Does an Investment Adviser Representative Have to Disclose PPP Loan Forgiveness as a Compromise on Form U4?

April 17, 2020

As investment adviser firms start to receive loan proceeds through the Paycheck Protection Program (“PPP”), which is a loan program that originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, many investment adviser firms have asked whether the forgivable nature of the PPP loan will constitute a compromise with a creditor for purposes of Item 14K of the Form U4 of an investment adviser representative who is a control person.

In response to these inquiries, FINRA updated its Form U4 and U5 Interpretive Questions and Answers with respect to Item 14K. FINRA clarified what constitutes a “compromise” with a creditor:

A compromise with one or more creditors generally involves an agreement between a borrower and a creditor in which a creditor agrees to accept less than the full amount owed in full satisfaction of an outstanding debt, unless such an agreement is included in the original terms of the loan (e.g., forgivable loan or forgivable promissory note)….  (Originally posted 03/23/12; revised 04/13/20)

See https://www.finra.org/sites/default/files/Interpretive-Guidance-final-03.05.15.pdf (emphasis added).

Based upon this new interpretation, it appears that FINRA would consider forgiveness of a PPP loan pursuant to the original loan terms as not constituting a “compromise” with a creditor for purposes of the Form U4.

Although FINRA’s new interpretation with respect to loan forgiveness is not controlling for investment adviser representative licensing purposes, it’s persuasive especially in the absence of guidance from the applicable state securities regulator.  In order to eliminate any regulatory ambiguity, an investment adviser representative, who is a control person of an investment adviser firm which receives a PPP loan, should contact his or her primary state securities regulator to confirm the state is following FINRA’s interpretation.

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Posted by Bryan Hill
Labels: Compromise with Creditor, COVID-19, Form U4, IAR Licensing, Investment Adviser Representative