SEC Enforcement Highlights Valuation Risks in Affiliated Loan Transactions

SEC³ Compliance
March 24, 2026

SEC3 Compliance regularly monitors SEC enforcement actions and examination findings to identify developments that may affect investment advisers and private fund managers. A recent enforcement action involving a private credit adviser highlights regulatory risks that can arise when advisers transfer assets from affiliated entities into client funds.

The U.S. Securities and Exchange Commission recently brought an enforcement action against a private credit adviser involving the transfer of loans from an affiliated entity to funds managed by the adviser. The SEC alleged that the adviser negligently violated the anti-fraud provisions of the Investment Advisers Act and breached its fiduciary duty to the funds in connection with how those loans were valued and represented during affiliated transactions.

These types of arrangements are common in certain private credit strategies where loans are originated and later transferred to affiliated investment vehicles after a short holding period.

What Happened

According to the SEC’s order, the adviser’s parent company originated loans that were typically held for approximately 30 to 60 days before being transferred to affiliated private funds. The funds’ offering documents indicated that these transactions would occur at fair value.

The SEC’s findings focused on loans originated in late 2019 and transferred to the funds in early 2020 as markets were experiencing significant disruption at the onset of the COVID-19 pandemic.

The adviser priced the loans using its standard methodology, transferring them at par value less an unamortized origination fee. The SEC alleged that the adviser did not reconsider whether the rapidly changing market environment affected the loans’ fair value before selling them to the funds.

At the same time, the adviser certified to an independent consent provider that the transactions were conducted at arm’s length and that the adviser believed the loans were being transferred at fair value based on current market conditions. The SEC concluded that these certifications lacked a reasonable basis because the adviser had not reassessed the loans’ value in light of the market disruption.

Principal Transaction Considerations

Because the loans were sold from an affiliate of the adviser to funds it advised, the transactions were treated as principal trades.

Under Section 206(3) of the Investment Advisers Act of 1940, advisers engaging in principal transactions must provide disclosure and obtain client consent before completing the transaction. In this case, the adviser relied on an independent third-party consent provider authorized to review and approve the transactions on behalf of the funds.

The SEC did not charge the adviser with violating Section 206(3). Instead, the enforcement action focused on the adviser’s representations to the consent provider regarding fair value and arm’s-length pricing.

According to the SEC, those representations were misleading because the adviser had not undertaken a fresh valuation assessment during a period of significant market stress.

Charges and Resolution

The SEC charged the adviser with negligent violations of the anti-fraud provisions of the Advisers Act, including Section 206(2) of the Investment Advisers Act of 1940 and Rule 206(4)-8 under the Investment Advisers Act.

Without admitting or denying the findings, the adviser agreed to settle the matter and pay a $900,000 civil penalty.

The SEC noted that most of the loans ultimately performed or were repaid and that the adviser voluntarily reimbursed the affected fund more than $5 million after issues were identified during an examination. The firm also enhanced disclosures following those findings. Despite these steps, the SEC proceeded with enforcement and imposed a penalty.

Why This Matters for Advisors

1) Valuation processes should reflect current market conditions. When offering documents state that affiliated transactions will occur at fair value, advisers should ensure that valuation methodologies account for prevailing market conditions rather than relying solely on historical pricing approaches.

2) Representations made during approval processes must be supported. Advisers often rely on advisory committees or third-party consent providers when approving principal transactions. Certifications regarding fair value or arm’s-length terms should be supported by documented analysis.

3) Examination findings may lead to enforcement actions. This matter originated from an examination referral. Valuation practices, conflicts of interest, and principal transactions continue to be areas of focus for both the SEC’s Division of Examinations and the Division of Enforcement.

4) Private credit valuation remains under regulatory scrutiny. Transactions involving the movement of assets between affiliated entities or funds, particularly where pricing decisions are determined internally, may receive heightened attention from regulators.

How SEC3 Compliance Can Help

SEC3 Compliance assists advisers in reviewing and strengthening controls around valuation and conflict-sensitive transactions. This may include:

• Reviewing valuation policies and procedures, including triggers for reassessment during periods of market volatility
• Evaluating disclosures in Form ADV, offering documents, and governing agreements relating to principal transactions and conflicts of interest
• Reviewing documentation supporting certifications provided to advisory committees or third-party consent providers
• Conducting targeted compliance reviews of principal transactions, cross-trades, and other affiliated transactions
• Helping advisers implement practical documentation and control frameworks to support valuation determinations

If you would like to discuss how these issues may apply to your firm, please contact SEC3 Compliance.

This alert is provided for informational purposes only and does not constitute legal or investment advice.

Need assistance with your compliance program? SEC’s team of experienced compliance professionals can help. For more information, please email us at
info@sec3compliance.com
, call (212) 706-4029 x 214, or visit our website at
www.sec3compliance.com.

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