Banks are prohibited from making PPP loans to their officers and “key employees,” and we believe this prohibition extends to officers’ and key employees’ close relatives.

The SBA regulations generally provide that neither a lender nor its associates can own an equity interest in a business that has received or is applying for an SBA loan from that lender. A lender’s “associates” include “[a]n officer, director, key employee, or holder of 20 percent or more” of equity in the lender, or “[a]ny entity in which one or more [of any such] individuals . . . or a Close Relative of any such individual owns or controls at least 20 percent.” “Close Relatives” include a spouse, parent, child, sibling or the spouse of a child or sibling.

Although the SBA recently issued an interim final rule providing that these prohibitions do not apply to “an outside director or holder of a less than 30 percent equity interest in a PPP Lender,” it also provides that “[o]fficers and key employees of a PPP Lender may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated.” Consequently, we do not believe officers’ and key employees’ close relatives are eligible to receive PPP loans, as they generally are prohibited from receiving SBA loans, and the interim final rule does not expressly exempt them from this prohibition.

Regarding “key employees,” the interim final rule does not define this term, but the SBA affiliation rules provide that a “key employee” is “an employee who, because of his/her position in the concern, has a critical influence in or substantive control over the operations or management of the concern.” We also are aware of an SBA Office of Hearings and Appeals decision finding that, “[a] key employee is one who actually has influence or control over the operations of the concern as a whole.”

As such, it is possible that a lower level employee at your bank would not be considered a “key employee” subject to the SBA’s prohibition on loans to affiliates. But if an employee has critical influence or substantive control over your operations or management, we recommend directing such an employee (and their close relatives) to apply for a PPP loan with a different lender.

For resources related to our guidance, please see:

• SBA Interim Final Rule, Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (“[T]he Administrator, in consultation with the Secretary, has determined that SBA regulations (including 13 CFR 120.110 and 120.140) shall not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30 percent equity interest in a PPP Lender from obtaining a PPP loan from the PPP Lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the Lender. Favoritism by the Lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The Administrator cautions, however, that Lenders should comply with all other applicable state and federal regulations concerning loans to associates of the Lender. . . . The foregoing paragraph does not apply to a director or owner who is also an officer or key employee of the PPP Lender.”)

• SBA Interim Final Rule, Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (“Officers and key employees of a PPP Lender may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated. SBA also reminds Lenders that the ‘Authorized Lender Official’ for each PPP Loan is subject to the limitations described in the Lender Application Form, which states in relevant part: “Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant [Borrower].”)

• SBA Regulations, 13 CFR 120.140 (“Lenders, Intermediaries, and CDCs (in this section, collectively referred to as ‘Participants’), must act ethically and exhibit good character. Ethical indiscretion of an Associate of a Participant or a member of a CDC will be attributed to the Participant. . . . The following are examples of such unethical behavior. A Participant may not: . . . (b) Have a real or apparent conflict of interest with a small business with which it is dealing (including any of its Associates or an Associate's Close Relatives) or SBA; (c) Own an equity interest in a business that has received or is applying to receive SBA financing (during the term of the loan or within 6 months prior to the loan application); . . . (i) Fail to disclose to SBA all relationships between the small business and its Associates (including Close Relatives of Associates), the Participant, and/or the lenders financing the Project of which it is aware or should be aware. . .”)

• SBA Regulations, 13 CFR 120.10 (“Lender or 7(a) Lender is an institution that has executed a participation agreement with SBA under the guaranteed loan program.”)

• SBA Regulations, 13 CFR 120.10 (“An Associate of a Lender or CDC is: (i) An officer, director, key employee, or holder of 20 percent or more of the value of the Lender's or CDC's stock or debt instruments, or an Agent (as defined in §103.1 of this chapter) involved in the loan process; or (ii) Any entity in which one or more individuals referred to in paragraphs (1)(i) of this definition or a Close Relative of any such individual owns or controls at least 20 percent.”)

• SBA Regulations, 13 CFR 120.10 (“Close Relative is a spouse; a parent; or a child or sibling, or the spouse of any such person.”)

• SBA Regulations, 13 CFR 121.103(g) (“Affiliation may arise where former officers, directors, principal stockholders, managing members, or key employees of one concern organize a new concern in the same or related industry or field of operation, and serve as the new concern's officers, directors, principal stockholders, managing members, or key employees, and the one concern is furnishing or will furnish the new concern with contracts, financial or technical assistance, indemnification on bid or performance bonds, and/or other facilities, whether for a fee or otherwise. . . .  A ‘key employee’ is an employee who, because of his/her position in the concern, has a critical influence in or substantive control over the operations or management of the concern.”)

• Size Appeal of Human Learning Systems, LLC, SBA No. SIZ-5769 (2016) (“A key employee is one who, because of his position in the concern, has a critical influence or substantive control over the operations or management of the concern. 13 C.F.R. § 121.103(g). Key employees are those who have influence or control over the operations of a concern as a whole, such as a Director of Operations. Size Appeal of Alterity Management & Technology Solutions, Inc., SBA No. SIZ-5514, at 6 (2013) (Alterity). An employee who is not an owner, officer or executive of a concern and who supervises only 4% of its business is not a key employee. Size Appeal of J.W. Mills Management, SBA No. SIZ-4909, at 4 (2008) (J.W. Mills). A Government Services Manager with no authority over substantive decision-making is not a key employee. Size Appeal of Willow Environmental, Inc., SBA No. SIZ-5403, at 6 (2012) ( Willow). A Human Resources Manager is not a key employee. Carwell, at 9. An employee with no authority to hire and fire or to enter into contracts is not likely to be a key employee. Id. Conversely, an employee who is critical to a concern's control of day-to-day operations is a key employee. Alterity, at 6. A key employee then, is not merely an employee with a responsible position or a particular title. A key employee is one who actually has influence or control over the operations of the concern as a whole.”)