Some financial advisors may have to repay their futile pandemic loans.
This is the uncomfortable prospect for brokers currently under scrutiny by Wall Street Self-Regulator to determine if they violated industry rules or securities laws when they received Paycheck Protection Program loans.
« Having a regulatory investigation or violation could jeopardize your ability to seek forgiveness on this loan, » said Matthew Schwartz, a securities dispute attorney for Kass Shuler in Tampa, Florida.
Robert Willens, an independent tax and accounting expert in New York, added, « I would imagine they would take the risk of losing the loan forgiveness. »
The self-regulatory regulator for the financial industry began looking into whether registered agents – independent financial advisors who trade securities through a broker-dealer or broker, but don’t work for those companies – are breaking Finra’s rules when it comes to it went out in business or disregarded federal securities laws when they took out the loans. PPP money can be tempting to brokers with side appearances in small businesses such as a coffee shop or consulting firm that the pandemic may have put at risk. The question is whether brokers have communicated the so-called external business activities to Finra if necessary.
The spate of forgivable government-backed credit – $ 523 billion from April to August and an additional $ 284 billion in new funding from December last year – was the government’s goal to keep small businesses alive in the COVID economy receive. According to the Small Business Administration, more than 1,400 financial advisory firms took out PPP loans totaling more than $ 150,000 each in the first round.
Since last October, borrowers who have used the majority of their PPP cash to pay employees have been able to apply to the federal government for forgiveness. Loans that have not been canceled must earn interest at one percent over a period of two or five years, depending on whether they were granted before or after June 5, 2020.
The loans from banks and other private lenders are issued by the SBA when a borrower can demonstrate that at least 60% of the money was used to pay employees and the remainder was used for eligible business expenses. Borrowers are required to provide business receipts, canceled checks, bank records, documents showing the number of full-time employees, evidence of renting or leasing businesses and payments to utilities, Internal Revenue Service wage tax forms, and quarterly wage forms as evidence.
Brokers who have received PPP money for undisclosed ancillary business shouldn’t panic automatically, said Ronak Patel, co-chair of Securities Litigation & amp; Enforcement at Winstead in Austin, Texas. « It doesn’t go without saying that not making your donut shop public will automatically cancel lending. » Those with fully disclosed external activity have little to worry about as brokers Finra typically do not report their investment scams. For others, « it is a simple government investigation for regulators and for companies to double-check the (SBA) list to see if their outside agents are disclosing, » said Emily Gordy, McGuireWoods securities attorney and former surrogate enforcement in Finra. She likened the process to “shooting fish in a barrel”.
Ancillary businesses are widespread among independent financial advisors, particularly in remote or rural areas, according to the Financial Services Institute. However, they are not always allowed. Unknown or illegal appearances ranged from freelance bookkeeping services and immigrant visa factories to industrial warehouses for growing medical marijuana and running Ponzi programs, according to Finra’s disciplinary procedures.
Even before the pandemic, Finra was investigating the unreported external business activities of brokers. The investment firm with which a broker is affiliated usually files the required disclosure, Form U4, with Finra.
Finra examines whether brokers have violated the legal requirements for disclosing business activities outside the company or have violated federal securities laws when taking out PPP loans.
Well, Schwartz said, brokers who have taken out or are planning PPP loans « by definition » indicate that they have a business that needs cash – and so invite « Finra » to see if that business is a sideline is was revealed.
Edward Wegener, former senior vice president and regional director of the Midwest with a focus on regulatory risk management and compliance at Finra, said that a broker’s unreported activity might actually be legitimate, like owning rental properties. Or they could be an investment scam. He called PPP loans « a brilliant bait » for unscrupulous brokers. According to Finra, there are 624,674 registered agents.
However, Dean Zerbe, a Houston tax attorney who is the National Managing Director of Alliantgroup and a former tax advisor to the Senate Finance Committee, argued that a broker who fails to report his outside business could be classified as « grossly negligent » in fraud in the US Government. « The reason he said, » You are not properly engaged in activities that you have not disclosed. «
The latest SBA guidelines on lending make no mention of what happens if a borrower violates industry regulations or securities laws. The SBA did not respond to repeated requests for comment.
Since both the government and lenders were effectively allowing borrowers to swear in good faith on their applications that they needed the money, the PPP lending program was fraudulent, according to industry watchers.
The SBA initially released detailed data for borrowers who took up to $ 150,000. Last December, a federal judge ordered the identity of all borrowers to be disclosed. Gordy said, « I’m sure there are people out there who have looked for PPP loans for their OBA (outside of business) and they might be surprised » once Finra checks the SBA details on loan recipients with details of brokers.
A Finra spokesman declined to elaborate, simply saying, « FINRA is proactively reviewing registered agents who have obtained loans through undisclosed external business activities. »
With the Treasury and Justice Department increasing scrutiny of PPP loan fraud, brokers who took out the loans to combat unknown sideline jobs should « sprint to speak to your lawyers and return the money, » Zerbe said. « I wouldn’t wait for a call from Finra. I would just handle everything and clean myself up. »