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Financial Planning > College Planning > Student Loan Debt

Yes, Advisors Should Report PPP Loans on Form ADV

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“If I were an advisor, I would almost certainly disclose any PPP loan,” Jeff Levine says.

Registered investment advisors taking Paycheck Protection Program loans must disclose such information on their Form ADVs if the circumstances leading the firm to seek a PPP loan or other type of financial assistance “constitute material facts relating to your advisory relationship with clients,” the agency said Monday.

What exactly the SEC means by “material” is unclear, but advisors should err on the side of disclosure, according to two experts who educate advisors and clients on PPP loans.

In an update to its COVID-19 frequently asked questions guidance, the SEC’s Division of Investment Management states in Question II.4 that RIAs “should provide disclosure of, for example, the nature, amounts and effects of such assistance” as securing a PPP loan.

Also, IM states that if an RIA firm is experiencing conditions “that are reasonably likely to impair its ability to meet contractual commitments to its clients,” the firm “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).”

As fiduciaries under federal law, RIAs “must make full and fair disclosure” to clients of “all material facts relating to the advisory relationship.”

If, for instance, an RIA requires a PPP loan to pay the salaries of employees “who are primarily responsible for performing advisory functions …, it is the staff’s view that you would need to disclose this fact,” the SEC said.

Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Michigan, told ThinkAdvisor in an email on Tuesday that he suspects “most advisors will report the PPP, and likely add a statement of its materiality and outcome” to Form ADV. “Maybe something along the lines of “On <date>, the firm received a Paycheck Protection Plan Loan through the SBA in conjunction with the relief afforded from the CARES [Act]. The firm used the PPP to continue payroll for the firm and the firm did not suffer any interruption of service.”

When it comes to deciding whether to disclose PPP loans on Form ADV, advisors will have “lots to consider,” LaBrecque said. “The first is ‘materiality.’”

He offered this example: “If I have $2.4M of expenses, and I get a PPP for $150K, is that ‘material’?  Is it material if I can accommodate the cost without the PPP? Does it become immaterial once it is forgiven? What if I pay it off?  If we are unable to meet our contractual obligations to our clients, does that mean I can’t provide an advisor?  In the past, advisors didn’t report layoffs or staff changes. They also only reported regular financial information.”

Jeff Levine, lead financial planning nerd for and a colleague of Michael Kitces at Buckingham Wealth Partners, told ThinkAdvisor on Tuesday that the IM guidance fails to give “a bright-line test or some sort of definitive answer as to how a PPP loan should (or should not) be accounted for on the ADV.”

That said, “if I were an advisor, I would almost certainly disclose any PPP loan,” Levine said.

The primary purpose of the PPP loan “is for maintaining payroll (e.g. paying salaries!),” Levine said. “More specifically, at least 75% of the loan must be used for payroll expenses, and no more than 25% of the forgiven amount can be for non-payroll costs.”

Based on the wording of the Q&A language, Levine said he sees two potential ways that a firm “could attempt to NOT include an ADV disclosure related to the PPP.”

The first is parsing the language of the guidance, and more specifically, the use of the word “require” in the Q&A.

“A firm could, for instance, make the argument that it wasn’t truly required … that they had other funds that could have been used to make the payroll, and that the PPP was taken more due to the uncertainty,” Levine explained. “But that’s a slippery slope, and it would be a really fine line to walk a ‘not required’ argument to the SEC, while making a ‘necessary due to economic uncertainty’ argument” to the Small Business Administration and Treasury Department.

Alternatively, Levine added, “an advisory firm could try and claim that the PPP funds were used to pay the salaries of employees who are not “primarily responsible for providing advisory services.”

Bottom line, according to Levine: “The SEC could still claim that needing a loan to cover some of the non-advisory functions is material and should be disclosed. Therefore, in light of everything, if I were an advisory firm taking a PPP loan, I would heavily lean towards disclosing any PPP loan in my ADV.”

Should Advisors Take PPP Loans?

The SBA resumed accepting PPP applications from participating lenders on Monday, as well as processing Economic Injury Disaster Loan and Advance applications that are already in the queue on a first-come, first-served basis.

Since its inception, the PPP has sparked debate about which firms should be taking the loans.

Treasury Secretary Steven Mnuchin and Small Business Administrator Jovita Carranza said in a joint statement Tuesday that SBA will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Regulatory guidance implementing this procedure will be forthcoming, SBA said.

“Outrageous: Millions of creditworthy small businesses are being shut out of #PPP & left empty handed while @SBAgov allows big banks to exploit the system to beef up their balance sheets & prioritize aid to their most preferred clients,” Sen. Jack Reed, D-R.I., tweeted Tuesday.

Levine tweeted on April 23: “I tend to agree that most advisory firms do not/should not qualify. But even if 95% don’t, that still leaves thousands of firms that do. Separately, in 2008, many firms withstood the crisis, in part, by cutting headcount, which is objectively what this [PPP] is meant to stop.”

David DeVoe, founder and CEO of DeVoe & Co., said in a recent email to ThinkAdvisor that “RIAs are small, independently-owned businesses, which are affected by economic downturns. For example, most RIAs were forced to lay off staff during the 2008 recession.”

LaBrecque added that he’s been helping advisors advise their clients about PPP loans. “The PPP is fraught with uncertainties. Lots of people are needing help. Along the way, I have answered questions for advisors themselves. Certainly some are hurt by the crisis,” with the “biggest questions” coming from sole proprietors and independent contractors, he said.

“The PPP is a great program, but full of confusion,” LaBrecque said. “The biggest confusion I see is the forgiveness part and what can and cannot be forgiven. Many advisors have kept on their crew, so they will likely qualify for forgiveness.”

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