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.

Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)

Can it benefit you and your business?

On Friday March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), that will create an estimated $2 trillion emergency relief package that could significantly impact the U.S. economy and the financial services industry.

The CARES Act has allocated $349 billion to provide relief to certain businesses through 100% guaranteed Small Business Administration (SBA) loans, a portion of which the SBA would forgive based on the employer meeting certain criteria. The CARES Act will include certain tax relief for businesses and individuals to help provide financial assistance during the COVID-19 crisis.

Below you will find a summary of provisions in the legislation applicable to investment advisers, broker-dealers, and others in the financial services industry.

Paycheck Protection Program:

The CARES Act allocated $349 billion to the SBA to provide loans to small businesses impacted by COVID-19. The application for borrowers is available here. Eligible businesses may take out loans up to $10 million to cover payroll and other operational expenses.

  • Eligibility:      
    • This program is for applicants whose principal place of residence is in the U.S. who have a small business with less than 500 employees (includes full-time, part-time and those employed on other bases, but does not include independent contractors) including private non-profit organizations described in section 501(c)(3) of the Internal Revenue Code or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.
    • Sole proprietors, independent contractors, and eligible self-employed individuals are eligible for loans, subject to some documentation requirements to substantiate eligibility.
      • You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
    • Additionally, the business must have been in operation on February 15th, 2020 and either had employees that were paid salaries or independent contractors reported on Form 1099-MISC.
    • Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.
    • SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered period for business concerns, non-profits, and veterans’ organizations for:
      • Any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act. This includes privately organized and privately managed investment firms that provide venture capital to small independent businesses.
  • Borrower Eligibility Requirement: Good-faith certification that:
    • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant;
    • The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
    • The applicant does not have any other application pending under this program for the same purpose; and
    • From February 15, 2020 until December 31, 2020 the applicant has not received duplicative amounts under this program.
  • Permissible Uses
    • Payroll costs
      • Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; cash tips; payment for vacation; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission based compensation) up to $100,000 in 1 year, prorated for the covered period and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation..
      • Excludes: Individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside the US; and sick and family leave wages for which credit is allowed under the Families First Act.
    • Group healthcare benefits during period of paid sick, medical or family leave and insurance premiums;
    • Salaries, commissions or similar compensation;
    • Rent/lease agreement payments;
    • Utilities; and
    • Interest on any other debt obligations incurred before the covered period.
    • If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
  • Loan Terms
    • The maximum loan amount (capped at $10 million) is the lesser of:
      • 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made, PLUS a loan received under the Economic Injury Disaster Loan Program; or
      • Upon request, for business that were not in existence during the period from February 15, 2019 through June 30, 2019 – 2.5 times the average monthly payroll payments from January 1, 2020 through February 29, 2020 PLUS a loan received under the Economic Injury Disaster Loan Program; or
      • $10 million.
    • Interest on the loan will be fixed at 1% and the payments of the loans shall be deferred for no less than 6 months, however interest will continue to accrue.
    • No personal guarantee requirement.
    • No collateral is required.
    • Loan maturity – 2 years
    • No prepayment fees.
  • How to apply
    • You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. 
    • Lenders may begin processing loan applications as soon as April 3, 2020 for small businesses and sole proprietorships
    • Starting April 10, 2020 independent contractors and self-employed individuals can apply.\
  • Lenders
    • All existing SBA certified lenders will be given delegated authority to process Paycheck Protection Loans.
    • All federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions are eligible to participate in this program.
    • A broad set of additional lenders can begin making loans as soon as they are approved and enrolled in the program.
    • Lenders must verify the borrower (i) was in operation on February 15, 2020; (ii) had employees on the payroll, and (iii) verify the dollar amount of average monthly payroll costs.
    • Lender Compensation: Lenders may not collect fees from the applicant. Processing fees will be based on the balance of the financing outstanding at the time of final disbursement:
      • Loans $350,000 and under: 5.00%;
      • Loans gretaer than $350,000 to $2 million: 3%; and
      • Loans greater than $2 million: 1%.
  • An agent is an authorized representative and can be:
    • An attorney;
    • An accountant;
    • A consultant;
    • Someone who prepares an applicant’s application for financial assistance and is employed and compensated by the applicant;
    • Someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans;
    • A loan broker; or
    • Any other individual or entity representing an applicant by conducting business with the SBA.
    • Agents will be paid out of lender fees and cannot collect any fees from the applicant. The fees for agents are as follows:
      • Loans $350,000 and under: 1.00%
      • Loans greater than $350,000 to $2 million: 0.50%
      • Loans greater than $2 million: 0.25%
  • Loan Forgiveness and Payment Deferral Relief
    • Loan forgiveness is based on the business maintaining or rehiring employees and maintaining salary levels.
    • The loan will be fully forgiven if the funds are used during the 8 week period following the origination of the loan (the “covered period”) for :
      • payroll costs;
      • Interest on mortgages incurred before February 15, 2020;
      • Rent in force before February 15, 2020; and
      • Utility payments for services which began before February 15, 2020.
    • 75% of the forgiven amount must have been used for payroll costs. No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
    • Forgiveness will be reduced if full-time headcount of employees decline or if salaries and wages decrease by more than 25% for any employee that made less than $100,000 in 2019.
      • There is relief from forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. The foregoing forgiveness reduction rules will not apply to an employer between February 15, 2020 and April 26, 2020 – where
        • The employer reduces the number of full time equivalent employees (FTE) in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEs; or
        • There is a salary reduction, as compared to February 15, 2020, during this period for one or more employees and that reduction is eliminated by June 30, 2020.
  • The CARES Act clarifies that employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees. 
  • Loan Forgiveness Procedure: Borrowers seeking forgiveness of amounts must submit to their lender:
    • Documentation verifying FTE on payroll and their pay rates;
    • Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
    • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
    • Any other documentation the SBA may require.
    • The SBA will issue additional guidance on loan forgiveness.
    • A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, covered mortgage interest, covered rent, and covered utility payments during the eight week period after loan disbursement.

