March 12, 2026
What happened?
On February 25, 2026, the SEC announced settled charges against an investment adviser for selling loans to private fund clients without determining whether those trades were at fair market value. Lack of a fair market value determination was contrary to the advisory agreements and other disclosures to private fund investors.
The adviser offered lending to companies being acquired by private equity firms. Portions of these loans were sold to private funds, including private funds managed by the firm. According to the firm’s valuation policy and practice, the firm would sell short term loans at par value less the unamortized loan fee. The belief was this method would generally represent fair market value for the short time period of the loans, which were typically held for 30 to 60 days. However, the advisory agreements of these funds and other representations to investors stated that the firm would sell the loans at “fair value” or “fair market value” after independent review by a third-party agent that provided consent and that transactions between the adviser and the private funds would be “no less favorable to [the funds] as the terms [they] would obtain in a comparable arm’s length transaction with a non-Affiliate.”
Loan sales made from March 2020 through May 2020 occurred during a period of market disruption due to the beginning of the Covid-19 pandemic. Despite downward price pressure from market conditions, no determination of fair market value was made. Instead, the firm continued to follow the same practice of charging par value less the unamortized loan fee and obtaining the third-party agent’s consent. The SEC found that the firm breached its fiduciary duty to the private funds and failed to act in accordance with disclosures to investors.
In the order, the SEC noted that the firm made prompt remedial acts in response to an examination deficiency letter regarding the valuation issue. The firm voluntarily reimbursed the private funds $5 million plus interest and enhanced its disclosures and loan transfer policies. The SEC considered these actions, and the settled charges were a $900,000 civil monetary penalty, a censure, and a cease and desist order.
What does this mean for me?
Private credit transactions will be scrutinized, especially affiliated transactions. The firm obtained consent of a third-party agent, as required for principal trades, but the agent relied on the firm’s valuation. The firm never assessed fair market value. The take-away appears to be: obtain evidence that principal transaction pricing reflects current market values, especially for sales during market disruptions.
The firm stuck to what was believed to be a sound method for valuation, all but one of the loans continued to perform or was fully repaid by borrowers, and when SEC examiners pointed out the issue the firm quickly and voluntarily reimbursed the private funds. None of these facts were enough to avoid an enforcement action. If you engage in principal transactions, review your valuation policies and disclosures with this enforcement action in mind.
We will continue to monitor new developments that impact investment advisers and compliance programs. If you have questions, contact us. Fairview is here to help.
