On April 27, 2020, the Securities and Exchange Commission’s Division of Investment Management (the “SEC”) issued updated guidance concerning the following topics in response to COVID-19:
- Disclosure requirements for investment advisers applying for loans through the U.S Small Business Administration’s Paycheck Protection Program (“PPP”);
- Requirements for sponsors and participating advisers of Wrap Fee Programs requesting relief for delivery of their Form ADV Part 2A Appendix 1 (“Wrap Fee Brochure”) under the SEC’s March 25, 2020 Order; and
- The failure of pooled investment vehicles to deliver audited financial statements to clients by the deadlines required under Rule 206(4)-2(b)(4) (the “Custody Rule”) of the Investment Advisers Act (the “Advisers Act”) due to unforeseen circumstances.
COVID-19 Relief Relating to PPP Loan Eligibility
In response to questions about disclosure requirements for investment advisers that seek a PPP loan, the SEC highlighted that if the facts and circumstances causing an adviser to seek a PPP loan are material in nature, the firm should update the disclosures in their Brochure (i.e. Item 18: Financial Information) and, if applicable, Form ADV Part 2A Appendix 1 (“Wrap Fee Brochure”) (i.e. Item 9: Additional Information) (“Brochure(s)”).
The updates should outline “the nature, amount, and the effects of such assistance.”
For example, if the adviser is intending to use the PPP loan to supplement the salaries of its investment professionals, this would constitute a material fact because an investment professional’s inability to receive his or her salary could impair their ability to perform their fiduciary duty for clients.
Likewise, if an investment adviser applied for the loan due to financial or operational issues that would otherwise prevent it from meeting its advisory responsibilities, this would also constitute a material fact, which should be disclosed in the adviser’s Brochure(s).
Read the updated guidance here.
Wrap Fee Brochure Delivery
On March 25, 2020, the SEC issued an order granting relief to investment advisers who were unable to file their Form ADV and deliver their Brochure(s) due to COVID-19. In response to questions about relief sought by sponsors and participating firms in wrap fee programs, the SEC clarified that in addition to the requirements set forth in the order, if the sponsor of the wrap fee program is relying on the order, it should indicate that the participating adviser is also relying on the order through their website and/or client notifications.
Likewise, the participating adviser should ensure that website postings and notifications regarding reliance on the order are also provided. Furthermore, the sponsor can notify the SEC about the participating adviser’s reliance on the order on the participating adviser’s behalf so long as it lists each participating adviser relying on the order in its email and website posting, or client notifications; however, if the participating adviser is relying on the order in relation to clients for whom the sponsor is not contractually obligated to deliver the Brochures, the participating adviser is still required to notify the SEC separately.
Read the updated guidance here.
What Does this Updated Guidance Mean for Me?
Investment advisers’ senior management and their Chief Compliance Officers (“CCOs”) should take the opportunity to review the updated guidance especially if they are seeking to apply for a PPP, relying on the SEC’s order for Form ADV relief, or, in the case of a pooled investment vehicle, unable to deliver their audited financial statements to investors by the required deadlines. Firms should consider the following with respect to each item listed above:
- For PPP loans, CCOs and senior management should document all of the facts and circumstances surrounding the decision to apply for the loan. If any of the facts and circumstances surrounding the application for the loan are due to issues of financial solvency, operations, and/or issues that could impact the ability of financial professionals to deliver advisory services to clients, then the amount, purpose, and effects of the loans should be disclosed in the Firm’s Brochures;
- Sponsors and participating advisers of wrap fee programs should coordinate their reliance on the SEC’s order and ensure that the public notices and delivery schedules for both parties remain consistent; and
- Pooled investment vehicles should document the reasons why they will be unable to deliver their audited financial statements by the required 120, 180, or 260-day deadlines and coordinate with their accounting firms on when they can reasonably expect their financial statements to be completed and ready for delivery.
Should you or your firm have questions regarding the SEC’s updated guidance or how to properly document reliance on the SEC’s order and guidance, please contact us at (619) 278-0020 to schedule a consultation. Our compliance experts are standing by to help during this difficult time.