Expansion of SBA Economic Injury Disaster Loan Program (EIDL)

  • The covered period for this section is modified to January 31, 2020-December 31, 2020.
  • Eligibility:
    • A business with 500 or fewer employees;
    • Sole proprietorships, with or without employees, and independent contractors;
    • Cooperatives with 500 or fewer employees;
    • Employee Stock Ownership Plans with 500 or fewer employees;
    • Entities that are exempt under 501(c);
    • The applicant must have an acceptable credit history;
    • Show an ability to repay the loan;
  • The CARES Act makes the following additional changes to the SBA Disaster Loan program:
    • Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
    • Waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
    • Waives the requirement that the business must be located in a state or county that received an economic injury disaster declaration from the SBA;
    • Waives the requirement that an applicant be unable to find credit elsewhere; and
    • Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”
  • Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the SBA of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The SBA is charged with verifying an applicant’s eligibility by accepting a “self-certification.” Advances are to be awarded within three days of an application.
    • A business can apply and receive this advance while still applying for the loan under the Paycheck Protection Program and if the business receives the loan under the Paycheck Protection Program it will be reduced based on the EIDL advance.
  • Loans under the EIDL may be used for:
    • Providing sick leave to employees unable to work due to direct effect of COVID-19;
    • Maintaining payroll during business disruptions during slow-downs;
    • Meeting increased supply chain costs;
    • Making rent or mortgage payments; and
    • Repaying debts that cannot be paid due to lost revenue.

Unemployment Benefits

  • Expanded Unemployment Insurance – $600 per week increase in benefits for up to four months and federal funding of Unemployment Insurance benefits provided to those not usually eligible for Unemployment Insurance, such as self-employed, independent contractors, and those with limited work history. The federal government is incentivizing states to repeal any “waiting week” provisions that prevent unemployed workers from getting benefits as soon as they are laid off by fully funding the first week of Unemployment Insurance for states that suspend such waiting periods.
  • Additionally, the government will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after workers have run out of state unemployment benefits.

