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CARES Act Paycheck Protection Program, etc.

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April 3rd update – 

Major clarification in the new regs were issued late last night.  https://home.treasury.gov/system/files/136/PPP–IFRN%20FINAL.pdf

1099’d independent contractors are NOT includable in the calculation for maximum loan or in the forgiveness.  Independent contractors will have the ability to apply individually. For example, if you are a broker/dealer, and your reps are independent contractors, you cannot include them in your calculation.  Only W-2 employees.  See section 2 h. on page 11, and 2p on page 15. 

  1. While it seems as if the new regs are unclear on independent contractors (as there are references that you can and cannot include), any reference that 1099’s are included refers to sole proprietors and independent contractors that are individually applying (and each of those will max at $20,833).  For example, registered reps of a B/D that are I/C’s and receive 1099’s, can file individually (beginning on 4/10), but are not included in the loan calc or forgiveness for the B/D.

Further, the interest rate was changed from .5% to 1% per annum.  Term is still 2 years.

Additionally, most bank/lender systems will not be up and running immediately (although B of A is now accepting apps for existing customers, however be careful…they are including 1099’s in their computation, which is inconsistent with the latest Regs).  Keep checking their websites for availability.

There is a new loan application available!  https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf

The new regs refer to the payroll lookback period for purposes of calculating the loan amount as “the last 12 months”, but the new application form refers “average monthly payroll for 2019”.  Hopefully their will be further guidance on this, but be prepared with both periods (Jan – Dec 2019, and April 19 – Mar 20).

On page 11 of the Regs, as it relates to “anything expressly excluded from the definition of payroll costs”.  It refers to “the employee’s share of FICA…for the period 2/15/2020 – 6/30/2020, which would mean that you can include in the loan calc formula, but that portion wouldn’t be forgiven (6.2% of the per employee loan amount).  Again, this is very confusing.  For purposes of the loan calc, if you are using calendar year 2019, this wouldn’t impact the loan amount calc, but when you calc the forgiveness it would.

 

April 2nd update (specifically for Broker/Dealers) – per small firm FINRA call today, FINRA assessment payments will be deferred and broker/dealers can add back any accrued expense relating to the assessment, thru September 1st, 2020.  

Additionally, CARES Act loans taken by broker/dealers do not have to be included in Aggregate Indebtedness as part of the Firm’s FOCUS filing and related net capital computation.  

Further, as qualified expenses are paid from the loan proceeds, those expenses can be added back to net capital.  Firms must maintain a physical record of these expenses, and they must be in compliance with the requirements of the loan in order to take this preferential treatment.

Prior to any loan forgiveness, the loan liability should be included on FOCUS line 1385 (A/P, accrued expenses, and other – Non-AI).  Any add-back of qualifying expenses incurred should be reflected on line 3525 – Other (deductions) or allowable credits (List).

 

April 1st update – The Treasury Department has release some clarification on PPP!  Starting April 3rd, 2020, small businesses (independent contractors and self-employed individuals will start April 10th) will be able to start applying for loans under PPP.  However, many lenders will only accept applications thru their portals, and some of those are not yet available for use.  Check with your SBA qualified financial institution for further details, and when you will be able to apply.  Sooner is better than later!

 

As we experience unprecedented times resulting from the COVID-19 global pandemic, many small businesses are in dire need for financial assistance to meet their basic needs.  Some form of this relief is on the horizon with the recent enactment of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  Specifically, Title I of the Act will provide qualifying (less than 500 employees or as defined by the SBA) small businesses with access to loans of up to $10 million.  This $350 billion fund within the Act is know as the Payroll Protection Program (“PPP).  There is currently a lot of confusion about PPP, so I am going to attempt clarify some things…

1) As of this moment, you cannot apply for a loan under PPP; it is not up and running yet.  The expectation is it will still be “a couple of weeks” before you can apply (see April 1st update above).  The SBA will continue to put out info on the details and when you will be able to apply.   https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources.

2) This program is different than the existing SBA Economic Injury Disaster Loans (“EIDL’s”).  The big recent positive revelation about EIDL’s, is that COVID-19 has been included in the definition of a qualifying disaster.  As such, if your business is impacted by COVID-19, you can apply for an EIDL.  Here’s the good news/bad news about EIDL’s.  It is a true SBA LOAN!  If approved, you can borrow up to $2mm at 3.75% for a term of up to 30 years, and the first repayment will be deferred for 1 year.  You have to go thru the application process (2-3 week process, plus an additional 5 days to fund), provide personal guarantees for any amount over $200,000, possibly provide collateral, and while there is a deferment of repayment period, there is NO FORGIVENESS!

