Finra Scrutinizes Brokers Who Took PPP Loans for Potential Violations
The Financial Industry Regulatory Authority is examining certain registered representatives who took aid program funds, including forgivable Paycheck Protection Program (PPP) loans for coronavirus relief.
Finra spokesman Andrew DeSouza confirmed the letter, which he said had been sent to individual brokers and was not part of an industry sweep or targeted exam. He declined to comment on how many brokers were under review.
“FINRA is proactively looking at registered representatives that obtained loans through undisclosed outside business activities,” DeSouza said in a prepared statement. “It is core to FINRA’s mission to detect, deter and investigate potential fraud.”
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Finra’s review seeks information on 13 areas, including why the broker applied for a loan, how the funds were received and used, and all compensation received since Oct. 1, 2019. The letter also asks for descriptions of any outside business activity in which the broker has participated since 2015 and whether that activity was disclosed to the rep’s brokerage.
The regulator notes that the examination “should not be construed as an indication” that Finra staff has determined any violations have occurred.
Finra appears to be focused primarily on the outside business activity violation, according to Max Schatzow, a lawyer with New Jersey-based law firm Stark & Stark whose broker-dealer client has a rep who received a letter. The regulator in recent years has been cracking down on undisclosed outside activities in effort to supervise potential conflicts with customers.
“They seem to be looking for instances where registered representatives received loans in connection with outside business activities, which could include an unaffiliated registered investment adviser,” Schatzow told AdvisorHub. “They also might be looking for instances where a registered representative failed to disclose an outside business activity and then requested a PPP loan.”
The broker has until February 3 to supply the information Finra has requested. The date of the letter as well as the recipient’s name and affiliation were redacted from the copy reviewed by AdvisorHub.
Over 1,400 companies that classified themselves as investment advisors received more than $150,000 each in the first round of PPP loans, according to a disclosure in July from the Small Business Administration.
Finra said previously that loans did not have to be disclosed on U-4 forms as a sign of a financial event because forgiveness was baked into the concept by Congress.
The Securities and Exchange Commission was stricter, telling registered investment advisors they had to disclose the loans in filings “if the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients.”
The loans prompted debate in the industry about whether it was appropriate for larger advisory firms to take the loans given the market’s swift recovery or whether they would be difficult to explain to customers.
