Participation in the Paycheck Protection Program and Potential Disclosure Obligations?

On March 27, 2020, the federal government provided relief to certain qualifying businesses in the form of $349 billion in funding authorized under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) via the Paycheck Protection Program (“PPP”). The intent and sole purpose for the PPP, is to help certain businesses cover their critical and necessary operating costs and provide specific tax relief due to the uncertainty caused by the coronavirus pandemic. Most importantly, loans under the PPP may be fully forgivable if used to maintain payroll (including, benefits and vacations) and pay mortgage interest, rent or utilities.

Applicants for the PPP loans must certify that the “current economic uncertainty makes this loan necessary to support the ongoing operations.” Prior to making the decision to take advantage of the PPP (and solely with respect to the certification referenced above), advisers should analyze whether the loan is necessary to support their ongoing operations. In doing so, they would seem to be free to consider retaining non-essential employees as long as those employees are necessary to support the firm’s ongoing operations. Each adviser’s circumstances are different and will require a thorough analysis.

Disclosure Issues?

Although the U.S. Securities and Exchange Commission (“SEC”) has yet to provide guidance, an advisor’s decision to take advantage of the PPP may be viewed by the regulators as a signal that the advisor may be experiencing financial difficulty or anticipates that it will be unable to meet contractual commitments – an event required to be disclosed on the advisor’s Form ADV. Specifically, Item 18 of ADV Part 2A, requires an advisor to “disclose any financial condition that is reasonably likely to impair its ability to meet contractual commitments to clients.” As the adopting release implementing amendments to Form ADV states, “what constitutes a financial condition reasonably likely to impair an adviser’s ability to meet contractual commitments is inherently factual in nature but will generally include insolvency or bankruptcy.” Whether an advisor participates in the PPP or not, they need to monitor their financial condition and consider their disclosure obligations under this item.

Firms that participate in PPP and decide against disclosure may want to consider preparing a memorandum to support that decision. The memorandum should outline the firm’s current financial position and conclude that the adviser is able to meet its contractual commitments. However, I understand that this memorandum could be interpreted as evidence that the firm’s receipt of a PPP loan was not necessary to support its ongoing operations. This is a double-edged sword.


The decision to participate in the PPP is a business decision that each adviser must make on its own. I remain available to counsel clients on participating in the PPP or on disclosure issues. My views may change as the federal government (and state governments) provide new details or guidance on the PPP. Of course, I will continue to monitor any new developments and remain available to address any questions.

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