The Lawfulness and Morality of Applying for PPP Loans and Not Disclosing Them


The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020, and introduced the Paycheck Protection Program (the “PPP”) with the goal of preventing job loss and small businesses failure due to losses caused by the COVID-19 pandemic. To accomplish the policy behind the program, qualifying businesses are provided with a forgivable loan to cover payroll and other costs.

PPP Loan Qualifications

The CARES Act made loans available for any business with “not more than 500 employees” and for other “small business concerns”. Allowable uses of program loans include payroll support, employee salaries, mortgage payments, rent, utilities; and other debt obligations that were incurred before the March 1, 2020. In addition, the CARES Act specifically removed the standard Small Business Administration requirement that the business certify that they were unable to obtain credit elsewhere. The only requirement for a small business to receive a loan is that they be able to certify, in good faith, that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”

The certification contains three key terms that are extremely flexible and can be interpreted either at a point-in-time or forward looking. Each of those is discussed further below:

Uncertainty of Current Economic Conditions

There was and remains without a doubt great economic uncertainty due to COVID-19. Most investment adviser’s revenues are directly dependent on their assets under management, which track the United States and world economies. Any business owner or investment adviser suggesting that they knew the financial markets would be relatively stable by April, May, or June would be lying. This supports their decision to apply for a PPP loan.

The United States and the world have not witnessed a scarier medical-economic event since arguably polio in the mid-to-late 1950’s.  The U.S. deficit in comparison to gross domestic product is at levels that have not been reached since World War II.  When the pandemic first reached the United States, forecasts for growth plummeted, and while some experts believed that growth would pick back up in the third and fourth quarters of 2020, no one could truly predict how long the pandemic would impact our country.  Notably, PIMCO put it quite eloquently when it stated: “there is a risk if not a likelihood of an uneven recovery, with significant setbacks along the way.”


Notably, the CARES Act does not require a showing of absolute necessity. The certification was not intended to be a binary test for whether a business would or would not survive without the loan. The decision by the SBA to remove the requirement to seek out credit elsewhere supports this view.

Too many commentators are viewing the necessary standard too narrowly. If Congress intended it to be an absolute necessity standard, then they would have written it into the law—which it is not.  If that were the intent of the Small Business Administrator Carranza, then she would have ensured that the certification be drafted accordingly.  The program was designed primarily to retain employees, so the certification needs to be viewed through that lens. If a business applied for a loan to retain employees, to keep payroll at levels that employees (including owner-employees) were accustomed to receiving, or avoid furloughing employees, then the applicant likely made the certification in good faith.

Ongoing Operations

While the period for determining forgiveness under PPP is currently based on the eight-week period after receiving a loan, neither Congress nor the SBA suggested that the period for considering whether a business is able to “support [its] ongoing operations” be viewed over that same period.  Most businesses considering applying for a PPP loan were thinking longer term.

If there was any realistic chance that a business would need the money to support its ongoing operations, regardless of whether that need would occur in two weeks or two years, an adviser would be in a position to make a good faith certification.

If an investment adviser’s worst nightmares and financial projections came to fruition and they did not apply for the PPP loan, they would have been thoroughly upset.  The PPP loan program would not have been available in a year or two if the economy didn’t recover.  It would only seem prudent to apply for a loan to avoid this scenario.

Implications on Morality

I acknowledge that my conclusion that most investment advisers acted in good faith and likely qualified for PPP loans may not sit well with some people.  However, I don’t believe that makes an investment adviser immoral, unethical, or any less of a fiduciary because they received a PPP loan and have not returned it.  Given where current financial markets stand, many people are considering it a windfall. Perhaps it is, but only time will tell.

Either way, I would ask these same people questioning the morality of investment advisers who have not returned loan proceeds how they feel about deferring payroll taxes under the CARES Act. There is no need to take advantage of this provision, but you would be imprudent if you didn’t.

In hindsight, perhaps Congress and the SBA should have created stricter requirements for PPP surrounding qualifications and forgiveness.  Perhaps businesses with year-over-year revenues that only decrease a certain percentage should have been eligible for forgiveness. These are policy issues that should have been determined during the legislative process.  It is unfair—and probably even unconstitutional—to apply them with the benefit of hindsight.

Disclosure Unnecessary?

The Securities and Exchange Commission’s Division of Investment Management released guidance on April 27, 2020, addressing disclosure surrounding an investment adviser’s participation in PPP.As the guidance correctly references, whether the application for or receipt of a PPP loan is material, and therefore requires disclosure to clients, is a question of fact. “A matter is material if there is a substantial likelihood that a reasonable person would consider it important…The omission or misstatement of an item…is material if, in the light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the disclosure would have been changed or influenced by the inclusion or correction of the item.” Put another way, would a typical client or prospective client consider this information important to their investment advisory relationship with their firm.

While the Division of Investment Management staff has stated its belief that disclosure would be necessary if a loan was “require[d] to pay the salaries of your employees who are primarily responsible for performing advisory functions…,” I do not believe that this is a helpful standard in determining materiality, and ultimately, whether disclosure is necessary.

I would recommend that investment advisers analyze all of the facts and circumstances associated with their current financial position and their decision to participate in the PPP.  After performing this analysis, if they believe that a client could consider their current financial position material, I would recommend disclosure.

I also do not believe that investment advisers have any obligation to try and reconcile their PPP certification and the whether their receipt of a PPP loan is a material fact requiring disclosure.  The PPP certification for most advisers was a forward-looking activity that was heavily predicated on future economic uncertainty.  If those uncertain events never come to fruition, then clients do not have any need to know about the investment adviser’s financial position assuming that they remain able to perform their contractual obligations. Materiality under the Investment Advisers Act of 1940 relating to a business’s financial position has never before required a future financial forecast, and in my opinion, that obligation should not start now.

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