Will the SEC disparage companies for failing to disclose PPP loans?
While several prominent RIAs have come under public criticism after revealing that they took out loans from the government’s Paycheck Protection Program (PPP), it is unclear how many companies have used the coronavirus relief program without disclosing this fact to customers.
The question of how the Securities and Exchange Commission (SEC) will react to forgivable loan non-disclosure also remains open.
In its April 27 guidelines on whether advisers are required to disclose that they have received a P3 loan, the commission left the door open to interpretation.
“If the circumstances that prompted you to apply for a PPP loan or other type of financial assistance are material facts about your advisory relationship with clients, staff believe that your business should provide information on, for example, the nature, amounts and effects of such assistance, ”the SEC said in the FAQ.
Amy Lynch, president of consultancy firm FrontLine Compliance and former SEC examiner, said the guidelines are “not very clear,” but that she tells her RIA clients that, essentially, it depends on the facts and the facts. circumstances behind why a business got the loan to start with.
The nuances such as whether the company used the funds to pay marketing or administrative staff versus investing staff are probably less important, especially if the companies did indeed need the cash injection for overcome them (or quite clearly did not).
Lynch said the SEC will likely take its time before providing further clarification on the issue of PPP loan disclosures or before taking enforcement action.
“The set of mechanisms around PPP loans are still evolving,” she said. “Until the process for handling these loans is clear, I think the SEC will wait because they don’t want to act too soon.”
Ultimately, Lynch said the enforcement of non-disclosures, or incomplete or misleading disclosures, will be treated as “broken windows” by the SEC.
“It depends on the size of the business and the nature of the loan, but if it is a small RIA that received $ 200,000 through a P3 and did not receive it. not disclosed, it will be a little slap on the wrist-type fine. ‘
Lynch said she doubts the SEC has “a real appetite” to pursue non-disclosures, as the chances are unlikely that a company will receive a PPP loan large enough to be “really significant” to its creditworthiness. business. “A company that is in serious danger of bankruptcy has probably not yet obtained enough PPP money to prevent this from happening,” she added.
Trace Schmeltz, a partner at Chicago law firm Barnes & Thornburg, said the world was much different when the program was first launched.
“PPP was so weird. It was rushed to the market and hundreds of millions of dollars were available, ”Schmeltz said. “The immediate question was, ‘Am I a jerk for not standing in line for this money? “
However, he said there were a number of concerns companies should have considered from the start.
“For a lot of our clients, we felt like the certification on this – what you would have to say to get the money – maybe was too steep for some people,” he said. “We wanted to dissuade people from doing it, if it ended up behaving more like a grant than a loan.”
Schmeltz said many advisers probably didn’t realize what the loan might look like after the SEC released his advice.
“People said, ‘Oh, I have testified that the current economic uncertainty made it necessary to apply for a loan to support my ongoing operations, and that could suggest material weakness,” Schmeltz said. “That’s a lot of. dots to connect to a time when no one knew what was going to happen. “
Judging from the SEC guidelines, Schmeltz said the regulator generally seems to “strongly suggest a requirement to tell people how close the bus is about to run over you.” He predicted that the SEC will eventually do an industry-wide sweep for anyone who took out a P3 loan and see how they handled it individually.
“Our advice is to put that in place and prepare this story on why you took it and why things weren’t as bad as you thought or maybe worse than you thought,” did he declare.
Schmeltz said it was possible for the SEC to make referrals to the Treasury in cases where the regulator finds there was “incorrect certification” of a loan requirement by an RIA that was not really having problems. He said businesses that were in “dire straits” and needed the P3 loan to do payroll probably should have already made financial disclosures to their customers.
However, Schmeltz said the regulator would likely find a “big messy milieu” of companies that were doing more or less well but had defensible concerns about the possible impacts of a prolonged disruption due to the pandemic.
“It is a burning mess, but each case will come down to independent facts and circumstances,” he said. “If you think you are falling into this muddy environment, take the time now to document your reasoning as to why you applied and what changed in the environment that changed the way you think. Don’t wait the six months or so before the SEC knocks on your door.