Tax Provisions

  • Tax Relief for Businesses
    • Under the CARES Act employers are eligible for a 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. It would be available to employers whose businesses were (i) disrupted due to virus-related shutdowns and (ii) firms experiencing a decrease in gross receipts of 50% or more compared to the same quarter last year.
      • The credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.
    • Employer-side Social Security payroll tax payments may be delayed until January 1, 2021. 50% owed on December 31, 2021 and the other half owed on December 31, 2022.
  • Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years.
    • The CARES Act suspends the Tax Cut and Job’s Act’s (TCJA) 80% of taxable income limit on net operating loss (NOL) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020.
  • Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could. 
  • Limitation on Business Interest Expense: The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30% of EBITDA has been expanded to 50% of EBITDA for 2019 and 2020.

While this alert focused on Investment Advisors, Broker Dealers, and others within financial services, it also applies to any small business concern with less than 500 employees, including private non-profit organizations described in section 501(c)(3) of the Internal Revenue Code or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.

Continued Compliance and Supervision in Light of COVID-19

I have been receiving an uptick in questions from clients regarding the transition to remote operations and best practices in light of the current pandemic. This is a great question and one that my clients have been really preparing for since Hurricane Sandy. This post is intended to provide an investment adviser’s Chief Compliance Officer and management with a high level list of items to consider because of COVID-19. In no way should this be considered an exhaustive list, and depending on the type of business your firm operates, it may not be entirely applicable.

  1. Client Communication. The pandemic has caused great uncertainty in the U.S. and world economy and client’s portfolios are losing value at rates that haven’t been witnessed since at least 2008. Some firms are taking or have already taken proactive measures to reduce their clients’ market exposure by increasing their cash allocations. Others have determined to ride out the storm. Regardless of the investment strategy being taken, it is crucial to communicate that strategy to clients. Based on personal experience, the best litigation risk reduction strategy is regular and honest communication with clients. This is especially true with respect to those clients who have expressed concerns about their financial plan, investment objectives, or ability to withstand their current losses. It is important to listen during these times and try to best accommodate a client’s wishes. If the client’s wishes are against their interests, advisers should try and explain to the client why their desires are not prudent.
  2. Adviser Communication. As most firms have implemented business continuity plans that involve staff working entirely remote or partially remote, Chief Compliance Officers and management should maintain regular lines of communication with all staff, but especially client service, investment and operational staff responsible for trading, billing, and money movement.  
    • Client Service Staff Communication. Communication from management to client service teams must provide clear directives on the firm’s philosophy during this crisis. In addition, client service personnel should be reminded the importance of listening and empathy during this difficult time. While it is a difficult balancing act, advisers must be able to instill confidence in clients and explain the unknown direction of the market on any given day.
    • Trading Staff Communication. Given the potential for increases in the volume of trading, it is important that traders be extra careful at this time. In addition, with many traders continuing their craft remotely from their home workstations, there are many added distractions that traders have not previously had to confront. For example, children or pets, while adorable, may distract traders who are placing very important and potentially large orders. Management should remind traders of the importance of these functions and ensure that their traders are able to perform their functions remotely with absolute focus. If a trader feels like they have too many distractions at home, management and the trader may want to mutually evaluate options to optimize the situation.
    • Money Movement and Billing Staff Communication. I am seeing a number of frauds being perpetrated on investment advisers and their clients surrounding COVID-19. This is a time where money movement staff should be extra vigilant. It is necessary to follow all red flag policies currently in place and any verbal or mutli-factor authentication procedures that a firm maintains prior to disbursing client funds. If your firm’s money movement staff is working remotely, it may even make sense requiring a second verbal confirmation prior to disbursing money. If firms do not have these types of measures in place already, they will want to consider implementing them now. With monthly and quarterly billing cycles likely to take place while staff are working remotely, those responsible for billing must be kept in the loop regarding credits or waivers provided to clients during these trying times. They must also be sure the credits and waivers are being applied correctly.
  3. Cash Monitoring. In any event, if the firm’s strategy or a client’s wishes involve going to cash, the firm should have a policy or procedure to monitor cash balances and for reviewing and making decisions on when to get back in the market. If the firm is not going to take on the obligation of monitoring cash balances and determining when to get back in the market, it must communicate that to the client. Regardless, from a business perspective, a firm probably does not want any of its clients to miss out on any rebound, so a constant reminder to clients with cash balances may be a prudent practice.
  4. Fair Treatment of Clients. For firms that manage proprietary funds or that trade in less liquid or low-volume securities, or that manage accounts across various custodians, they should be extra sensitive with respect to these issues. They will want to ensure that allocations are made consistent with the firm’s policies and procedures and that clients are treated fairly. To the extent that cross transactions are being executed, both clients must be treated fairly.
  5. Investment Policy or Guideline Monitoring. Firms should be monitoring investment policies and guidelines to ensure that recent market events have not caused them to be breached. If actions can be taken to avoid breaches, they should be taken. If a breach has occurred, firms should remediate those breaches.
  6. Cybersecurity, Information Security, and the Continued Operation of Remote Working Capabilities. The importance of these items are self-evident. Firms should be reviewing their policies and procedures regarding cybersecurity and information security, and make sure their employees and staff understand their most important roles and responsibilities.
  7. Continued (and Heightened) Supervision. Given that there is no sense of direct supervision for employees (and not solely advisers who interface with clients), it is important to continue to supervise employees in whatever ways that can be done. For example, firms may want to consider:
    • performing additional or more focused email reviews with a view towards client complaints or potential complaints;
    • implementing additional safeguards for approving and reviewing money movement (especially larger transfers);
    • having teams assigned for trading or large trades that operate as a “buddy system”; and
    • randomly or scheduling calls or video conferences with employees during the work day to ensure they are performing their essential functions. In addition, the longer that offices are closed, these visits may be determined necessary as part of a firm’s branch office review policy.
  8. Plan for Mail Delivery. To the extent that main and branch offices are able, they will want to have a process for reviewing hard copy mail. The SEC Staff has provided temporary relief from the custody rule if it receives checks or securities during this period and is unable to access its mail or deliveries, but it would be best if the mail was still being processed. That guidance is available here (see Question II.1). This process must be done in a manner that is consistent with any executive orders issues by state or local government regarding continued business operations.
  9. Business Continuity Plan Review. While most business continuity plans have already been implemented, now is a good time to review and update the firm’s business continuity plan. I have personally witnessed OCIE Staff requesting information about these policies and their implementation during examinations conducted in March 2020. If you have too many things going on currently, this should absolutely be a focus of the firm’s annual review of its policies and procedures pursuant to Rule 206(4)-7.
  10. Review of Form ADV Part 2. Firms should review their Form ADV Part 2 brochures to ensure that they remain accurate in light of changes in their practices. In addition, advisers should review the offering documents for any investment vehicle sponsored by the adviser to ensure disclosures remain accurate.
  11. Due Diligence of Vendors and Service Providers. Firms should continue and perhaps increase their review of vendors and key service providers to ensure that they can continue to perform as needed.

