Do Registered Investment Advisors Have to Disclose PPP Loans?

Due to current economic circumstances, many registered investment advisors ("RIAs") applied for and received Payroll Protection Program ("PPP") loans. In a recent update to its COVID-19 FAQ, the Securities and Exchange Commission ("SEC") stated that as fiduciaries RIAs must disclose on their Form ADV that the firm received a PPP loan or other type of financial assistance if the circumstances leading to the application for the loan constitute material facts related to the firm's advisory relationship with clients.

The SEC did not provide a definition of, or standard for, what is "material" when accepting financial assistance for purposes of this disclosure. The COVID-19 FAQ does, however, provide some guidance. For instance, if the firm requires the PPP loan to pay the salaries of its employees who are primarily responsible for performing advisory functions for clients, the adviser would need to disclose the loan and that fact to clients. Similarly, if the firm is experiencing conditions that are reasonably likely to impair the firm’s ability to meet contractual commitments to clients, the firm may be required to disclose this condition in response to Item 18 of Part 2A of Form ADV. Assuming the adviser concludes that the circumstances leading it to seek a PPP loan are material to its advisory relationship with clients, such as those examples above, the COVID-19 FAQ states the firm should disclose the nature, amounts and effects of such assistance (e.g. the PPP loan).

Firms should expect that the SEC exam staff will be inquiring about any financial assistance received during the COVID-19 crisis and critically reviewing any decision not to disclose any financial assistance, including PPP loans, to clients. Accordingly, firms should seriously review their specific circumstances and consider disclosing to clients any financial assistance, whether through a PPP loan or other financial assistance, and update Form ADV accordingly.

Given the complicated disclosure questions involved, firms may want to seek legal counsel if they have any question about disclosing.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.