3) If you borrow via EIDL, you cannot also take a PPP loan (note – there is a mechanism to refinance your EIDL into a PPL).  One important thing to note about EIDL’s.  When applying (directly through the SBA website), you will be asked if you want an advance of up to $10,000, which will be distributed within 3 days.  If you are not approved for the loan, you are not required to repay the $10,000, so this is essentially a grant.  If you eventually take a PPP loan, any forgiven amount is reduced by the $10,000 you received.

Now for the PPP loan…again, as of today, this is not yet available.  However, the expectation, once it is made available, is as follows:

1) You will apply through your bank (if they are an approved lender/facilitator) or a non-bank SBA lender, not directly with the SBA.

2) The amount you can borrow is based on 2.5x your average monthly “payroll” costs measured over the 12 month period preceding the loan origination date (per April 1st update, this will be based on calendar year 2019).  Payroll costs include salaries, commissions (important for broker-dealers!), tips, health insurance, and more…but do not include FICA and federal income tax withholdings, and does not include compensation per employee in excess of $100,000 per year.

3) The loan term is 2 years, and the interest rate is .5% (yes, 1/2 of 1%).  Further, the first repayment is deferred for 6 months.

4) No collateral, no personal guarantees!

5)  This is the big one…if you are in compliance with the certain terms of the loan, all or a portion of your loan will be forgiven!  The forgivable portion is calculated as the amount you spend during an 8 week period after the loan date,  on payroll costs, rent and utilities, and certain other expenses (per April 1st update, payroll costs during the 8-week period must make up at least 75% of your qualified spend for forgiveness).  The forgivable portion will be reduced if you do not maintain the average number of full-time employees during the covered period, as you had prior to the covered period.  Additionally, if you reduce any individual employee’s comp by more than 25% measured against the most recent full quarter, there will be a reduction in forgiveness.  Interest on the loan is not forgiven (but hey, if you borrow $100,000 and you pay $4k in interest, you are still way ahead of the game).

Clearly, both EIDL and PPP are designed to assist small businesses during this difficult time, but PPP has one huge distinct advantage, there is a forgiveness component, that may ultimately convert the loan into the equivalent of a grant.

So…most importantly, be aware that there is a lot of info flying around about what types of loans are available to small businesses relating to the impact of COVID-19.  Be sure to ask a professional (tax accountant, a MAVEN, or other trusted advisor) for assistance with navigating through the info that is out there.   Don’t make any assumptions (i.e. if you borrow, it is forgivable; if anything assume it is not, until you are absolutely sure).  Again, you cannot yet apply for a PPP loan, but now is a good time to get all your ducks in a row, so that when the time comes, you have all the info you need to apply.  At a minimum, this will include 2019 and YTD 2020 payroll and employee benefits reports, and possibly income tax returns, W-2’s, etc.

These vehicles will hopefully assist us in  keeping our employees employed, and keeping us going long enough to get through this, and get us back on our feet before too long…stay safe and well, and let us know if you have any questions, and how we can help!

Wow, it’s been almost 5 years…what’s new? POO and PFO designations for one.

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It is hard to believe that it has been almost 5 years since my last post. While a lot has stayed the same, a lot has changed. One thing is for sure, the role of the FINOP is more important than ever. In an effort to ensure transparency, the regulators continue to add additional regulatory reports to our periodic filings. Depending on your minimum net capital requirements and broker/dealer business types, we are now preparing and filing some or all of the following: FOCUS, Supplemental Statement of Income (SSOI), Form Custody, Supplemental Inventory Schedule, and Supplemental Schedule for Derivatives and Other Off-Balance Sheet Items (OBS).

Additionally, we have been given some new hats to wear. Per FINRA Regulatory Notice 17-30, effective October 2018, firms are required to designate a Principal Financial Officer (PFO) and a Principal Operations Officer (POO). The PFO designation makes all the sense in the world to me. The FINOP has always been considered the “regulatory CFO”. The PFO designation has memorialized the role and its responsibilities. The PFO must hold the Series 27 FINOP license, and is required to primarily be responsible for financial filings and the related books and records.

