Disclosing your PPP Loan on Form ADV

Many advisers have applied for and received loans under the Paycheck Protection Program (“PPP”) offered by the federal government to help businesses retain employees and stay afloat during the Covid-19 crisis. Many investment advisers who have received a PPP loan are now wondering if they are required to disclose the loan to their clients.

In this article we will review the requirements for disclosure of an adviser’s financial condition on Form ADV.  We will also take note of the confusing (and sometimes changing) rules of the Small Business Administration (SBA) to determine if and how those rules may impact advisers who disclose their PPP loans.


The Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) was passed by Congress with bipartisan support and signed into law by President Trump on March 27th, 2020. Among other things, the CARES Act established the PPP, which is designed to provide small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.  A firm receiving a PPP loan may have the loan forgiven if the loan was used to meet certain enumerated expenses, including payroll and utilities.

Form ADV disclosure

Form ADV Part 2A Item 18 requires the following:

If you have discretionary authority or custody of client funds or securities, or you require or solicit prepayment of more than $1,200 in fees per client, six months or more in advance, disclose any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.

Many advisers have wondered if the simple act of receiving a PPP loan is sufficient to trigger disclosure under this Item. To address this, the Division of Investment Management provided the following FAQ on April 27, 2020:

Q.  I am a small advisory firm that meets the requirements of the Paycheck Protection Program (PPP) established by the U.S. Small Business Administration in connection with COVID-19. If I receive or have received a PPP loan, what are my regulatory reporting obligations under the Investment Advisers Act of 1940 to my firm’s clients?

A.  As a fiduciary under federal law, you must make full and fair disclosure to your clients of all material facts relating to the advisory relationship. If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance. If, for instance, you require such assistance to pay the salaries of your employees who are primarily responsible for performing advisory functions for your clients, it is the staff’s view that you would need to disclose this fact. In addition, if your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you may be required to disclose this financial condition in response to Item 18 (Financial Information) of Part 2A of Form ADV (brochure), or as part of Part 2A, Appendix 1 of Form ADV (wrap fee program brochure). Posted April 27, 2020

As the FAQ response makes clear, determining whether disclosure of a PPP loan is required depends on each adviser’s facts and circumstances.

If an investment adviser has taken out a PPP loan, Part 2A disclosure would only be required if, without the receipt of the loan, the firm would truly be in a position where it was in danger of being unable to meet its obligations to its clients. For example, if a firm could not continue to manage client accounts without the loan, disclosure would be required.

If a firm is taking a loan to maintain its current staffing levels, pay the rent, keep employees on, etc., then disclosures would not be required.

What if disclosure is not required?

NRS suggests that advisers who do take out a loan write a memo for their files, stating that they are aware of that disclosure obligation but are not participating in the PPP program because of the need for funds to continue operations or to meet client obligations but rather due to the uncertainty of the current economic situation, to pay rent and utilities, and/or to maintain quality employees through this crisis.

That said, many persons have opined that advisers disclose that they have received PPP loans even if they were not needed. NRS thinks that this is overstating the case, and that while the SEC would be unlikely to object to such disclosure, advisers should be aware of the impact of such disclosure on the PPP loan itself.

A firm needs to meet several requirements before obtaining a PPP loan and subsequent forgiveness of the loan. Unfortunately, the US Small Business Administration (“SBA”) has faced loud and frequent criticism for a lack of clarity about these requirements.  As one adviser told ThinkAdvisor:

“We start with one version of guidance, which is then changed in subsequent rules, and then changed in an application, which is changed by another set of rules. It’s very tough to comply when the rules change continuously, usually on Friday night.”i

This confusion about the scope of PPP requirements may make advisers look long and hard at the wisdom of disclosing a PPP loan if the disclosure is not required by the SEC. For example, assume an adviser received a PPP loan and used it only to pay the salaries of administrative staff, and that the ability of the adviser to meet its duties to its clients was never in doubt. The adviser drafts a disclosure stating, “We qualified for and received a PPP loan for the following purposes, and are disclosing it even though we are not required to do so by the SEC.”  The adviser files this new disclosure on an updated ADV Part 2A and, in doing so, swears under penalty of perjury that the disclosure is true.

Now assume that an SBA interpretation on which the adviser has relied for its loan is re-interpreted. The adviser may now have made a sworn statement on its ADV that it has acted in a manner inconsistent with the new interpretation.

NRS recommends that any disclosure of a PPP loan that goes beyond the specific language of Part 2A Item 18 be reviewed with a CPA or another professional with knowledge of the most current SBA requirements for PPP loans.

SEC interest in PPP loans

Recent headlines about publicly-traded firms with significant cash reserves that applied for and received PPP loans have prompted the SEC to look into these firms. This has prompted headlines such as “SEC Launches PPP Investigations”.  While the Commission’s immediate interest is focused on those public companies, and there has been no announcement of a “PPP sweep” of advisers, it should come as no surprise to investment advisers if an SEC examiner asks whether the firm has received a PPP loan.

Talk to an NRS Consultant today for guidance on disclosing PPP loans on Form ADV.

i https://www.thinkadvisor.com/2020/05/26/advisors-confused-as-sba-issues-ppp-loan-forgiveness-rule/