April 13, 2021

Volume XI, Number 103

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April 13, 2021

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April 12, 2021

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FINRA Issues Guidance on Net Capital Treatment of PPP Loans under the CARES Act

In its online forum regarding COVID-19/Coronavirus, FINRA has issued guidance related to PPP loans.  Our prior alert regarding loans to individuals can be found here. FINRA also provides guidance to firms on the net capital treatment of loans received from the Paycheck Protection Program (PPP) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  PPP loans are eligible for debt forgiveness in an amount equal to specific costs incurred, and payments made, during the eight-week period following the origination date of the loan.  The covered loan amount may include costs associated with, but not limited to, payroll, interest on mortgage obligations, rent and certain utility payments (“the Forgiveable Expense Amount”).

FINRA specifies that a member firm that has included  a loan issued under the PPP on it balance sheet may add back to net capital the Forgiveable Expense Amount, to the extent the firm has recorded the expenses for the costs and payments making up that Forgiveable Expense Amount.  FINRA further states that the amount added back to net capital may not exceed the liability for the covered loan that the firm reasonably expects to be forgiven under the PPP.  FINRA emphasizes that the additional amount reflected in net capital may not, under any circumstances, increase net capital by an amount more than the balance sheet liability for the loan.  The firm must create and retain detailed documentation to support any “add-back” to net capital, and any “add-back” must be reported on the firm’s FOCUS Report (Item 3525). 

In providing further guidance for FOCUS Reports, FINRA also states that a “member firm that has included a covered loan as a liability on its balance sheet may exclude such covered loan from aggregate indebtedness during the 8-week period after the origination of such covered loan.  After the end of the covered period, such firm may exclude from aggregate indebtedness the amount of its liability for such covered loan that the firm is permitted to add back to net capital”.  These amounts may be included in either FOCUS Report Part II in Item 1380 (Other – Accounts payable and accrued liabilities and expenses”) or in Item 1385 (Accounts payable, accrued liabilities, expenses and other) in its FOCUS Report Part IIA.

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©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume X, Number 108
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Pete S. Michaels MIntz Member Securities Litigation White Collar Defense & Government Investigations Arbitration, Mediation,
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Pete focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents multinational and regional financial services firms, including banks, broker-dealers, investment advisers, mutual fund firms, and insurance companies as well as their employees, directors, and officers.

Pete’s extensive experience with securities disputes includes class actions, state and federal court cases, arbitration, and related employment matters. He also represents clients before a wide range of federal, state and...

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David L. Ward Member Securities Litigation White Collar Defense & Government Investigations Complex Commercial Litigation Arbitration, Mediation, ADR
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David Ward focuses his practice on financial services regulatory matters, internal investigations and related litigation. He represents financial services clients throughout the United States, including broker-dealers, investment advisors, banks, pension consultants, insurance companies and publicly traded entities before the SEC, FINRA, CFTC, U.S. Department of Justice and state regulators. David regularly assists clients in internal investigations; the defense of regulatory investigations, sales practice issues, corporate governance matters and securities-related litigation in state and...

617-348-4860
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