January 24, 2021

Volume XI, Number 24


January 22, 2021

Subscribe to Latest Legal News and Analysis

Some Financial Businesses May Be Ineligible for the SBA's Paycheck Protection Program

At least some financial markets and funds businesses are likely precluded from applying for the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as a result of an Interim Final Rule (IFR) published by the US Small Business Administration (SBA) on April 2.1 Impacted businesses include banks, investment companies, passive real estate investment companies and speculative trading firms. This advisory will explore:

  • How the SBA carved back the eligibility of certain businesses on the eve of the PPP's start date
  • The potential implications of applying if found to be ineligible

As noted in a prior Katten Financial Markets and Funds advisory, the PPP was one of several measures enacted by Congress under the CARES Act to provide small businesses with support to cover payroll and certain other expenses over the next three months due to the economic effects of the COVID-19 pandemic.

Prior to the issuance of the IFR, it was generally believed that the CARES Act expressly provided for new increased eligibility requirements for businesses that were not previously eligible for SBA section 7(a) loans, including financial markets and funds businesses. Limitations on certain industries were already in effect for other SBA section 7(a) loan programs, but the imposition of those limitations on PPP eligibility were not affirmatively picked up in the CARES Act.

On the eve of the first day SBA lenders were to begin accepting PPP applications, the SBA through its IFR, carved back the types of eligible businesses by specifically incorporating an existing SBA regulation and guidance document that lists the types of business that are ineligible from applying for Section 7(a) SBA loans. Specifically, the IFR provides that "Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA's Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2…."2

Some of the ineligible financial markets and funds businesses listed in the SBA's Standard Operating Procedure 50 10 (SOP) include, without limitation:

  • Banks;
  • Life insurance companies (but not independent agents);
  • Finance companies;
  • Investment companies;
  • Certain passive businesses owned by developers and landlords, which do not actively use or occupy the assets acquired or improved with the loan proceeds, and/or which are primarily engaged in owning or purchasing real estate and leasing it for any purpose; and
  • Speculative businesses that primarily "purchas[e] and hold[ ] an item until the market price increases" or "engag[e] in a risky business for the chance of an unusually large profit."

Since the SOP does not define many of the listed entities and activities, there is some uncertainty regarding whether other types of financial markets businesses are ineligible from applying for the PPP. However, the stakes are high for financial markets businesses that apply and are deemed ineligible under existing SBA regulations and guidance. This is because knowingly submitting a false statement in the PPP application is a criminal offense. The SBA's template PPP loan application includes certifications that the applicant, among other things: (1) "is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the SBA implementing the PPP…;" and (2) is not "knowingly making a false statement to obtain a guaranteed loan from SBA…."3

See US Small Business Administration, Interim Final Rule: Business Loan Program Temporary Changes; Paycheck Protection Program, __ Fed. Reg.___, available at https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf.

See Interim Final Rule at 8, citing 13 C.F.R. 120.110 and US Small Business Administration Standard Operating Procedure 50 10 Subpart B, Chapter 2.

3 The SBA PPP Borrower Application Form provides that a knowingly false statement to obtain a guaranteed loan from SBA "is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000." U.S. Small Business Administration Paycheck Protection Program Borrower Application Form, OMB Control No.: 3245-0407 (Exp. Sept. 30, 2020), available at https://www.ccsb.com/wp-content/uploads/2020/04/COVID-19-Paycheck-Protection-Program-Application-Updated-4-2-20.pdf.

The application form includes a number of other certifications and acknowledgements as well.


©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 99



About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...

Mark Goldstein, Katten Law Firm, New York, Financial Law Attorney
Special Counsel

Mark Goldstein focuses his practice on advising investment advisers, mutual funds and private investment funds. Mark has more than 25 years of experience advising clients on compliance and regulatory requirements, corporate matters, and the federal securities laws. He has extensive experience advising on the formation, distribution, structuring and on-going operational aspects of a wide array of investment products, including mutual funds, private investment funds, offshore funds, funds offered to separate accounts of insurance companies as funding vehicles for variable...

Christina J. Grigorian, Banking legal Specialist, Katten Muchin Law firm
Special Counsel

Christina J. Grigorian counsels clients in all matters related to banks, bank holding companies, and state and foreign-licensed consumer and commercial lenders. Ms. Grigorian provides advice to the firm’s financial institution clients concerning structural and operational issues, including legislative developments impacting such operations, and has worked with companies and individuals in the establishment of de novo entities, including national banks, federal savings banks and state-chartered institutions, as well as state-licensed lenders. She has also counseled clients with respect to...

Carl E. Kennedy Financial Services Lawyer Katten Muchin Rosenman Law Firm

Carl Kennedy is a partner in Katten's Financial Services practice. He applies his extensive prior financial services and government experience to assisting financial institutions, clearing firms, asset managers, clearinghouses, exchanges, hedge funds and proprietary trading firms with a full range of regulatory, compliance, transactional and enforcement-related issues in the commodities and derivatives markets.

Carl's prior professional experience includes working as senior in-house legal counsel at a large investment bank and futures commission merchant, providing legal advice and...

Lance A. Zinman, Attorney, Financial Services, Katten Muchin Law Firm

Lance Zinman serves as global co-chair of Katten's Financial Services practice and sits on the firm's Board of Directors and Executive Committee. Lance is a Registered Foreign Lawyer and a non-practicing partner in Katten Muchin Rosenman UK LLP. He represents hedge funds and commodity pools in all asset classes, private equity funds, investment advisers, commodity trading advisors and other asset managers. He also advises a broad cross section of proprietary trading firms—large and small—including many of the major firms in the industry. Lance’s multidimensional...