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RIA Alert: Do PPP Loans Trigger a Form ADV Disclosure?

By George C. Miller of Shustak Reynolds & Partners, P.C. posted on Monday, May 4, 2020.

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, injecting more than $2 trillion in emergency stimulus funds into the economy.  The initial bill included approximately $350 billion in loan money to be distributed to businesses through the Paycheck Protection Program (PPP).  The overwhelming demand for these emergency PPP loans, which can be forgiven under certain circumstances, prompted Congress to release an additional $310 billion in loan funds in late April.  With the economy grinding to a halt and wild market volatility, many small to medium-sized RIA firms were eligible for and received a portion of the $670 billion in outstanding PPP loans.  Do these loans constitute a “material fact” that must be disclosed via the Form ADV?  The short answer?  Yes, but there are some exceptions. 

The Investment Advisers Act of 1940 requires advisers to make full and fair disclosure to clients of all material facts relating to the advisory relationship.  According to the SEC’s Coronavirus FAQ page, “If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.”  The SEC goes on to state that if an RIA “require[d] such assistance to pay the salaries of [its] employees who are primarily responsible for performing advisory functions for [its] clients, it is the staff’s view that [the RIA] would need to disclose this fact.”  Moreover, if an RIA is “experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients,” that information would also need to be disclosed.  

Thus, in most circumstances, it appears the SEC’s position is the receipt of, or even circumstances leading up to the application for, a PPP loan constitutes a “material fact” that must be disclosed via Form ADV.  If, however, the PPP loan funds were not “required,” or if those funds were used to pay employees who were not directly involved in performing advisory functions, the disclosure arguably would not be required.  It is, however, generally advisable to err on the side of disclosing, rather than withholding, information that is potentially material. 

FINRA, unlike the SEC, has concluded that a registered representative’s receipt of PPP funds does not constitute a disclosable event on Form U4.  That is true even if the PPP loan is ultimately forgiven. 

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500. 

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