With most tax returns now across the filing deadline, some investors and their wealth advisors are confronting potential scrutiny of the free money they received during the pandemic.
More than
Unsurprisingly for quick cash requiring little documentation and honor-system assertions, fraud was rampant. The Internal Revenue Service and Justice Department, along with the watchdog of the brokerage industry and the Securities and Exchange Commission, are taking notice.
As of March 23, the IRS had brought
Wealth advisors don't always know what certain small business clients are up to. If a customer falls under audit for a PPP loan, "you walk them through how to correct it," said Clark Kendall, the president and CEO of Kendall Capital in Rockville, Maryland. "And you make sure you document it."
Meanwhile,
The government made PPP loans of up to $10 million available at 1% interest to firms with fewer than 500 employees, a restriction later relaxed for the hotel and restaurant industries. Businesses had to use the loans for up to 10 weeks of payroll costs, capped at $100,000 per worker per year, and keep wages close to pre-crisis levels during the two to six months after receiving the loan.
Loan recipients could also use the money to pay business mortgage interest payments, rent, utilities, paid medical leave, insurance costs, and state and local taxes. Companies could have their loans forgiven if they used at least 60% toward payroll expenses.
FINRA, which oversees brokers and tracks independent advisors, said in January 2021 that it was looking at advisors who took the loans to
Asked to comment on its scrutiny, FINRA spokesman William Bagley said Monday, "We can't provide any information about ongoing reviews."
'Abusing'
The
Most of the dollars went to small or tiny financial planning and wealth management firms, such as
But some big industry players with boldfaced names in wealth management also got money.
Some wealth advisors still view the loans as a sign of financial weakness, either actual or perceived.
"We just decided that it wasn't worth it for us," said Perry Green, the chief financial officer and senior wealth strategist at Waddell & Associates in Memphis. "There was too much opportunity for reputational risk."
But it may have been worth it.
"I haven't heard anyone that got that PPP money regretting it or losing clients because of it," said Zachary Milam, a vice president at Mercer Capital, a valuation and consulting firm for financial advisors based in Memphis.
Processed by banks, with JPMorgan in the lead, but mostly by financial technology companies, the loans were for payroll costs and regular business expenses, such as mortgage interest on a business's property. They weren't expressly aimed at helping independent advisors deal with the sharp market downturn that materialized as the pandemic unfolded.
Still, said Max Schatzow, a co-founder and partner at RIA Lawyers in Ewing, New Jersey, "No one knew where the heck the economy was going, where markets were going, where revenues were going."
He argued that advisors who earn fees on assets under management that plummeted when the S&P 500 fell 34% over February-August 2020 were justified in taking PPP loans because they would have had to "downsize or discontinue their growth plans."
The Journal of Banking & Finance study said that some investment firms said they would retain a number of jobs greater than the payroll figures disclosed on their Form ADV. Investment firms took "liberties" to "exaggerate payroll needs" that "may have facilitated misconduct in the PPP loan procurement process," the study said.
The SEC, which oversees registered investment advisors, warned independent advisors in April 2020 that as fiduciaries, they're
It cited payment of salaries to employees performing advisory functions and any questions over a firm's ability to meet its contractual commitments to clients as items the firm would need to disclose to regulators on their registration form with the Wall Street regulator.
