Executive Summary
On February 25, 2026, the Securities and Exchange Commission (“SEC”) announced settled charges against an SEC registered investment adviser (the “RIA”) for breaching its fiduciary duty and contravening its disclosures1. Specifically,
- The SEC penalized a valuation process failure, not a valuation error.
- The SEC determined that the RIA violated its fiduciary duties by failing to reasonably determine fair market value when selling loans to affiliated private funds during the onset of the COVID‑19 market disruption (March–May 2020, the “Relevant Period”).
- Although the RIA disclosed that loans would be sold to the funds at “fair value” and required approval from an independent review agent, the RIA mechanically applied its pre‑pandemic pricing convention—par value less unamortized fees—without assessing the impact of dramatically changed market conditions.
The SEC’s message is consistent with ASC 820, Fair Value Measurement:
Fair value is not a number you reuse — it is a conclusion that must be re‑evaluated, especially when market conditions materially change.
Core Conduct at Issue
Background on the Transactions
The RIA originated senior loans to private‑equity‑backed lower-middle‑market companies, held the loans for approximately 30–60 days, then sold portions to affiliated pooled investment vehicles (the “Funds”) in principal transactions. The transactions were subject to Section 206(3) of the Advisers Act (the “Act”).
To ensure adherence to Section 206(3) of the Act, each Fund engaged an independent, unaffiliated third-party agent to act as the independent review party (“Review Agent”). The Review Agent was responsible for reviewing the proposed transactions and providing consent to the sales on behalf of the Funds, but was not responsible for making its own determination of fair market value.
The RIA made certifications to the Review Agent that the sale was being conducted on an arm’s length basis and that the sale was at fair value, based on current market conditions.
Disclosures, Pricing Methodology and Monitoring
Disclosures: The Funds’ advisory agreements and disclosures to investors stated that the RIA sells the loans to the Funds at “fair value” or “fair market value” as reasonably determined by the RIA, consistent with applicable law and without third-party valuation.
Valuation Policy: The RIA’s written valuation policy (during the Relevant Period) provided that the RIA’s purchase price, less the unamortized loan fee or discount, subject to market adjustments that may be made in the RIA’s discretion, would be used as the price for the loan to a Fund.
Monitoring ― Internal Credit Rating System: The RIA assigned each loan it underwrote an internal credit rating ranging from “A” to “F”. These ratings were used to monitor the overall portfolio based on the performance of the underlying assets. The RIA originated only loans that received a “B” credit rating, reflecting its determination that the underlying portfolio company was a stable, performing business.
The RIA would upgrade the loan to an “A” or “B+” rating if the portfolio company significantly outperformed projections or its debt declined meaningfully. Conversely, if the company underperformed in one of several ways, the RIA would downgrade the rating to a “C+” and have further downgrades if the company defaults on its covenants, continues to default on its covenants, reveals liquidity concern, and/or fails to meet its payment obligations.
Actual Practice
The RIA sold loans to the Funds at par value, less any unamortized loan fee/discount. The RIA believed this price generally reflected the fair market value due to the limited time between loan origination and sale to the Funds, and that the loans sold were rated “B” or above at the time of the proposed sale.
However, no adjustments were applied during the Relevant Period, even after current market conditions during the Relevant Period showed that credit spreads widened significantly, liquidity in private credit markets deteriorated, and new originations were priced at materially higher yields.
Further, the RIA acknowledged the above conditions in updates to investors, but did not incorporate them into the valuation of the loans sold to the Funds.
Why the SEC Viewed This as a Violation
Failure to Determine Fair Value
The SEC did not assert that every loan was mispriced (i.e., had a valuation error). Instead, the violation was procedural and fiduciary: the RIA failed to determine the effect of market disruption on fair value at the time of the sale.
Key points:
- Underlying company continued performance was irrelevant.
- Internal “B” credit ratings were insufficient.
- Short holding period did not excuse proper fair value analysis.
Misleading Representations
The RIA certified to the Review Agent that transactions were arm’s length, and that prices reflected current market conditions. However, while the RIA’s own update to investors acknowledged widening spreads and valuation uncertainty, the valuations did not reflect these conditions.
The SEC found these representations misleading because no contemporaneous market analysis was reflected in the valuation.
Legal Findings
The SEC found willful violations of the following sections of the Act, and rules thereunder:
- Section 206(2) – negligent fraud or deceit (no scienter required)
- Section 206(4) and Rule 206(4)-8 – misleading statements or deceptive practices with respect to pooled investment vehicles
Sanctions and Remedies
- $900,000 civil penalty
- Censure
- Cease-and-desist order
Separately, the RIA had already:
- Reimbursed approximately $5.0 million plus $204 thousand in interest to the Funds in 2021.
- Enhanced valuation and disclosure policies following an SEC exam.
Takeaways ― Why This Case Matters
“Fair Value” Requires Process, Not Just Outcome
This case reinforces that:
- Fair value ≠ par (or cost) by default – the entry-price cannot be presumed to be fair value without an explicit reassessment.
- Fair value ≠ “still performing”- the subsequent performance of the loan (“B” rating) does not alone support fair value (e.g., market participants were demanding higher yields and discounts during the Relevant Period).
- Ratings ≠ market participant pricing
- Fair value ≠ “held briefly” (in this example, a 30-60 day holding period) - fair value must consider measurement‑date conditions such as company-specific, industry and market conditions (e.g., that liquidity risk increased significantly during the Relevant Period and that market participants were demanding higher yields/ discounts).
Fair value represents the exit price at the measurement date under prevailing market conditions, liquidity conditions and risks characteristics, and reflects assumptions of market participants.
It is Imperative that during market dislocations, advisers must:
- Identify observable market, liquidity, company-specific and industry changes.
- Assess the changes (e.g., spread movements and liquidity).
- Document why (or why not) those factors affect fair value.
Mechanical Pricing is Dangerous in Volatile Markets
- Policy language ≠ valuation analysis.
Using any standing convention (e.g., defaulting to an historical entry price policy/convention such as cost or par less fees/discount) without reassessment:
- Can violate fiduciary duty
- Can invalidate disclosures made to investors/others
- Will not be saved by hindsight portfolio company/loan performance
Independent Review ≠ Independent Valuation
The Review Agent relied on the RIA’s certifications and was not tasked with valuation. The implications include:
- An adviser cannot outsource fair value responsibility indirectly.
- Certifications by an adviser must be supported by real analysis.
Bottom Line for Management
Once management represents investments are carried at fair value, it creates an affirmative duty and a continuing obligation to prove and support the fair value conclusion ― especially when markets and/or conditions are volatile.
Accordingly, management must:
- Ensure that valuation governance is substantive, not procedural:
- Process matters, not just outcome:
- Reasonable and supportable methodology and process
- Consistent application of the procedures
- Clear contemporaneous documentation
- Reliance on “policy says so” for valuation can be viewed as a weakness.
- Process matters, not just outcome:
- Evidence that it actively monitors valuation risk:
- Be aware of changing risks and conditions in the underlying company, industry, geography and securities market.
- Reflect identified risk(s) in the valuation process.
- How are affiliate, principal or cross trade transactions valued and challenged.
- Reassess the appropriateness of methodologies and assumptions:
- What triggers a valuation reassessment.
- How does management identify changes in risks and dislocations that affect fair value.
- Document, Document, Document and Document:
- Document fair value conclusion.
- Document the changes in conditions and risks (including the supporting information/basis).
- Document whether the methodology and assumptions remain appropriate or not at each measurement date.
- Document contemporaneously why observable changes and changes in risks do or do not impact valuations.