Treasury Answers FAQs on Subsidiary Borrowers; Questions Remain on Disclosure and Main Street Program

Monday brought a round of questions on the CARES Act stimulus spending:

  • The Washington Post today joined the chorus of media wondering “Who’s getting these hundreds of billions in government aid?”, noting that such information may only become public pursuant to FOIA requests
  • The LSTA held a webinar today in which it pointed out a number of the unresolved questions around the terms of the Main Street Facilities, which cover many of the same points that we noted last week, and go into more detail.   The comment period on those facilities expires this Thursday (April 16) and many commentators are hopeful that we will see updated Fed guidance next week.  We will continue to monitor for updates on the program.

At the same time those questions were being asked, SBA and Treasury continued answering questions by yet again updating the PPP FAQ on Monday afternoon, adding four new questions and answers (22-25). Clean and redlined copies are attached. Questions #22 and 25 focus mainly on lender mechanics, but #23-24 provide some helpful information on affiliation analysis for subsidiaries and brother-sister companies, especially via the examples.  (But no, this is not the silver bullet for PE and VC funds and their portfolio companies, nor is it the updated guidance on forgiveness).

1. First and foremost, these FAQ expressly state that separate brother-sister subsidiaries may each apply for their own PPP loan; provided that each sub “uses its unique EIN.” This means that parent companies could obtain loans aggregating more than $10M across their subsidiaries. (See #4 below). Borrowers considering separate PPP loans for such subsidiaries will want to:

a.       Look carefully at the applicable size standard for each subsidiary (see #2 below);

b.       Carefully apply the affiliation analysis across such sub and the parent company (see #3 below);

c.       Apply separately at each eligible subsidiary;

d.       If the workers at one or more subsidiaries are employed centrally by the parent company or another sub, the companies will need to carefully allocate payroll costs to each eligible sub and be able to document such allocation for the lender(s)

e.       Ensure that each sub uses the loan proceeds only for its own payroll costs and other permitted expensesof such subsidiary (this could be challenging for businesses with centralized employment or real estate leasing structures); and

f.        If possible, retain each sub’s PPP loan proceeds within a bank account used solely by such subsidiary in order to track and document the usage of such proceeds.

2.       SBA also acknowledges that brother-sister companies that operate in different NAICS codes can qualify as a small business concern individually under their respective NAICS code even if their number of employees must be aggregated due to affiliation with each other.

a.       For example, consider a parent company that has two wholly-owned subs that each have 600 employees:

            i.       one which manufactures light bulbs (NAICS 335110, which has a 1,250 employee std.); and 

            ii.      one which manufactures residential light fixtures (NAICS 335121, which has a 750 employee std.).  

b.       Although each company could meet its respective NAICS size standard if it were tested on its own, both companies are instead affiliates of each other, because they are wholly owned by the same parent, and are deemed to have 1,200 employees in the aggregate.  

c.       The lightbulb sub IS ELIGIBLE for a PPP loan qualify because the combined 1,200 employees are less than the 1,250 limit for its NAICS code.

d.       The light fixture sub is NOT eligible because the 1,200 combined employees do not meet the 750 limit for its NAICS code.

3.       SBA has now expressly addressed the question of how to treat exemptions for brother-sister businesses where one “sibling” is exempt from affiliation but the other is not.  In example 3, SBA notes that if Company X owns Company Y, which operates in NAICS 72 and is thus exempt from affiliation, and Company Z, which does not (and is not exempt), then:

a.       For purposes of Company Y’s PPP application, Company Y is not affiliated with Company Z and the size test is applied solely to Company Y on its own. 

b.       For purposes of Company Z’s PPP application, Company Z IS affiliated with Company Y, and so the size test is measured on an combined basis for both Y and Z.

c.       NOTE: Although the SBA example refers to the NAICS 72 exemption, the same logic will apply to franchisees and to companies who have SBIC financing.  This confirms our prior approach for PE sponsors and VC funds:

                                                   i.      Portfolio companies with SBIC financing can be measured on their own for their own PPP applications.

