CFTC provides relief to futures commission merchants and introducing brokers receiving PPP loans

By Rodney F. Tonkovic, J.D.

In a further response to the COVID-19 (coronavirus) pandemic, the CFTC's Division of Swap Dealer and Intermediary Oversight issued a no-action letter on the treatment of covered loans under the CARES Act. Subject to certain conditions, the DSIO will not recommend enforcement action against any futures commission merchants and introducing brokers that receive a covered loan under the Paycheck Protection Program and, in computing its net capital, adds back to its capital certain expenses that are forgivable. The letter also grants targeted no-action relief regarding adding-back accrued FINRA annual assessment fees.

PPP covered loans. The letter is in response to a joint request from the Futures Industry Association and the National Introducing Brokers Association on behalf of member firms that are registered as futures commission merchants (FCMs) or introducing brokers (IBs), respectively. The request asked the DSIO to address the net capital treatment of loans obtained by FCMs and IBs under the Paycheck Protection Program (PPP) pursuant to the CARES Act. Recipients of covered loans are eligible for forgiveness of indebtedness on that loan in an amount equal to the sum of enumerated costs and payments (the "Forgivable Expense Amount") for eight weeks following the loan's origination.

At issue is the treatment of covered loans under Commission regulation 1.17. The DSIO will not recommend enforcement action against any FCM or IB that receives a PPP covered loan and, in computing its net capital under Regulation 1.17, adds back to its capital the eligible Forgivable Expense Amount. This relief is subject to the five following conditions:

• The FCM or IB includes a covered loan as a liability on its balance sheet;
• The FCM or IB creates and retains documentation of the basis of the add-back;
• The amount of the add-back cannot exceed the balance sheet liability for the covered loan that the firm reasonably expects to be forgiven and, as such, the add-back amount cannot increase net capital by more than the balance sheet liability for the covered loan;
• The add-back is reported on line 3070 of the Statement of the Computation of the Minimum Capital Requirements of the applicable Form 1-FR-IB or Form 1-FR-FCM, with an explanation on a separate page; and
• An FCM or IB that files a FOCUS Report reports the Forgivable Expense Amount add-back on line 3525 as directed by the FINRA April 2, 2020 FAQ. 

Aligns with FINRA. On April 2, 2020, FINRA issued guidance providing that until September 1, 2020, small firms may add back to net capital the amount of any accrued and unpaid annual assessment fees due to FINRA. This amount should be reported on the firm's FOCUS report, FINRA said. DSIO also will not recommend enforcement action against an IB or FCM that, in computing its net capital under Regulation 1.17, adds back its accrued annual FINRA assessment fees, so long as the IB or FCM also is an SEC-registered broker-dealer, qualifies as a small firm under FINRA's bylaws, and is eligible to take advantage of the FINRA guidance.

"It is a key priority for the CFTC to ensure that markets remain orderly and liquid in the current environment," said DSIO Director Joshua B. Sterling. "This relief letter will help ensure that intermediaries, who play a key role in our markets, are able to continue supporting their customers’ trading activities. It also makes good sense to align our approach to Paycheck Protection Program loans with that of FINRA, especially for intermediaries that are jointly regulated as broker-dealers and FCMs or IBs."

NFA issues relief. In response to the CFTC's no-action relief, the National Futures Association announced similar relief from NFA requirements for members. NFA members that are FCMs and IBs and are in compliance with the terms of the CFTC's relief will be deemed to be in compliance with the NFA's related financial requirements.

The no-action letter is CFTC Letter 20-15.