Many Registered Investment Advisors (“RIA”) have obtained loans guaranteed by the United States Small Business Administration (SBA) under the Paycheck Protection Program (“PPP”).1 Applicants for PPP loans were required to provide certain certifications to the SBA, including that “the current economic uncertainty makes [the] loan application necessary to support the applicant’s ongoing operations. »2 RIAs that have received PPP loans and made these certifications should be aware of their obligation to fully and fairly disclose to clients. In addition, Item 18 of Form ADV Part 2A requires RIAs to disclose any financial condition that could reasonably affect your ability to meet contractual commitments to customers.

The Securities Exchange Commission (“SEC”) recently issued guidance regarding the disclosure obligations of RIAs that have received PPP loans.3 As part of this guidance, the SEC clarified that “[i]f the circumstances leading [a RIA] applying for a PPP loan or other type of financial assistance constitute material facts relating to [its] advisory relationship with clients is the [SEC’s] to see that [the RIA] should disclose… the nature, amounts and effects [of the PPP loan].”4 As an example, the SEC specifically noted that if the aid was used to pay the salaries of employees to provide advisory functions, or if the RIA accepted a PPP loan because it knows of terms that could harm its ability to meet contractual commitments of customers, these material facts must be disclosed in the RIA Form ADV Part 2A.5 RIAs who have obtained PPP loans should consider whether the circumstances that gave rise to their need for the PPP loan also give rise to a disclosure requirement generally or under Item 18 of Form ADV Part 2A. RIAs should be aware of the requirement to notify clients of material changes to Form ADV Part 2, even when the changes do not necessarily trigger the submission of a Provisional Amendment.