Colorado Provides Investment Advisers with Guidance on Disclosing PPP Loans

May 18, 2020

The Division of Securities within the Colorado Department of Regulatory Agencies recently provided guidance to state-registered investment adviser firms who received Paycheck Protection Program (“PPP”) loans.  Click here to review this guidance.

In response to the inquiry of whether a state-registered investment adviser firm is required to disclose on the Form ADV the receipt of a PPP loan, the Colorado Division of Securities provided the following explanation:

Pursuant to the terms of the PPP loan program, anyone receiving funds must certify that the loan is necessary to support the ongoing operations of the loan applicant. If you are certifying that you are experiencing conditions that are reasonably likely to impair your ability to meet contractual commitments to clients, it is the Division’s view that you would need to make a disclosure.

See https://content.govdelivery.com/accounts/CODORA/bulletins/28aa736 (emphasis added).

The explanation by the Colorado Division of Securities leads to the question of whether an investment adviser firm’s certification in the PPP loan application that “the loan is necessary to support the ongoing operations of the loan applicant” is the equivalent of an investment adviser “experiencing conditions that are reasonably likely to impair your ability to meet contractual commitments to clients” under Item 18.B for the Form ADV Part 2A.

An investment adviser firm receiving a PPP loan or facing financial challenges should consult with its accountant for an opinion on the investment adviser firm’s financial condition and whether the investment adviser firm has the ability to meet contractual commitments to its investment advisory clients.  Such financial analysis should be carefully documented so an investment adviser firm can objectively substantiate the basis for its decision whether to make a disclosure to clients about the investment adviser firm’s financial condition.

To the extent that a state-registered investment adviser firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to clients and thus required to make a disclosure, the Colorado Division of Securities noted that the investment adviser firm must disclose the PPP loan under Item 2 and Item 18 of the Form ADV Part 2A until the PPP loan has been repaid/forgiven and the underlying impaired financial condition has been resolved.

In addition to the disclosure in the Form ADV Part 2A, the Colorado Division of Securities stated that a state-registered investment adviser firm must report the PPP loan as a liability on its balance sheet while also meeting all applicable net worth requirements.

Similar to the guidance from FINRA, the Colorado Division of Securities explained that the PPP loan forgiveness does not need to be disclosed as a compromise with a creditor on an investment adviser representative’s Form U4.  Click here to read a previous blog on this topic.

If your investment adviser firm is registered in another state, your investment adviser firm should contact its state securities regulator for guidance on whether the PPP loan should be disclosed.  Click here for our blog article discussing informal, non-binding guidance from North Carolina Securities Division about disclosure of a PPP loan.  If your investment adviser firm is registered with the U.S. Securities and Exchange Commission (“SEC”), please click here to review our recent blog about the SEC’s guidance on the disclosure of a PPP loan.

RIA Compliance Consultants has prepared sample disclosure language for Item 2 and Item 18 of the Form ADV Part 2A regarding an investment adviser firm’s receipt of a PPP loan.  The sample disclosure language is available (via your online subscription account) on a complimentary basis to our current Annual Compliance Program clients in the Bronze, Silver, Gold and Platinum packages, and it can also be purchased separately on a la cart basis by clicking here.

If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance updating its Form ADV Part 2A with a PPP loan disclosure, we encourage you to speak with your compliance consultant, or if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with one of our Senior Compliance Consultants.

Posted by Bryan Hill
Labels: Colorado Investment Advisor, COVID-19, Financial Statements, Form ADV, Form U4