Advisors Who Took PPP Loans May Face SEC Scrutiny

But the Securities and Exchange Commission and other regulators are not necessarily precluded from making enforcement referrals based on their own determinations with respect to the certifications made by advisors that applied for or received PPP loans.

Applying for Loan Forgiveness

Advisors who expect to take advantage of PPP loan forgiveness may find another issue. According to the SBA, loan forgiveness is based on whether the borrower has maintained or quickly rehired employees and maintained salary levels for such employees.

In this regard, loan forgiveness may be reduced if full-time employee headcount declines, or if employee salaries and wages decrease. The most recent amendments by Congress to the CARES Act require borrowers to use loan proceeds within a 24-week period from the date of disbursement, and at least 60% of the PPP loan proceeds must be used for payroll costs.

Realize that loan forgiveness is not automatic; to be considered, a borrower must submit an application to its lender that includes loan forgiveness amount calculations and additional certifications. The Treasury Department also has issued recent guidance that states a borrower may, when calculating the amount of loan forgiveness under the program, exclude laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) but declined the borrower's offer to rehire.

Updating Disclosures

The SEC's Division of Investment Management issued guidance in April that states that an investment advisor must consider whether the circumstances leading it to seek a PPP loan or other type of financial assistance constitute material facts relating to the firm's advisory relationship with clients and therefore must be disclosed.

In the SEC's view, if disclosure is required to be made, it must include the nature, amounts and effects of the financial assistance. The SEC provided examples for whether advisors have a disclosure obligation. First is where an advisor requires the financial assistance to pay the salaries of employees who are primarily responsible for performing advisory functions for clients. Second is where an advisor is experiencing conditions reasonably likely to impair its ability to meet contractual commitments to clients.

Finally, from a practical perspective, as advisors make any updates to disclosures in this regard they may wish to consider whether any financial assistance has an impact on any other disclosures or written materials provided to clients, with a particular focus on aligning any PPP loan disclosure with other disclosures or written materials provided to clients.

Possible SEC Targeted Exams

Given this SEC guidance, it is possible the SEC would request information about any financial assistance for which an advisor has applied, and the circumstances that may have led to such an application.

If an advisor received PPP funds, the SEC may request information about how the loan proceeds were used, and the time period during which they were used. If an advisor applied for but did not receive funds from the PPP, the SEC may have additional questions for it in connection with its certification and how it maintained operations without such funding. And, as indicated above, the SEC will expect an investment advisor's disclosures to adequately address any material facts relating to its advisory relationship with clients.

Clifford Kirsch is a partner with Eversheds Sutherland law firm and an authority on securities and regulatory law. Issa Hanna is a counsel with Eversheds Sutherland and Bria Adams is an associate with Eversheds Sutherland.