Help for Those Who Need It

Earlier today we received an email from a Chief Compliance Owner and equity owner of an independent investment adviser firm. One of their employees appears to have tragically taken their life. I was deeply saddened by this news. It appears that the causes were the recent performance of the markets and client complaints. It is also possible that these events were totally unrelated. In any event, this post is to let everyone know that no matter how hard life gets, no matter how poorly the markets perform, no matter how angry clients may be, your life is precious. If you have any thoughts otherwise, I invite you to reach out to me. We are all in this thing called life together.

SEC Provides Relief for Advisers in Light of COVID-19

On Friday, March 13, 2020, the SEC issued an Order under Section 206A of the Investment Advisers Act of 1940 that is intended to provide relief for certain investment advisers who are impacted by COVID-19.

For the period between March 13, 2020 and April 30, 2020, the SEC is providing relief to registered investment advisers from the obligation to file an amendment to Form ADV or deliver its Form ADV Part 2 to existing clients if they meet certain conditions. In addition, during this same period, the SEC is providing relief to registered investment advisers to file Form PF if it meets these same conditions.

The conditions for relying on this relief require the investment adviser to establish:

  • The registered investment adviser is unable to meet a filing deadline or delivery requirement due to circumstances related to current or potential effects of COVID-19;
  • The investment adviser relying on this relief for Form ADV delays must promptly notify the SEC via email at and disclose on its public website (or if it does not have a public website, promptly notifies its clients and/or private fund investors of) the following information:
    • That it is relying on the SEC Order;
    • It must provide a brief description of the reasons why it could not file or deliver its Form ADV on a timely basis; and
    • The estimated date by which it expects to file or deliver the Form ADV Part 2.
  • The investment adviser relying on this relief for Form PF delays must promptly notify the SEC via email at stating:
    • That it is relying on the SEC Order;
    • It must provide a brief description of the reasons why it could not file its Form PF on a timely basis; and
    • The estimated date by which it expects to file the Form PF.
  • The investment adviser must file the Form ADV or Form PF, as applicable, and delivers the brochure (or summary of material changes) and brochure supplement required by Rule 204-3(b)(2) and (b)(4) under the Advisers Act, as soon as practicable, but not later than 45 days after the original due date for filing or delivery, as applicable.

