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Monday, May 25, 2020

PPP Loan Disclosures, Form CRS, and COVID-Driven filing extensions

By Cory Roberson, Principal of FIN Compliance, Lancer, Ventures
By David McNeal, Contributor of My Compliance Blog 




May 25, 2020. While the world reels from the effects of Covid-19, U.S. leaders are left in a precarious position to restart the American economy while seeking to stem the tide of infections.
As with many of its global counterparts, the U.S. federal government signed an economic stimulus driven Payroll Protection Program ("PPP") into law on March 19, 2020, as part of the broad sweeping Coronavirus Aid Relief and Economic Security Act ("CARES Act").
The rapid implementation for the PPP plan was geared to help American businesses retain workers on its payroll as the economic effects of the COVID-19 crisis becomes more pronounced in terms of the ballooning unemployment rate.  
As of May 21, 2020, 38 million americans1 filed unemployment claims (official rate 14.7%) since the start of business shutdowns began in March 2020.
On May 15, 2020, the U.S. House of Representatives passed a $3 trillion coronavirus aid package to apply temporary financial relief to all types of businesses, including investment advisors and broker-dealers.
How are Investment Advisors, Funds, and Brokers affected?
Given the fluidity of these matters, we wanted to shed a little light on the ongoing requirements for firms dealing with the fallout of COVID-related business interruptions.  
Over the last two months, we observed that a portion of investment advisors in our network pursued loans for their own practices and/or provided guidance to its client base in similar situations.  
Moreover, many advisors and broker dealers who are receiving the loans, may not understand the implications for using the stimulus in the near term.  In some cases, firms who receive PPP loans may require additional reporting to federal and/or state regulators.
Are there compliance reporting requirements related to PPP loans?
While firms with stronger balance sheets may plan to use the loans as a capital buffer, others are using the funds as a means to meet its contractual obligations to clients.
Under normal circumstances, a regulator would require a disclosure if there are financial conditions that could affect the firms' ability to service its customers, and as such, would trigger its requirements for reporting.
But these are not normal times as we observed that some firms applied for loans in anticipation of what (may) happen in its financial circumstances.  This presents a bit of a regulatory grey area if firms received a PPP loan even when it did not have any clear financial hardships that would prevent it from servicing its clients.
The types of small business eligible for loans is broad sweeping.  For some, PPP Loans presented a low interest opportunity to boost capital reserves in anticipation of a possible reduction in client revenue.  
We are in a regulatory gray area--What should we do about disclosures?
Each firm should carefully consider whether it meets the threshold for disclosing the receipt of PPP loans on its records.  We error on the side of firms making disclosures, but you should consider the following guidance from the SEC2 staff on the matter that says:
(1) If the circumstances that lead you to apply for a PPP loan or other financial aid constitute relevant material facts to the firm's relationship with clients, it is required that your company report, for example, the extent, amounts, and consequences of such assistance, and/or
(2) If, for instance, you need such assistance to pay the wages of your employees who are primarily responsible for offering advice to your clients, it is the staff's opinion that you will need to report that fact.
Some ideas on where to disclose PPP loans/financial conditions*
ADV Part 2A
Item 2 – material changes (w/ a notice to customers)
Item 18 – Financial Information
Part 2A - Wrap Brochure (appendix 1)
*Disclaimer: The following is not necessarily a complete list of areas to disclose a PPP loan and/or its financial implications to a firm’s clients. We encourage you to speak with your: (1) Regulator, (2) Legal Counsel, and/or (3) consultant on suggestions.
Are regulators helping firms to get back on track?
There is a light at the end of the tunnel for firms scrambling to find normalcy once shelter in place regulations continue easing throughout the country.
Federal, and many state regulators, enacted a grace period for its general records and financial reporting requirements.  
The following are some of the latest developments in terms of Covid-related grace periods and/or extensions.
ADV & Form PF Filing Deadlines
On March 25, 2020, the SEC released an order for the extension of filing and firm delivery obligations for Registered Investment Advisors and exempt reporting firms. 
This includes the following conditions for:
Firms filing an update to Form ADV Parts 1 and 2 or filing reports on Form ADV Part 1A,
Firms delivering an update to Form ADV brochures, brochure supplements, and a summary of material changes to existing clients, and/or
Private fund advisers filing a Form PF.
In each case, the filing or delivery obligations will need to be satisfied in no later than 45 days after the date the filings were required initially.
State-Registrants: Please check with your state securities regulator on any possible filing extensions.
Regulation Best Interest & SEC Form CRS deadline is 6/30/2020
For now, the SEC continues the same deadline for firms to file the Client Relationship Summary (Form CRS), a filing requirement of Regulation Best Interest (BI) for investment advisors and brokers.
As a fiduciary registered under the SEC, advisors and broker-dealers must file a Form CRS with the Commission and deliver it to each client (“retail investor”).  
Is Form CRS required for state-registrants?
Currently, most states have not adopted Form CRS filing requirements, but we will be monitoring for changes to this exception on an ongoing basis. 
As of now, Oklahoma firms are required to file a Form CRS onto their existing ADV Part 2 brochure. https://www.securities.ok.gov/Firms-profs/InvestmentAdviser/Form-CRS/
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About FIN Compliance 

FIN Compliance  (FinCompliance.iois a consortium of compliance, consulting, and business management solutions designed to help boutique investment firms to structure, maintain, and develop their internal regulatory review programs.  

Our product line consists of:  RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management system, B-D Review, a Hybrid-management system (est. in 2020)*, and FIN Lancer, a Business/Task Management system. 

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FIN Ventures focuses on business strategy consulting for impact-based projects (FINVentures.io).  

FIN Missions (FINmissions.com) provides business/vision support group sessions for other entrepreneurs and youth mentoring.  In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.

Contact:  Cory Roberson - Cory@RIAconsults.com 

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