North Carolina Provides Guidance to an Investment Adviser About a PPP Loan

May 13, 2020

The following is informal (non-binding) guidance recently provided by the North Carolina Securities Division to a particular state-registered investment adviser firm regarding the disclosure of a Paycheck Protection Program (“PPP”) loan as it relates to the investment adviser firm’s financial condition.

Investment advisers at all times are required to disclose a financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients. [18 NCAC 06A.1801 (a)(17(A)]

For this reason, the [North Carolina Securities] Division requires disclosure to clients of financial events such bankruptcy, outstanding judgments or tax liens.

Accepting a PPP loan may indicate the adviser is not able to meet contractual commitments to his clients. But it may not. The adviser may take the PPP loan for its primary intent: To keep the adviser’s employees employed.

The [North Carolina Securities] Division does not typically look at one event (accepting a PPP loan, unpaid taxes, outstanding judgment) and automatically assume the adviser is unable to meet contractual commitments to clients. We would look at the adviser’s entire financial picture and the reasons for the financial situation (often a divorce or a dispute with a business partner. Or a pandemic).  

The [North Carolina Securities] Division does not require advisers to disclose to clients their loan obligations. Instead, advisers disclose loan obligations on their financial statements due to the Division (typically received on or before 3/31 each year). The [North Carolina Securities] Division also reviews financial statements during all routine books and records examinations.

To the extent that your investment adviser firm is registered with North Carolina and has received a PPP loan, your investment adviser firm should confirm in writing with the North Carolina Securities Division whether this informal guidance is in effect and/or applicable to your investment adviser firm.  If your investment adviser firm is state-registered in another state, your investment adviser firm should contact its state securities regulator for guidance on whether the PPP loan should be disclosed; it is our understanding that unlike North Carolina, some state securities regulators consider the receipt of a PPP loan in itself as a disclosure event for an investment adviser firm.  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.

Under these circumstances, RIA Compliance Consultants believes that it would be prudent for an investment adviser firm receiving a PPP loan to 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.

Posted by Bryan Hill
Labels: Financial Statements, North Carolina Investment Adviser