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One part of the COVID 19 federal relief package known as the CARES Act is the Paycheck Protection Program (PPP), which allows individuals and small businesses to obtain loans for the purpose of paying their employees during the crisis. Repayment of these loans may be forgiven if certain terms are met. If a securities firm obtains a PPP loan, must that fact be disclosed/reported to the firm’s clients?


The answer depends on whether the entity receiving the loan is a broker-dealer (BD) or a registered investment adviser (RIA).


For BDs, the key consideration is whether there would be a compromise with a firm’s creditor such that the creditor would “agree to accept less than the full amount owed in full satisfaction of an outstanding debt,” which is the subject matter of question 14K of Form U4. FINRA’s recently issued FAQs on COVID-19 indicated a PPP loan that’s forgiven consistent with the terms of the loan is not a disclosable event per Form U4, question 14K. FINRA concluded that because forgiveness of the loan was part of the terms of the loan, the forgiveness of the loan, and therefore the loan itself, was not “a compromise with creditors for purposes of Form U4 Question 14K."


For RIAs, the key consideration is different than for BDs, and leads to a different answer. The SEC notes in COVID-19 FAQs that as fiduciaries RIA’s “must make full and fair disclosure to your clients of all material facts relating to the advisory relationship.” While the FAQ does not give a clear “yes or no” answer for every situation, it does expressly state that if the loan was needed to pay the salaries of employees who are responsible for performing advisory functions for clients, then “it is the staff’s view that that you would need to disclose this fact”. An RIA could try to avoid disclosure by claiming the loan was used for some other purpose that didn’t rise to the level of a “material fact relating to the advisory relationship.” However, it seems that the safe approach would be for RIAs to disclose any PPP loan on their Form ADV, Part 2A.


Since most of the discussion by the SEC and FINRA are focused on the BD and RIA level, individual registered representatives and investment advisor representatives should discuss any questions they may have on this issue with their BD and/or RIA firms.

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