SEC Reportedly Inquiring Into Small Business Association Loan Disclosures

Alerts / May 15, 2020

The Securities and Exchange Commission’s (“SEC” or “Commission”) Division of Enforcement is reportedly conducting inquiries into public companies that received funds from loans under the Small Business Association’s (“SBA”) Paycheck Protection Program (“PPP”).[1] While the SEC has yet to publicly comment on the matter, this is yet another sign that the Commission is active in investigating statements and actions related to the global coronavirus pandemic that fall within its enforcement jurisdiction.[2]

The PPP, established with the passage of the CARES Act,[3] is a loan program that is meant to provide direct incentive for small businesses to keep their workers on payroll during the global coronavirus pandemic.[4] The program provides that the SBA will forgive loans if employees are kept on payroll for eight weeks, and the money is used for, among other things, payroll, rent, and utilities.[5]

The SEC previously guided companies to disclose the receipt of government aid,[6] and it is now reportedly issuing “voluntary” information requests to registrants who disclosed the receipt of PPP funds regarding their qualifications to receive a PPP loan, such as the impact of COVID-19 on the business.[7] The inquiry is reportedly titled, In the Matter of Certain Paycheck Protection Program Loan Recipients, and appears to be a “sweep” inquiry conducted by the Commission’s Enforcement Division in its Washington, D.C., headquarters.[8] On May 13, the SBA released PPP loan frequently asked questions (“FAQs”) that address, among other things, how the SBA will review borrowers’ required good faith certification concerning the necessity of their loan request.[9] Another likely line of inquiry will be to examine disclosures made by issuers in their PPP applications and compare them with public disclosures concerning their businesses and the effect of COVID-19 on operations. Overly optimistic public disclosures that do not mirror less-optimistic disclosures made in a non-public loan application are almost certain to attract scrutiny. The SBA, in consultation with the U.S. Department of Treasury, set forth a safe harbor that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”[10] It is unknown whether the SEC will apply or honor any type of similar safe harbor in its inquiries.

While the SEC’s focus currently appears to be on public companies, some investment advisory firms could also be impacted. On April 27, 2020, the SEC’s Division of Investment Management (the “Division”) issued guidance regarding an investment adviser’s reporting obligations when it receives or has received a PPP loan.[11] The Division notes that because investment advisers are fiduciaries under federal law, they are obligated to disclose material facts related to its advisory relationship, which may, in turn, require the adviser to disclose that it applied for a PPP loan.[12] The Division provides that disclosure depends on whether the circumstances leading the adviser to seek a PPP loan constitute material facts related to its relationship with its clients. For example, the adviser should provide disclosure of the “nature, amounts and effects of such assistance” where it is used to pay the salaries of employees who are “primarily responsible for performing advisory functions” for the firm’s clients.[13]

The SEC’s guidance and Director and Commissioners statements do not have legal force or effect; rather, these are meant to highlight certain important disclosure considerations for registrants and advisers who have received PPP assistance to inform investors and clients regarding their financial condition. As these disclosures now come under targeted scrutiny as part of the review of qualification for PPP loans, it remains to be seen how the SEC’s statement that accompanied the disclosure guidance – that it will not take action against “good faith attempts to make appropriately framed forward-looking information,” but will remain “laser-focused on identifying bad actors who would seek to use the current uncertainty to prey on our investors” – will play out.[14] Issuers who receive these inquiries from the SEC Enforcement Division, are well advised to seek qualified counsel to assist in navigating these uncharted waters.

Authorship Credit: Jonathan R. Barr, John J. Carney, Jimmy Fokas, Teresa Goody Guillén, Lauren Resnick, Janet A. Spreen, Michelle N. Tanney

[1] Melanie Waddell, “SEC Launches PPP Loan Sweep of Public Companies,” ThinkAdvisor (May 14, 2020), available at
[2] See, e.g., Teresa Goody Guillen, Jimmy Fokas, Michelle Tanney, The SEC and Shareholders Signal Aggressive Litigation for Alleged COVID-19-Related Fraud (May 4, 2020), available at
[3] Pub. L. 116-136.
[4] Small Bus. Admin., Paycheck Protection Program Loan Information, available at
[5] Id.
[6] See, e.g., Teresa Goody Guillén, Charlotte W. Pasiadis, Janet A. Spreen, SEC’s Chairman Clayton and Director Hinman Issue Statement on Disclosure During COVID-19 (Apr. 10, 2020), available at
[7] See supra, n.1.
[8] See supra, n.1.
[9] Small Bus. Admin., Paycheck Protection Program Loan Frequently Asked Questions, No. 46 (May 13, 2020), available at
[10] Id.
[11] U.S. Sec. & Exch. Comm’n, Division of Investment Management Coronavirus (COVID-19) Response FAQs, Question II.4. (Apr. 27, 2020), available at
[12] Id.
[13] Id.
[14] See, supra n.6.

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