On the other hand, the POO designation is where I think they missed the mark. It appears that the the POO is geared towards self-clearing or firms with a minimum requirement of $250,000 or more. But, it is does not exclude all of the other firms, which make up the majority of FINRA members. The POO has the primary responsibility for the day-to-day operations of the business, including many securities and customer related matters. AND, the POO is required to have the Series 27. This is where I have an issue. I’ve held my FINOP license for over 20 years, and I consider myself a regulatory accounting expert, but I do not profess to be an operations expert; I never needed to be. Putting aside the testing/license requirement, the practical experience necessary to aptly oversee operations is where the disconnect lies. We typically service the small to medium sized broker/dealers, and with that comes limited resources. Having said that, employees responsible for operations, compliance, and trading, are typically very qualified to address the needs of their respective departments. In fact, I would argue that those individuals with smaller firm experience are more qualified than those with just large firm experience, because they’ve done and seen it all. However, they shouldn’t be expected to sit for, or pass the Series 27 exam. Nor should a FINOP be expected to oversee operations. The Rule allows for the POO to designate others to handle certain day-to-day tasks, but still keeps the ultimate responsibility with the POO.

As FINOPs, we can voice our opinion, but when push comes to shove, we are at the mercy of the regulators. As such, we have taken the necessary steps to ensure that the most appropriate individuals are assigned these new roles, and in the cases where we must wear the POO hats and are somewhat in over our heads, we are working towards getting better at it. We are collaborating with those individuals that have the expertise to see that the proper structure, checks and balances, and oversight is in place.

Revision to Designation of Accountant requirements

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Back in November 2013, we talked about the Designation of Accountant requirements. Well, effective June 1, 2014 there was an amendment to SEC Rule 17a-5(f)(2). As such, all Broker/Dealers must file a NEW Designation of Accountant form. FINRA has recently announced that there is a new electronic form, which will be available on the FINRA Gateway as of November 24, 2014. As in the past, this form is due by the 10th of the December (for fiscal year end December firms). All Broker/Dealers are required to file a new form, regardless of whether or not you have changed auditors, or if your audit engagement is continuous in nature. So, be sure to remind your FINOP to mark their calendars for the period 11/24 – 12/10, as they will have 16 days to file the new form. Again, a reminder that you should make sure your audit engagement letters have language in them stating that the agreement is of a continuing nature, providing for successive engagements. This will allow you to avoid having to file a new Designation of Accountant form each year, and does not preclude the annual renegotiation of fees and terms. Of course should you decide to change auditors, you will be required to file a Replacement of Accountant under Rule 17a-5(f)(3).

Amended SEC Rule 17a-5(d) – Exemption or Compliance Report requirement effective June 2014

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In accordance with the amended SEC Rule 17a-5(d),Broker/Dealer’s are now required to file annually either a compliance report or an exemption report. If your firm did not claim an exemption from Rule 15c3-3 (carrying brokers) for part or all of the year, you are required to file a compliance report. The compliance report must include statements as to whether the firm established and maintained internal control over compliance, if such controls were effective, if the firm was in compliance with SEC Rule 15c3-1 and paragraph (e) of Rule 15c3-3 for the most recent year. If there were material weaknesses, the firm must identify each weakness, and also disclose any non-compliance with 15c3-1 and paragraph (e) of 15c3-3. If your firm did claim exemption from Rule 15c3-3 for the most recent year, you are required to file a compliance report. The exemption report requires 3 straightforward statements in response to the following: 1) What exemption did the firm claim during the most recent year, 2) Did the firm meet the exemptive provisions, and were they without exception, 3) if there were any exceptions, what were they. While this amendment is new and has no precedent or real guidance, the requirements are clear (especially for those firms required to prepare and file an exemption report). Of course, auditors of Broker/Dealers are required, under PCAOB Attestation Standard No. 2 to review the compliance and exemption reports prepared by a Broker/Dealer (see http://pcaobus.org/Standards/Attestation/Pages/AT2.aspx).