Should you have any questions about whether this relief is available to your firm or whether it makes sense to rely upon this relief, do not hesitate reaching out.

SEC Focusing Efforts on Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI)

It has become abundantly clear that the Office of Compliance, Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission is focusing efforts on advisers who advertise and manage investment strategies, portfolios and funds that consider factors or matters that relate to ESG or SRI. In fact, OCIE Director Peter Driscoll said as much while he was addressing the Investment Adviser Association Compliance Conference today, on March 6, 2020.

Prior to those remarks, OCIE has issued one or more requests to investment advisers as part of examinations that are focusing on topics relevant to advisers who manage and advertise ESG and SRI strategies, portfolios, and funds. For advisers who advertise and manage these strategies, portfolios, and funds, they should be aware of where OCIE is focusing its efforts. As one can see from the request list below, OCIE is placing its focus on:

  • the scope and definition of the terms ESG and SRI for investment purposes;
  • whether the adviser adheres to the UN Principles for Responsible Investment, and if so, whether it maintains written documentation of these selection principles;
  • whether the adviser has submitted shareholder proposals for the companies that it invests in;
  • whether the adviser has proxy voting authority, and if so, examples of documentation used to form the basis for certain votes on ESG and SRI matters;
  • advertisements that discuss ESG and SRI investments; and
  • the investment performance of ESG and SRI investments.

The last one is notable in that it seems OCIE may be prepared to question whether ESG and SRI investments were consistent with an adviser’s duty of care.

Investment Losses Resulting From Robinhood’s Website and App Failures?

On March 2, 2020, Robinhood’s trading platform failed to open for trading–the single purpose for which it was created–free trading. As we have come to learn, the failure was the result of a programming error that did not account for the leap year in February.

Broker-dealers such as Robinhood Financial are governed by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA).

FINRA Rule 2010 requires that members must “observe high standards of commercial honor and just and equitable principles of trade.” In addition, FINRA Rule 5310 requires a broker-dealer to “use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions”. While these rules don’t specifically address a broker-dealer’s responsibility in the event of a failure in their trading platforms, they should be interepreted broadly to apply to Robinhood’s failures.

While Robinhood and its lawyers will argue that it did not engage in fraud and therefore should not be liable for any trading losses, that would be the wrong outcome for the general public. Broker-dealers such as Robinhood that operate digital trading platforms must be held to a higher standard when its users only expect a single service in exchange for access to their cash–an operating platform.

If you have been financially injured as a result of Robinhood’s trading platform failures, you should evaluate your available options. The agreements that you electronically entered with Robinhood contain a mandatory arbitration provision. That means the likelihood of participating in a class action are unlikely. If you believe your case involves substantial losses (in excess of $30,000), please email me at In your email, please provide information about your situation, your trades that incurred loss, the amount of your losses, and your contact information. I stand ready to provide you with a free consultation. If your case involves losses less than $30,000, there are numerous options available to you. You should also feel free to reach out to me by email, but it might not be cost-effective for me to represent you.

Law School Clinics – Investors with limited income or with small dollar claims may find it difficult or impossible to hire a lawyer. Law schools across the country have established securities arbitration clinics to provide legal representation to investors who cannot hire a lawyer to handle their claims. For a list of these clinics, please visit – I am partial to the University of Miami’s clinic as I was part of its inaugural class of students.

File Your Own Arbitration Claim – You can file your own arbitration claim through FINRA. For information on how to file a claim, please visit Information about the process is available at and There is also a simplified arbitration process for cases involving less than $50,000. You can request a hearing on the “papers” or an abbreviated telephonic hearing. More information about that process is available at  Filing fees for simplified cases range from $50 to $600 depending on the size of the claim and claimants can also request a hardship waiver.

