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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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Smaller securities broker-dealers are likely eligible for forgivable loans under the Paycheck Protection Program (PPP), part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP authorizes Small Business Administration (SBA) approved lenders to provide loans to certain eligible businesses on borrower-friendly terms, including low interest rates and loan forgiveness, without federal tax consequences, if certain payroll levels are met at the conclusion of the second quarter of 2020. Amid investor uncertainty and market turmoil, these loans may be particularly attractive to broker-dealers seeking capital liquidity to maintain sales force and consistent operations during the height of the COVID-19 pandemic. But broker-dealers eyeing the PPP were unclear how these loans—which are legislatively-designed to effectively turn into government grants—would be treated under existing “net capital” rules and calculations. To that end, the Financial Industry Regulatory Authority (FINRA) has published guidance for broker-dealers addressing key issues regarding how broker-dealers can account for PPP loans under existing net capital requirements and obtain favorable treatment.

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Loan Term Basics. The PPP loan rules are set forth in Section 1102 of the CARES Act, amending Section 636(a) of the Small Business Act, and permit SBA lenders to offer loans to small businesses in an amount up to 2.5 times a borrower’s “payroll costs” (as defined), with a $10 million maximum. Small businesses—with some exceptions—are defined as companies with 500 or fewer full and part-time employees. Under recent guidance issued by the SBA in coordination with the Department of Treasury, loan terms include:

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At least 75% of the loan proceeds must be used for payroll costs and the remainder may be used to pay obligations in existence before February 15, 2020, including interest on the borrower’s mortgage obligations, rent, utilities, and interest on other debt obligations.

Loan Forgiveness. PPP loans may be forgiven in an amount equal to a borrower’s actual payments for payroll, interest on covered mortgages, covered rent, and covered utilities as calculated over an 8-week period after the loan is obtained. This amount may be reduced if a borrower reduced workforce or reduced employees’ compensation as compared to a defined lookback period in 2019. The forgiveness amount must be comprised of at least 75% payroll costs.

500 Employee Maximum Across Affiliated Entities. Applicants to the PPP will have to consider the SBA’s existing affiliation rules. Under SBA regulations, the employees of an affiliate are counted as employees of the applicant for purposes of determining compliance with the 500-employee cap on the small business loan program. These affiliate rules deem an applicant’s affiliates to include:

Careful consideration of a potential borrower’s ownership and management, to determine eligibility under the PPP as a “small business,” is necessary before planning for any PPP loan.

Anticipating that many member firms will obtain PPP loans, FINRA has updated its <a href="https://www.finra.org/rules-guidance/key-topics/covid-19/faq">Frequently Asked Questions</a> to provide a detailed explanation of net capital relief for members borrowing under the PPP. Of welcome relief to broker-dealers, FINRA guidance dictates that PPP loans are to be net capital neutral and do not add to aggregate indebtedness. Additionally, certain expenses related to the loans can be added back to net capital.

To obtain this treatment, member firms may:

Members must reasonably calculate the forgiveness amount based on the provisions of CARES Act, and the PPP, and retain documentation and records supporting the calculation. The computation must include any estimated reductions in the forgiveness amount tied to a decrease in workforce and/or employee compensation. Members must maintain documentation of the costs and payments that actually comprise the loan forgiveness amount.

Member firms are instructed to report PPP loan liability and the net capital add-back amount on their quarterly FOCUS Reports.

FINRA has also provided guidance and relief concerning member firms’ annual assessment payments. Small firms are advised to follow GAAP and determine whether to accrue a liability for their 2020 annual assessment. If a liability is accrued for an unpaid annual assessment, small firms may add back the amount of that liability to their net worth for purposes of computing net capital and exclude the liability from their aggregate indebtedness in computing their minimum net capital requirement. This relief is only permitted until September 1, 2020.

Riccardo M. DeBari 212.908.3975 <a href="mailto:Riccardo.DeBari@ThompsonHine.com">Riccardo.DeBari@ThompsonHine.com</a>

Brian Lanciault 212.908.3945 <a href="mailto:Brian.Lanciault@ThompsonHine.com">Brian.Lanciault@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/FINRA_Provides_Critical_Guidance_on_Net_Capital_Treatment_of_Loans_Obtained_by_Broker-Dealers.pdf

FINRA Provides Critical Guidance on Net Capital Treatment of Loans Obtained by Broker Dealers through the PPP of the CARES Act

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