The Treasury building in Washington. The Treasury building in Washington. (Photo: Shutterstock)

As part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), investment advisors who qualify as small businesses may have secured loans for emergency financial relief under the Paycheck Protection Program. The PPP was primarily created to provide funds for job retention for small businesses that have been impacted by COVID-19.

The most important aspect of this program is that it permits loans to be fully or partially forgiven for a borrower that satisfies specific conditions. As of June 30, the U.S. Treasury Department reported that 4.9 million loans were to “small businesses of all types and across all industries” under the PPP, with an average loan size of $100,000.

Certification Requirement

Initially, there was much confusion as to whether investment advisors were even eligible for PPP loans, due to the fact that certain investment and lending businesses are generally ineligible for loans administered by the Small Business Administration.

Further speculation as to advisors’ eligibility for PPP loans arose based on the certification requirement for PPP loans. When applying, borrowers were required to certify in good faith that, among other things, the loan request was necessary due to uncertain times and the proceeds of the loan would be used for allowable expenses.

Even after some advisors had applied and received funds under the PPP, the Treasury Department announced a safe harbor with respect to certification that applies to a borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million.

In the SBA’s view, such borrowers automatically will be deemed to have made the required certification concerning the necessity of the loan request in good faith. However, the SBA may still review PPP loans in excess of $2 million and other PPP loans, as appropriate.

Upon review, if the SBA determines that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the Treasury Department has stated that the SBA will seek repayment of the outstanding loan balance. However, the SBA will not pursue administrative enforcement or make referrals to other agencies as long as the borrower repays the outstanding loan balance.

But the Securities and Exchange Commission and other regulators are not necessarily precluded from making enforcement referrals based on their own determinations with respect to the certifications made by advisors that applied for or received PPP loans.

Applying for Loan Forgiveness

Advisors who expect to take advantage of PPP loan forgiveness may find another issue. According to the SBA, loan forgiveness is based on whether the borrower has maintained or quickly rehired employees and maintained salary levels for such employees.

In this regard, loan forgiveness may be reduced if full-time employee headcount declines, or if employee salaries and wages decrease. The most recent amendments by Congress to the CARES Act require borrowers to use loan proceeds within a 24-week period from the date of disbursement, and at least 60% of the PPP loan proceeds must be used for payroll costs.

Realize that loan forgiveness is not automatic; to be considered, a borrower must submit an application to its lender that includes loan forgiveness amount calculations and additional certifications. The Treasury Department also has issued recent guidance that states a borrower may, when calculating the amount of loan forgiveness under the program, exclude laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) but declined the borrower’s offer to rehire.

Updating Disclosures

The SEC’s Division of Investment Management issued guidance in April that states that an investment advisor must consider whether the circumstances leading it to seek a PPP loan or other type of financial assistance constitute material facts relating to the firm’s advisory relationship with clients and therefore must be disclosed.

In the SEC’s view, if disclosure is required to be made, it must include the nature, amounts and effects of the financial assistance. The SEC provided examples for whether advisors have a disclosure obligation. First is where an advisor requires the financial assistance to pay the salaries of employees who are primarily responsible for performing advisory functions for clients. Second is where an advisor is experiencing conditions reasonably likely to impair its ability to meet contractual commitments to clients.

Finally, from a practical perspective, as advisors make any updates to disclosures in this regard they may wish to consider whether any financial assistance has an impact on any other disclosures or written materials provided to clients, with a particular focus on aligning any PPP loan disclosure with other disclosures or written materials provided to clients.

Possible SEC Targeted Exams

Given this SEC guidance, it is possible the SEC would request information about any financial assistance for which an advisor has applied, and the circumstances that may have led to such an application.

If an advisor received PPP funds, the SEC may request information about how the loan proceeds were used, and the time period during which they were used. If an advisor applied for but did not receive funds from the PPP, the SEC may have additional questions for it in connection with its certification and how it maintained operations without such funding. And, as indicated above, the SEC will expect an investment advisor’s disclosures to adequately address any material facts relating to its advisory relationship with clients.


Clifford Kirsch is a partner with Eversheds Sutherland law firm and an authority on securities and regulatory law. Issa Hanna is a counsel with Eversheds Sutherland and Bria Adams is an associate with Eversheds Sutherland.