PIABA – You can search for an attorney at to assist you. Many attorneys will accept smaller cases, but there is no guarantee. Some will occasionally take on a matter pro bono (i.e., for free).

Contact Robinhood, FINRA, and the SEC – If you are interested in taking a less confrontational path towards resolving your potential claim, you may want to try reaching out directly to Robinhood, FINRA or the SEC. You can lodge a complaint at Robinhood at The SEC’s Office of Investor Education and Advocacy maintains a website for investors to file complaints, which is available at FINRA maintains its own informal complaint website at

Registered Investment Adviser Entity Formation, Registration and Employment Transition Checklists

I have assisted numerous financial industry professionals with their transition from the wire-house channel to operating as independent investment advisers. To do so takes experience, legal know-how, preparation, and patience. While other compliance companies can offer to register an investment adviser for a very small fee, I always caution prospective clients to be wary of going that route. Below is a sample checklist that I prepared and relied on for a recent wire-house breakaway and registration with the U.S. Securities and Exchange Commission. As you will see, registration is just one small piece of the equation. With all of the legal elements of registration and operating an investment adviser, do you really want to try and cut corners and costs on what will presumably be your biggest career decision?

TaskAssigned ToDate PerformedNotes
Formation of Entity   
Name Selection   
Entity Selection   
Name Registration (state-wide and trademark)   
Entity Formation   
Obtain tax identification number   
Prepare Operating Agreement   
Designate registered agent   
Elect “S” Corporation Tax Status by filing Form 2553, if desired (within 75 days)   
Registration of Investment Adviser   
Review firm and “advisory affiliate” disqualifications, as applicable (Item 11 of Form ADV Part 1A)   
Request Entitlement through FINRA   
Determine state, federal or exempt reporting adviser registration status   
Prepare Draft Form ADV Part 1A   
Appoint Chief Compliance Officer   
Determine “Custody” Requirements (surprise examination, financial statement audit, etc.)   
Prepare Draft Brochures   
A. Form ADV Part 2A   
B. Wrap Fee Brochure   
C. Part 2B (Brochure Supplement)   
Initial Draft of Policies and Procedures   
A. Compliance Manual   
B. Code of Ethics   
C. Business Continuity Plan   
D. Privacy Notice/Policy   
E. Information Security Policy/Cybersecurity Policy   
Determine initial licensing of “investment adviser representatives”   
Determine initial state notice filings and reporting by exempt reporting advisers   
Draft initial Investment Advisory Agreement(s), Financial Planning Agreements and Solicitor (referral) Agreements   
Submit initial application of Form ADV (if registering with the SEC, begin the 45 day clock for approval)   
File initial Form-U4s, as applicable   
Establish appropriate procedures for preparation and maintenance of “books and records” under Rule 204-2   
Review any performance advertising, sales literature and marketing materials (including website content and social media sites)   
Receive Registration Approval   
Analyze and update registration as needed within 120 days if relying on Rule 203A-2(c)   
Employment Transition Issues   
Review employment agreements for potential non-compete, non-solicit and “garden leave” issues   
Analyze state law to determine whether provisions are enforceable   
Review departing and “new” RIA for potential Protocol for Broker Recruiting compliance   
Advise client on transition risks, including potential for temporary restraining orders   
Formulate transition plan with client (enforceability of confidentiality provisions in employment agreement and inability to take certain client information)   
Prepare resignation letters   
Prepare and submit Joinder Agreement to Protocol for Broker Recruiting, if required   
Submission of resignation(s)   
Client transitioning   

You should not rely on this checklist as this was a highly customized checklist that was prepared for a specific engagement. This should not be relied upon as legal advice. Not for distribution or commercial use.

Form ADV Part 1 and Determining United States Person Status

Due to the constant shrinking of the globe, we have witnessed a rise in investment advisers who render investment advice to separate account clients across borders or to foreign citizens. For example, it is now not uncommon for (i) a wealth manager to have a client who resides in the United States decide to move to a foreign country and want to keep receiving investment advice from their investment adviser located in the United States, or (ii) a foreign citizen come to the United States temporarily or permanently and seek out investment advice. While these situations raise numerous questions, the issue this post focuses on are the ramifications these scenarios create under Form ADV Part 1A.

