tuesday that he suspects "most advisors will report the PPP, and likely add a statement of its materiality and outcome" to Form ADV. "Maybe something along the lines of "On <date>, the firm received a Paycheck Protection Plan Loan through the SBA in conjunction with the relief afforded from the CARES [Act]. The firm used the PPP to continue payroll for the firm and the firm did not suffer any interruption of service."
When it comes to deciding whether to disclose PPP loans on Form ADV, advisors will have "lots to consider," LaBrecque said. "The first is 'materiality.'"
He offered this example: "If I have $2.4M of expenses, and I get a PPP for $150K, is that 'material'? Is it material if I can accommodate the cost without the PPP? Does it become immaterial once it is forgiven? What if I pay it off? If we are unable to meet our contractual obligations to our clients, does that mean I can't provide an advisor? In the past, advisors didn't report layoffs or staff changes. They also only reported regular financial information."
Jeff Levine, lead financial planning nerd for Kitces.com and a colleague of Michael Kitces at Buckingham Wealth Partners, told ThinkAdvisor on Tuesday that the IM guidance fails to give "a bright-line test or some sort of definitive answer as to how a PPP loan should (or should not) be accounted for on the ADV."
That said, "if I were an advisor, I would almost certainly disclose any PPP loan," Levine said.
The primary purpose of the PPP loan "is for maintaining payroll (e.g. paying salaries!)," Levine said. "More specifically, at least 75% of the loan must be used for payroll expenses, and no more than 25% of the forgiven amount can be for non-payroll costs."