As Busy Season Comes to an End…

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Unlike most accountants, busy season for FINOP’s and Broker/Dealer accountants does not coincide with tax season. Rather, it relates to the regulatory requirement to submit annual audited financial statements within 60 days of the Firm’s fiscal year end. As such, January and February are our busy seasons, where we are closing the month of December, the 4th quarter, and the year as a whole. Audit requests start as early as October of the previous year, but most of the heavy lifting comes in January and February.
It used to be different. The auditors did it all. They prepared their own schedules, wrote the reports, wrote the footnotes, completed the checklists, edited it all, and handed you a nice tidy package. Heck, they even used to send the reports out to the regulators. Like a lot of things, times have changed.
In 2002, by way of Congress, the PCAOB (Public Company Accounting Oversight Board) was created, as part of the Sarbanes-Oxley Act (thank you Enron, thank you Bernie Madoff…). For the first time ever, auditors of U.S. public companies (oh, and Broker/Dealers) were to be subject to independent external oversight. Mind you, prior to that, the auditing world was self-regulated.
Well 10+ years after the establishment of the PCAOB, the screws have been tightened on B/D audits. After 2012 audits, the PCAOB did a sample review of B/D audits and found that all of them lacked the required independence and did not meet many of the standards set forth. As such, auditing firms were read the riot act, and told they better shape up, or their audits were going to be rendered worthless.
Fast forward to today. Here we are dealing with the fallout, which goes something like this:
The auditors need to charge more money because they have to do more work to ensure they are in PCAOB compliance BUT, they can’t prepare supporting schedules, they can’t prepare the audit report, they can’t prepare the footnotes, they can’t prepare the disclosure checklists, they can’t edit the report, they can’t bind the report, and of course they can’t send out the report. So, the B/D’s of which the majority don’t have internal resources to handle this have to rely on their limited resources and their outsourced resources to do all of this work…which their auditors, who have the expertise, used to do. Oh, and that’s going to cost more money. The auditors are in CYA mode…and the management rep letter that used to be 1 page is now 7!
So now, you have a B/D that contends with more and more regulation each year, smaller and smaller margins/fees, more demanding reps and employees, and they have to pay their auditors and consultants more money to get a document that typically verifies what they already know…that their books and records are just fine.
There are plenty of reasons I believe that a lot of this makes no sense, and that small B/D’s should probably not be subject to PCAOB standards (or at least not full blown standards). Auditors are required to express an opinion on the financial statements they audit, but then they are required to turn over that opinion to the B/D, who will include it with their financials and submit it to the regulators. How does the auditor know that their opinion letter is going on the financials they audited if they aren’t allowed to bind the financials? Auditors can’t write footnotes, but they are the GAAP experts. This is what they do best.
If you take a step back, the independent audit is just an over-regulated process that can cost a B/D, particularly a small B/D a lot of time, money, and heartache. The SEC and FINRA are regulating the industry and they regularly audit B/D’s. Why not just have them finish the job, and provide an opinion on the financial statements? If that is not where this is all headed, than I have another prediction – the independent accounting firms are eventually going to have to be paid out of a PCAOB fund. It’s never really made sense to me how a B/D can pay for an independent audit and expect to really get an independent audit. Where does the accounting firm’s interests lie? In getting paid! If you have a disgruntled B/D, they are going to lay into their service provider – the auditors, and the auditors then have the choice of pissing off their client or strictly complying with regulation.
At the end of the day, and at the end of a very grueling busy season, we have a flawed system. A system, that ultimately is supposed to be designed to protect the investor…to protect the clients of the B/D. There’s got to be a better way!

FINRA Banking Changes

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As a reminder, in February 2014, FINRA will switch its banking services to a new bank. As part of this transition, FINRA will simplify the methods firms use to make payments to them. FINRA will consolidate all check payment addresses, with the exception of GASB payments, into a single payment address. This change will allow for a more efficient check payment and deposit process. Second, to ensure your firm’s payments are applied to the correct invoice in a timely manner, firms must include invoice numbers on all check remittances, and include it as the reference number on ACH and wire payments. Note: If a firm submits a payment without an invoice number, FINRA will apply the funds to the firm’s FINRA Flex-Funding account, which is accessible via E-Bill. Someone at your firm must then transfer the funds to the appropriate invoice in order for the invoice to be closed. Starting in February,you must use the following information to make payments to FINRA. Mailing Address To mail a check to FINRA, include the invoice number on the check and mail the payment to: All payments (except GASB payments) Bank of America Lockbox Services FINRA 418911 MA5-527-02-07 2 Morrissey Blvd.