There are two items on Form ADV Part 1A that investment advisers and their legal and compliance officers frequently struggle addressing. These two questions are both located in Item 5 of Form ADV Part 1A. Each of these questions is set forth below:

  1. Item 5.C.(2) states: “Approximately what percentage of your clients are non-United States persons?
  2. Item 5.F.(3) states: “What is the approximate amount of your total regulatory assets under management (reported in Item 5.F.(2)(c) above) attributable to clients who are non-United States persons?

As an aside, the SEC included these items in Form ADV Part 1A so that its examination staff could better understand the extent of investment advice provided to non-U.S. clients, which apparently would assist in its risk assessment process. To date we haven’t noticed any trends in this area.

To respond accurately to each of these questions, the person compiling this information must first be able to understand the definition of “United States persons”. Luckily, “words that appear in italics on Form ADV are defined in the Glossary of Terms to Form ADV.” In fact, if you are competing the Form ADV electronically, you can actually access the definition by clicking on an italicized word.

The Glossary of Terms to Form ADV defines “United States Persons” has having “the same meaning as in rule 203(m)-1 under the Advisers Act, which includes any natural person that is resident in the United States.” You are probably thinking that that is the least helpful definition in the world, and I concur. Rule 203(m)-1 defines that term as “any person that is a U.S. person as defined in Rule 902(k) of Regulation S under the Securities Act of 1933, except that any discretionary account or similar account that is held for the benefit of a United States person by a dealer or other professional fiduciary is a United States person if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.” Again, another definition using an incorporated definition.

Rule 902(k) of Regulation S defines the term “U.S. person” to mean: (i) any natural person resident in the U.S.; (ii) any partnership or corporation organized or incorporated under the laws of the U.S.; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the U.S.; (vi) any nondiscretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; and (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the U.S., and (viii) any partnership or corporation if (A) organized or incorporated under the laws of any foreign jurisdiction, and (B) formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts.

What each of these definitions establishes is that for natural persons (i.e., human beings), the definition of United States Person is a person who is resident in the United States. Unfortunately (or fortunately, depending on how you prefer ambiguity) the SEC did not define the phrase “resident in the U.S.”. Therefore, I would look to the plain meaning of that term for its meaning. Merriam-Webster defines it several ways, but the most helpful definition in my view is “the place where one actually lives as distinguished from one’s domicile or a place of temporary sojourn.” There you have it. A non-United States person for purposes of Form ADV means a person who is not living in the United States for more than a temporary period. There remains a ton of flexibility in this definition and investment advisers and compliance departments are free to set their own guidelines that work within this framework. I would be failing if I didn’t mention that firms should document this decision and seek to remain consistent from year to year.

Massachusetts Fiduciary Rule and Regulation Best Interest

Earlier today, on February 21, 2020, the Massachusetts Securities Division (“MASD”) adopted amendments to its regulations in an effort to hold broker-dealers and agents to a fiduciary standard when dealing with their customers (the “Massachusetts Rule”).

While I personally believe that the rule will ultimately be overturned based on federal preemption, in an effort to avoid that from happening, MASD drafted the regulation so that the failure to adhere to the fiduciary standard would be deemed a dishonest or unethical practice. Also in an effort to avoid preemption arguments under the National Securities Markets Improvements Act, the rule states that it does not require any making or keeping of additional records, but at a minimum, it would seem to require revisions to policies and procedures.

Regardless of my predictions and the ultimate staying power of the Massachusetts Rule, legal and compliance departments will need to start preparing for its effective date of September 1, 2020. In an effort to help easily digest the rule, below is a chart outlining the aspects of the rule in comparison to Regulation Best Interest (the “SEC Rule”).

