SEC Charges Credit Fund Adviser Over Principal Transaction Pricing Practices

On February 25, 2026, the U.S. Securities and Exchange Commission (SEC) charged a credit fund adviser with negligence-based anti-fraud violations and breaches of fiduciary duty in connection with the sale of originated loans to affiliated private funds.¹ This enforcement action underscores the SEC’s continued focus on principal transactions and highlights the importance of robust valuation practices when advisers sell assets from their own accounts to affiliated funds. The case is particularly relevant for managers with “season and sell” loan strategies.

Background

The adviser originated loans through its parent company and, after seasoning them for approximately 30 to 60 days, sold them to its affiliated private funds in principal transactions. The funds’ private placement memoranda (PPMs) stated that such transactions would be priced at “fair value.”

The SEC’s charges focused on a series of loans originated in late 2019 and sold to the funds in early 2020, after significant market disruption resulting from the onset of the COVID-19 crisis.

According to the SEC’s order:

• The adviser priced the loan sales at par value less an unamortized loan fee, consistent with its typical practice.
• The adviser did not reassess whether changed market conditions resulting from COVID-19 affected the fair value of the loans at the time of sale to the funds.
• The adviser nevertheless certified to a third-party consent provider that the transactions were conducted at arm’s length and that it believed the funds were acquiring the loans at fair value based on current market conditions.

The SEC found that the adviser breached its fiduciary duty to its funds and violated the anti-fraud provisions of the Advisers Act by failing to reassess valuation to account for changing market conditions.

Section 206(3) and the Use of Third-Party Consent

Section 206(3) of the Investment Advisers Act requires advisers engaging in principal transactions to provide the impacted clients with written disclosures and obtain client consent before completing the transactions. The trades at issue appear to have been principal transactions because the adviser sold loans from its parent company to its funds.

To comply with Section 206(3), the adviser engaged a third-party agent with authority to provide the requisite consent on behalf of the funds following an independent review. The SEC did not charge the adviser with violating Section 206(3). However, the SEC found that the adviser misled the agent by certifying that:

• The transactions were conducted at arm’s length in accordance with the governing management agreement.
• The adviser believed the funds were acquiring the loans at fair value based on current market conditions.

In finding that the adviser violated the anti-fraud provisions, the SEC highlighted the certifications, noting that they were not reasonably supported given the adviser’s failure to reassess the valuation in the disrupted market environment.  

Charges and Settlement

The SEC charged the adviser with negligently breaching its fiduciary duties and engaging in misleading and deceptive conduct with respect to its funds and investors in violation of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. To settle the matter, the adviser agreed to pay a $900,000 civil monetary penalty.

Notably, the SEC acknowledged that:

• All but one of the loans were either fully performing or had been repaid.
• The adviser voluntarily reimbursed the fund more than $5 million and enhanced its disclosures in response to examination deficiencies that preceded the enforcement referral.

Despite these mitigating factors, the SEC proceeded with the action and imposed a substantial penalty.

Key Takeaways

Valuation Practices Should Reflect Current Market Conditions

Where offering documents state that principal transactions will be priced at “fair value,” advisers must ensure that valuation practices are reasonably designed to reflect prevailing market conditions—particularly during periods of significant volatility or disruption. Reliance on historical or formulaic pricing approaches without reassessment may invite scrutiny.

Certifications to Advisory Committees or Third Parties Require a Reasonable Basis

When advisers rely on an advisory committee, third-party agent or other consent mechanism to approve principal transactions, they must ensure that:

• Certifications are accurate and not misleading.
• They have a reasonable, well-documented basis for valuation conclusions.
• Supporting materials provided to the reviewing body are complete and accurate.

The SEC’s order makes clear that misleading an independent consent provider can form the basis for anti-fraud charges, even in the absence of a Section 206(3) violation.

Examination Referrals Continue to Drive Enforcement Activity

The matter arose from a referral by the SEC’s Division of Examinations. This follows a recent trend that we have seen of deficiencies identified during routine examinations of private fund advisers that involve allegations of fraud or investor harm leading to enforcement investigations. Managers should be mindful of such examination findings—particularly those relating to valuation, conflicts of interest and principal transactions—as potential enforcement risks.

Remediation Does Not Necessarily Preclude Penalties

The SEC brought this action and imposed a substantial penalty, despite recognizing that the adviser engaged in substantial remediation, including voluntarily reimbursing the funds for the cost of the transactions. This arguably runs counter to recent remarks by senior SEC officials suggesting that voluntary remediation will be given greater recognition than under the prior administration and may lead to opportunities for non-enforcement resolutions. It remains to be seen how the SEC will implement this policy shift and the degree to which remediation will in fact result in reduced penalties and declinations in future cases.²

Private Credit Valuations Remain in Focus

More broadly, this case serves as a reminder that private credit valuations have caught the eye of regulators. Late last year, Jay Clayton, the former Chairman of the SEC and current U.S. Attorney for the Southern District of New York, publicly emphasized his office’s commitment to investigating potential valuation-related abuses by private credit and equity managers.³ In doing so, he specifically flagged situations where a firm is “moving a position from Fund A to Fund B”, observing that “if you can just name a price internally, the opportunity to pick a price that benefits the house over investors is pretty high.” Around the same time, the SEC announced its 2026 Examination Priorities, which listed managers with private credit strategies and valuation as areas of focus.⁴ This suggests that the SEC and other agencies may be on the lookout for further opportunities to bring “message cases” involving valuations in the private credit space.

Considerations for Advisers

Private fund managers with season and sell loan strategies or structures that could lead to principal transactions may wish to consider:

• Reassessing valuation policies and procedures, including triggers for reevaluation during market stress.
• Reviewing disclosures in PPMs and governing documents regarding pricing and conflicts, particularly with respect to principal and cross-trade transactions.
• Evaluating documentation and support for certifications provided in connection with principal trades.
• Conducting targeted compliance reviews focused on principal transactions and other aspects of the business that involve valuation-related conflicts.

^{1 In the Matter of Madison Capital Funding LLC, Admin. Proc. No. 3-22599 (Feb. 25, 2026), available at https://www.sec.gov/files/litigation/admin/2026/ia-6948.pdf.}

^{2 On February 24, 2026, the SEC announced long-anticipated revisions to its Enforcement Manual, including updated guidance on how the agency intends to assess and credit cooperation and remediation in enforcement matters. See our client alert on this subject here. It is unclear whether this revised guidance was applied in the Madison Capital Funding matter, which was announced only one day after the publication of the revised Enforcement Manual.}

^{3 Sridhar Natarajan, Private Credit’s Sketchy Marks Get Warning Shot From Top DOJ Cop, Bloomberg (Nov. 25, 2025), https://www.bloomberg.com/news/articles/2025-11-25/private-credit-s-sketchy-marks-get-warning-shot-from-wall-street-s-top-cop.}

^{4 See Fiscal Year 2026 SEC Examination Priorities, at 5-6, available at https://www.sec.gov/files/2026-exam-priorities.pdf.}