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 for violating industry rules or securities laws in making Paycheck Protection Program loans.
“I would imagine they would take the risk of losing the ‘forgiveness’ of the loan,” says Robert Willens, an independent tax and accounting expert.
“Having a regulatory investigation or violation may 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 investigating last month whether registered agents – independent financial advisors who trade securities through a broker-dealer or broker, but do not work for those companies – are breaking Finra rules if they do involved in doing outside business or disregarding federal securities laws when they took out the loans. PPP money can be tempting to brokers with small business appearances like a coffee shop or advisory 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-sponsored credit – $ 523 billion in April through 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 sideline business shouldn’t panic automatically, said Ronak Patel, co-chair of Securities Litigation & Enforcement at Winstead in Austin, Texas. “It cannot be taken for granted that failure to disclose your donut shop, for example, will automatically cancel lending.” Those with fully disclosed outside activity have little to worry about as brokers Finra typically do not report their investment scams. For others, “it is a simple regulatory investigation for regulators and 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”.
According to the Financial Services Institute, side business with independent financial advisers is common, especially in remote or rural areas. But 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 checks 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 activities might actually be legitimate, like owning rental properties. Or they could be an investment scam. He called PPP loans “a shining 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 does not report his outside business could be viewed as “grossly negligent” or “grossly negligent” US Government Fraud. “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 loan recipient violates industry regulations or securities laws. The SBA did not respond to repeated requests for comment.
With both the government and lenders effectively allowing borrowers to swear in good faith on their applications that they needed the money, the PPP lending program was fraught with fraud, according to industry watchers.
The SBA initially released detailed data for borrowers who have drawn up to $ 150,000. Last December, a federal judge ordered the identity of all borrowers to be disclosed. Gordy said that “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 of loan recipients against details from 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 tackle 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. “