 The Massachusetts RuleThe SEC RuleNotes
Who it applies to? Broker-dealers and agentsA broker, dealer, or a natural person who is an associated person of a broker or dealer…The scope of coverage is identical.
For what category of investors does the standard apply?The term “customer” shall include current and prospective customers, but shall not include: (a) A bank, savings and loan association, insurance company, trust company, or registered investment company; (b) A broker-dealer registered with a state securities commission (or agency or office performing like functions); (c) An investment adviser registered with the SEC under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or agency or office performing like functions); or (d) Any other institutional buyer, as defined in 950 CMR 12.205(1)(a)6. and 950 CMR 14.401.   Does not apply to a fiduciary to an employee benefit plan, its participants, or its beneficiaries, as those terms are defined in the Employee Retirement Income Security Act (ERISA)Retail customers: a natural person, or the legal representative of such natural person, who: (i) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (ii) Uses the recommendation primarily for personal, family, or household purposes.The Massachusetts Rule is arguably broader in scope than the SEC Rule. The Massachusetts Rule applies to all customers, but provides 4 specific carve outs which encompass most institutional investors.  However, the Massachusetts Rule would seem to apply to most organizations with assets of less than $5 million and 501(c)(3) charities with portfolios less than or equal to $25 million
When it applies?When providing investment advice or recommending an investment strategy, the opening of or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.   During any period in which the broker-dealer or agent: 1.  Has or exercises discretion in a customer’s account, unless the discretion relates solely to the time and/or price for the execution of the order; 2. Has a contractual fiduciary duty; or 3. Has a contractual obligation to monitor a customer’s account on a regular or periodic basis, as such regular or periodic basis is determined by agreement with the customerWhen making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer… at the time the recommendation is made 
Standard of CareFiduciary duty- To meet the fiduciary duty, each broker-dealer or agent shall adhere to duties of utmost care and loyalty to the customer.Shall act in the best interest of the retail customerThe Massachusetts Rule appears to be more amorphous and potentially more restrictive.  The SEC Rule is met if a broker-dealer or agent meets the specific component obligations (i.e., Disclosure Obligation, Care Obligation, Conflict of Interest Obligation, and the Compliance Obligation)
Duty of Care/Care Obligation(a) The duty of care requires a broker-dealer or agent to use the care, skill, prudence, and diligence that a person acting in a like capacity and familiar with such matters would use, taking into consideration all of the relevant facts and circumstances. For purposes of this paragraph, a broker-dealer or agent shall make reasonable inquiry, including: 1. The risks, costs, and conflicts of interest related to all recommendations made and investment advice given; 2. The customer’s investment objectives, risk tolerance, financial situation, and needs; and 3. Any other relevant information.The broker, dealer, or natural person who is an associated person of a broker or dealer, in making the recommendation, exercises reasonable diligence, care, and skill to: (A) Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; (C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the broker, dealer, or such natural person making the series of recommendations ahead of the interest of the retail customer. 
Duty of LoyaltyThe duty of loyalty requires a broker-dealer or agent to: 1. Disclose all material conflicts of interest; 2. Make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated; and 3. Make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.Disclosure Obligation: The broker, dealer, or natural person who is an associated person of a broker or dealer, prior to or at the time of the recommendation, provides the retail customer, in writing, full and fair disclosure of: (A) All material facts relating to the scope and terms of the relationship with the retail customer, including: (1) That the broker, dealer, or such natural person is acting as a broker, dealer, or an associated person of a broker or dealer with respect to the recommendation; (2) The material fees and costs that apply to the retail customer’s transactions, holdings, and accounts; and (3) The type and scope of services provided to the retail customer, including any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer; and (B) All material facts relating to conflicts of interest that are associated with the recommendation   Conflict of Interest Obligation: The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to: (A) Identify and at a minimum disclose, or eliminate, all conflicts of interest associated with such  recommendations; (B) Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; (C)(1) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, , and (2) Prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer….  The Massachusetts Rule imposes an obligation to avoid conflicts of interest to the extent reasonably practical, and eliminate those that cannot be reasonably avoided.  This is a more difficult standard to implement than the SEC Rule’s standard to identify and disclose or eliminate.
Duty of Loyalty and Sales ContestsIt shall be presumed to constitute a breach of the duty of loyalty for a broker-dealer or agent to recommend any investment strategy, the opening of or transferring of assets to a specific type of account, or the purchase, sale, or exchange of any security, if the recommendation is made in connection with any sales contest.The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to: … (D) Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.The Massachusetts Rule appears to prohibit additional types of sales contests.  The SEC Rule is limited is limited to security-specific or product specific contests and are tied to a limited duration.   The Massachusetts Rule extends to strategies, account types and conversions, and exchanges.