PPP loans; Package Costs Program Brochure Deliv; Guard rule
On April 27, 2020, Securities and Exchange Commission (“SEC”) staff updated their Division of Investment Management (COVID-19) Coronavirus (COVID-19) Response FAQ and Staff asked questions on the Conservation Rule FAQ to address the following topics in light of the COVID-19 pandemic:
1. Paycheck Protection Program (“PPP”) Loan Disclosure: Whether an advisor needs to disclose receipt of a PPP loan in their Form ADV Part 2A (“Brochure”). In discussing this issue below, we also discuss recent guidance from the Small Business Administration (the “SBA”) on a new interim final rule.
2. Late delivery of brochures for packaging fee programs: How an advisor participating in a packaging fee program can rely on the SEC order allowing the temporary late delivery of brochures.
3. Delay in the distribution of audited financial statements and retention rule: Will the SEC recommend the application in case of violation of the retention rule if the audited financial statements are not distributed on time due to some unforeseen circumstances.
PPP Loans – Brochure Disclosure
(FAQ II.4, available here)
The guidelines state that investment advisers who receive a PPP loan (or other type of financial assistance) must disclose this arrangement if the circumstances that led the company to apply for the loan constitute “material facts about your relationship. advice with clients ”. For example, staff believe that an advisor should provide information if they need financial assistance to pay the salaries of employees primarily engaged in advising clients. In addition, staff believe that an advisor may be required to disclose his or her financial situation in response to section 18 of the brochure (Financial Information) or as part of Annex 1 of the brochure (brochure on the packaging costs program) if it experiences conditions that could affect its ability to meet its contractual commitments to its customers. Such disclosure would include the nature, amounts and effects of the financial assistance and arises from the fiduciary duty of an investment advisor to fully and fairly disclose to clients all material facts relating to the advisory relationship.
PPP loans – Eligibility criteria
(Provisional final rule, available here)
On April 13, 2020, the SBA issued additional guidance on an interim final rule regarding eligibility for PPP loans (effective April 24, 2020). The guidance clearly states (in question 2.a.) that hedge funds and private equity firms are do not eligible to receive a PPP loan because these entities are “primarily engaged in investment or speculation”. However, the guidelines (under question 2.b.) also provide that a holding company of a private equity fund may be eligible for a PPP loan in the same way as any other company, including the applicable rules. in matters of affiliation.
Late delivery of the brochure for packaging cost programs
(FAQ II.5, available here)
A Participating Advisor who has contracted with a Packaging Fee Program Sponsor to deliver the brochure to affected customers may rely on the SEC Order (the “Order”) (available here) which allows the delivery of the brochure to be delayed in the event that the program sponsor cannot deliver the brochure on time due to the circumstances surrounding the COVID-19 pandemic. To take advantage of this temporary exemption, the participating advisor must comply with the conditions of the Order. The guidelines noted the following considerations regarding wrap programs:
The advisor must disclose on their public website (or if they do not have a public website, notify clients) that they are relying on the College. For clients who interact primarily or exclusively with the Participating Advisor through the Wrap Program Sponsor, SEC staff believe that the Sponsor should also consider posting a notice on their public website that the Participating Advisor is based on the Order.
The advisor should notify SEC staff by email that they are relying on the College. Staff believe that the Program Sponsor could provide such notice on behalf of the Participating Advisor if, in their email, the Program Sponsor identifies each participating Advisor who relies on the College and declares that they have the power to submit the email. mail on behalf of these advisers. If the Participating Advisor relies on the Order with respect to clients for which the Program Sponsor is not contractually bound to deliver the Brochure, the Participating Advisor will have to separately satisfy the above notice requirements.
Delay in the distribution of consolidated audited statements and the custody rule
(FAQ VI.9, available here)
SEC staff will not recommend execution against an investment adviser to a common investment vehicle when the adviser relies on the “audit provision” of the hold rule and reasonably believes that the audited financial statements of the pool would be distributed within 120 days, 180 – days (funds of funds or pool investing in funds of funds) or times of 260 days (leading mutual investment vehicle investing in one or more funds of funds), but did not distribute them on time under some unforeseeable circumstances.