The CARES Act has been passed and contains several provisions that may provide relief to broker-dealers seeking assistance during these trying times. Firms should also consider how assistance should be reported to FINRA on the FOCUS filing.
Below is a summary of some of the key lending programs of interest to small and medium-size broker-dealer firms in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and how Small Business Administration (“SBA”) and other loans under the CARES Act should be treated per Financial Industry Regulatory Authority (“FINRA”).
Funding Options for Small and Medium-Size Businesses
PPP: Paycheck Protection Program
This lending program allows for some loan forgiveness. PPP provides for assistance with paying payroll and related expenses, as well as qualified expenses such as mortgage interest, interest on debt taken prior to February 15, 2020, rent and utilities. The SBA will guarantee loans through December 31, 2020. The following are some highlights on this program:
- To be eligible, a Borrower must have fewer than the greater of (i) 500 employees or (2) the applicable SBA limit based on their NAICS code, when taking into consideration itself and all its affiliates. The borrower must have been in operation on February 15, 2020.
- Loans will be made by banks and commercial lenders authorized to make SBA loans, and the application period ends June 30, 2020. The SBA released an updated application on its website SBA.gov on April 2, 2020.
- The amount of the loan is limited to the lesser of (i) $10M or (ii) the borrower’s average total monthly “payroll costs” (payroll costs generally include employee salaries and tips, retirement benefits, severance payments, state and local taxes on employee compensation, but does not include compensation paid to employees and independent contractors in excess of $100,000/year, and amounts paid to persons who reside outside the US.) for the 1-year period ending on the date the loan is made multiplied by 2.5, plus any refinanced loan under the EIDL program (See below for detail) obtained after June 31, 2020.
- The loan proceeds may be used for payroll costs (as defined), employee benefits and commissions, interest payments on mortgages, rent, utilities, and interest on debt incurred before February 15, 2020.
- No lender fees will be charged to the borrower, but rather will be paid to the lender from the SBA based on a percentage of the total loan amount.
- Loan terms per the borrower sheet published by the SBA:
- No collateral required
- Maximum interest rate of 1.0%
- Maximum term of 2 years
- No interest or principal payments are required for a period between 6 months and 1 year (though interest will accrue from the day the loan is made)
- Prepayment penalties are prohibited
- Borrower may apply for loan forgiveness in an amount equal to the cumulative amount of payroll costs, rent, utilities, and interest paid on mortgages during the 8 weeks after the loan is made. The amount forgiven is limited to the extent compensation and headcount are reduced relative to a base period, and any amount forgiven will not be taxable to the borrower (as it otherwise would have been). Can include payroll, mortgage interest, rent and utilities but a minimum of 75% must have been used for payroll costs.
- If these loans are taken, a Company cannot take advantage of payroll tax forgiveness provisions in the CARES Act (see below).
Other Assistance to Note
Economic Injury Disaster Loan (“EIDL”) Program. This program currently streamlines the loan application process and allows for emergency loans of up to $2M to assist companies affected by COVID-19. The bill waives the requirement for personal guarantees on loans under $200K, it would waive the requirement that the borrower not be able to obtain credit elsewhere, and provide emergency grants of up to $10K within 3 days of the borrower filing an application, though the amount of the grant would reduce any loan forgiveness under the PPP (see above).
Employer payroll tax holiday. Employers and self-employed individuals can defer payment of the employer’s share (6.2%) of the Social Security payroll tax, but the deferred amount must be repaid in equal installments by December 31, 2021 and December 31, 2022. This benefit is not available if any debt is forgiven under the PPP (see above).
FOCUS Reporting Guidance from FINRA
FINRA has updated their Frequently Asked Questions with the details of net capital relief provided for firms that borrow under the CARES Act. The loans provided are to be net capital neutral and do not add to aggregate indebtedness (“AI”). Additionally, expenses related to the loans can be added back to net capital.
- Members may add back to net capital the Forgivable Expense Amount to the extent the firm has recorded expenses for the costs making up that amount. The add back may not exceed the liability recorded on the balance sheet.
- Members may exclude the covered loan (as defined in section 1106(a)(1) of the CARES Act) from AI for the 8 week period following issuance of the loan. Subsequent to that period, a firm may exclude from AI the amount of the loan that thy are permitted to add back to net capital, as noted above.
- Members should report covered loans liability on either line 1380 or 1385 on the FOCUS Report.
- Members should report expenses paid with the SBA loan on line 3525 (other allowable credits) on the FOCUS Report.
The Withum Financial Services Team is available to answer your questions as you consider your options.
Click here to access the details from the FINRA site.
Author: Lauren Grossi, CPA | firstname.lastname@example.org