Securities Litigation

On April 27, the SEC’s Division of Investment Management updated its COVID-19 FAQs to reflect the Staff’s position that small investment advisers must report the “nature, amounts and effects” of PPP loans if potentially material to their ability to serve clients and meet contractual obligations.

Question 11.4 provides:

Q. I am a small advisory firm that meets the requirements of the Paycheck Protection Program (PPP) established by the U.S. Small Business Administration in connection with COVID-19. If I receive or have received a PPP loan, what are my regulatory reporting obligations under the Investment Advisers Act of 1940 to my firm’s clients?

A. As a fiduciary under federal law, you must make full and fair disclosure to your clients of all material facts relating to the advisory relationship. 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. If, for instance, you require such assistance to pay the salaries of your employees who are primarily responsible for performing advisory functions for your clients, it is the staff’s view that you would need to disclose this fact. In addition, if your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you 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). (Posted April 27, 2020).

The FAQs are here.

Although the Guidance appears to leave a slim path for not reporting PPP loans if used only for administrative personnel and some expenses not “material” to the provision of advisory services to clients, that may turn out to be a perjury trap due to the requirement that PPP recipients certify the loans as “necessary” to their continued functioning.

Among other topics, the Staff guidance previously said that advisers do not need to update their Form ADV to reflect WFH business locations under a firm’s business continuity plan.  That guidance is here.