                                                 ii.      Controlled portfolio companies WITHOUT SBIC financing need to be aggregated, on their PPP applications, with all other controlled portfolio companies, INCLUDING the other portfolio companies that have SBIC financing

4.       This approach does highlight an inconsistency that we have been discussing.  

a.       If a restaurant company has 100 “company-owned” locations with 400 employees at each location and all of the locations are held in a single legal entity, that company can obtain one single PPP loan of up to $10M.  (The applicable size standard for NAICS code 72 is <500 employees per physical location).

b.       If however, that same company uses a structure where each such location is a separate legal entity (each having an EIN), then those 100 entities could apply for 100 separate PPP loans up to a theoretical maximum of $1 BILLION (100 loans x $10 million per loan).

c.       Because the IFR requires businesses to have been “in operation on February 15, 2020”, it is not clear that the company with a single entity could now reorganize its business to create the 100 separate subsidiaries, because such subs would not themselves have been in existence or operation on February 15. 

5.       FAQ #23 also includes some potentially confusing language around franchisor-franchisee affiliation.  The CARES Act exempts from affiliation requirements franchisees operating under a franchise listed in the SBA Franchise Directory (i.e., those for which the SBA has issued a franchise identification code).  In general, in order to be listed in the Directory, a franchisor must demonstrate, to SBA’s satisfaction, that its franchise agreements do not allow the franchisor to impermissibly control the franchisees under SBA’s affiliation guidelines.  SBA is now allowing franchisors to apply for listing in the directory without SBA “applying affiliation rules”, which appears intended to allow listing even where franchisors may have control features previously deemed impermissible, but frankly the language here is less than clear as to what is intended.

6.       Finally, Treasury also clarifies that Banks making loans to new customers must verify not only collect information to verify the identity of the borrower’s 20% owners, but also must collect such information for “appropriate beneficial ownership information” on entities who are 20% equityholders.  In related news, a Federal court in Baltimore rejected a plaintiff’s request for an emergency order requiring Bank of America to accept applications from non-customers.      BofA appears to have made the decision to limit the application that it accepts out of concern around the timing of, and potential liability for errors in, processing these required FinCEN and BSA verifications.  Reinforcing this standard, FinCEN today issued its own FAQs, which simply reiterate #18 and #25 from the SBA FAQs.

The Washington Post article notes that as of Friday, lenders had submitted more than 487,000 PPP applications to SBA (8X the number of SBA loans closed in 2019) for more than $125B in loans, 5X SBA’s entire loan volume in 2019 and more than one-third of the total $349 allocated to the program.  That’s an average loan size of about $250k.   If that average holds, the $349B would be allocated to more than 1.3 million businesses.  In reality, that average is likely to drop as independent contractors and sole proprietor applications are processed. 

Finally, raise your hand if you noticed that “frequently” was misspelled on the prior versions of the Treasury FAQ page?  Yeah, me either, but this explains why the browser tabs that I had open over the weekend wouldn’t refresh.

Rick Giovannelli


Please find below an update on the federal response to the coronavirus. We’re happy to discuss if you have any questions.

Congressional Response 

Congressional leaders continue negotiations over an interim coronavirus relief measure aimed at increasing funding for the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As reported in our previous update, the Senate failed to pass a clean increase in funding last week as Senate Democrats introduced their own proposal to also provide additional funding for health care providers and state and local governments in addition to the funding increase for the PPP.

On Saturday, Senate Majority Leader Mitch McConnell (R-KY) and House Minority Leader Kevin McCarthy (R-CA) issued a joint statementcondemning what they perceive as “Democrats’ reckless threat to continue blocking this job-saving funding unless we renegotiate unrelated programs which are not in similar peril,” emphasizing that “this will not be Congress’s last word on COVID-19, but this crucial program needs funding now.”

This morning, House Speaker Nancy Pelosi (D-CA) and Senate Democratic Leader Chuck Schumer (D-NY) issued a joint statement on Democrats’ priorities for an interim measure, stressing the need to ensure equal access to the PPP and to increase funding for disaster loans, as well as to support families who rely on SNAP and increase funding for the production and distribution of testing and Personal Protective Equipment. Shoring up funding for the U.S. Postal Service has also emerged as a sticking point for Democrats.

Congress faces mounting pressure to act as the PPP is projected to run out of funding as early as this week. Although the Senate adjourned its pro forma session today without reaching a compromise, negotiations are likely to continue in hopes of acting during the Senate’s next pro forma session scheduled for Thursday. The House has its next pro forma session scheduled for Friday. Although the House was scheduled to reconvene next week on April 20, Majority Leader Steny Hoyer (D-MD) informed members that they do not expect to reconvene until May 4at the earliest unless an emergency arises. Notably, this does not preclude them from considering legislation, such as an increase in funding for the PPP, which could be passed on days when they are in pro forma session by unanimous consent.  

