FINRA announced yesterday that it will not require the disclosure of loans forgiven under the Paycheck Protection Program (“PPP”) in response to Form U4 Question 14K, as long as the forgiveness is consistent with the loan’s original terms.

FINRA requires registered persons to affirmatively disclose on their U-4 a “compromise” of a debt to a creditor. Form U-4, Question 14K.  In late March 2020, the federal government enacted the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) making available $349 Billion in U.S. Small Business Administration (“SBA”) loans to help small businesses suffering from the pestilence. One of the available loans is the PPP loan, which was designed to incentivize small businesses to refrain from laying off their employees. Effectively, subject to specific conditions, SBA will be forgiving PPP loans if the business uses the funds to pay for payroll, rent, mortgage interest, or utility expenses and all of its employees remain on its payroll for eight weeks.  The circumstances surrounding the PPP loans has sparked concern in the securities industry on whether a forgiven PPP loan, or part thereof, obtained by a registered person or entity that they control must be reported as a “compromise with a creditor” in response to Question 14K of FINRA’s Form U4.

FINRA has now issued written guidance that if a registered person or entity they control obtains a loan pursuant to the PPP, which is later forgiven, these forgiven loans will not require affirmative disclosures in response to Form U4 Question 14K, provided that the loan is forgiven consistent with its original terms. In interpreting Form U4 Question 14K, FINRA noted that “a compromise with one or more creditors ‘generally involves an agreement between a borrower and a creditor in which a creditor agrees to accept less than the full amount owed in full satisfaction of an outstanding debt, unless such an agreement is included in the original terms of the loan.’” See Form U4 and U5 Interpretative Questions and Answers at p. 11.  The PPP loan by design contemplates forgiveness of some or all of the loan as part of its original terms, rather than involving a new agreement or “compromise” by the creditor. Therefore, FINRA has concluded that it is not a required disclosure so long as the loan is forgiven consistent with its original terms.  However, it is important to determine whether there is any forgiveness beyond the original terms of the loan because, as FINRA advised, that would be considered a “compromise with creditors” warranting a reportable event.

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