In that regard, members have been stressing the need for the chamber to do as much as possible through unanimous consent. Speaker Pelosi has cautioned that Senate Republicans’ proposal with a clean increase in funding is unlikely to pass by unanimous consent, stressing that “it’s time for the Republicans to quit the political posturing by proposing bills they know will not pass either chamber and get serious and work with us towards a solution.”

Meanwhile, today Senator Elizabeth Warren (D-MA) and Representative Ro Khanna (D-CA)announced a proposal for an “Essential Workers Bill of Rights” aimed at protecting frontline workers, which they would like to include in the next relief package. The proposal includes health and safety protections, premium compensation, universal paid sick leave and family and medical leave, health care security, child care, among others. While it is unlikely the proposal as a whole would be included in future relief packages, there is a possibility that some of the concepts could be plucked from the proposal by Democrats for inclusion.  

Agency Response 

Treasury Department 

Treasury updated today its PPP FAQs (see questions 22-25). In addition, Treasury announced details of the Payroll Support Program, which is aimed at providing payroll support for American workers employed by passenger air carriers, cargo air carriers, and related contractors. Treasury announced that it will not require passenger air carriers that receive $100 million of payroll assistance or less to provide financial instruments as appropriate compensation, noting that “for passenger air carriers with payroll support payments up to $100 million, funds will be available promptly upon approval of their applications.”  

Department of Labor

The Department of Labor’s Employment and Training Administration issued Unemployment Insurance Program Letter 17-20, which provides further guidance to states regarding the CARES Act Pandemic Emergency Unemployment Compensation program, under which states can provide up to 13 weeks of federally funded benefits. In addition, the Occupational Safety and Health Administration (OSHA) issued interim guidance for enforcing OSHA’s recordkeeping requirements as it relates to recording cases of COVID-19.

Health and Human Services

The Department of Health and Human Services, along with the Department of Labor and the Treasury Department, issued guidanceimplementing the recently enacted requirement for group health plans and group and individual health insurance to cover diagnostic testing and certain other related services at no cost, including urgent care visits, emergency room visits, and in-person or telehealth visits to the doctor’s office. The guidance specifies that the coverage requirement applies to both diagnostic testing as well as antibody testing.

In addition, the Centers for Medicare and Medicaid Services (CMS) announced that it has approved its 50th COVID-19 Medicaid emergency waiver to Utah and that it has approved a COVID-19 Medicaid Disaster Amendment that brings relief to Arizona. CMS noted that it has approved a total of 50 emergency waivers, 27 state amendments, 8 COVID-related Medicaid Disaster Amendments, and 1 CHIP COVID-related Disaster Amendment to date.

Executive Action

President Trump issued a memorandum for the Secretary of State and the Secretary of Homeland Security to impose visa sanctions if a “government of a foreign country denies or unreasonably delays the acceptance of aliens who are citizens, subjects, nationals, or residents of that country after being asked to accept those aliens, and if such denial or delay is impeding operations of the Department of Homeland Security necessary to respond to the pandemic.” In addition, President Trump issued amemorandum authorizing the Secretary of Veterans Affairs to exercise certain contracting authority with respect to contracts performed in support of Department efforts to combat the coronavirus.

It was reported today that President Trump has named leaders of a newly formed “Council to Re-Open America,” which will put forward recommendations on when Americans may go back to work during the pandemic. According to some reports, current members include White House Chief of Staff Mark Meadows, Senior Advisors to the President Ivanka Trump and Jared Kushner, Treasury Secretary Steven Mnuchin, Economic Advisor Larry Kudlow, U.S. Trade Representative Robert Lighthizer, and Commerce Secretary Wilbur Ross.

Supreme Court Update

The Supreme Court announced that it will be holding oral arguments in some cases that were scheduled to be argued this term via telephone conference. While dates have not been determined for specific cases, they are likely to be heard between May 4 and May 13.The Court noted that it anticipates providing a live audio feed to news media. Some of the cases that will be heard over the phone include cases relating to President Trump’s financial records, as well as a case concerning the Affordable Care Act’s contraceptive mandate.

Please do not hesitate to let us know if you have any questions. The K&L Gates COVID-19 resource center, which includes a variety of updates from across the firm’s platform, can be found here. Thank you.


K&L Team