Fund valuation practices have been a recent focus of the SEC and, increasingly, federal prosecutors. Two enforcement actions settled in recent weeks make clear that the SEC is actively pursuing a broad array of valuation-related cases, from the use of allegedly inadequate methodologies to audit failures. In addition, private credit fund valuations are under pressures as lenders and other market participants have begun to mark down collateral values even where the funds have yet to do so themselves. Based on recent statements by senior SEC and DOJ leadership, and in view of recent headlines citing private credit risk, we expect more cases will follow.
SEC Faults Fund Advisor for Failing to Update Valuations in “Season and Sell” Loans Case
On February 25, 2026, the SEC announced settled charges against Madison Capital Funding LLC, a formerly-registered Illinois-based investment adviser, for violating the fiduciary duty and antifraud provisions of the Investment Advisers Act.[1] The SEC alleged that the adviser sold loans to private fund clients and represented that they were priced at fair market value, even though the adviser allegedly had not taken sufficient steps to assess those valuations in light of market disruptions caused by the 2020 outbreak of COVID. The adviser originated senior loans for private equity sponsors acquiring lower-middle market companies and then sold portions of those loans to its funds, typically after holding them for 30 to 60 days for tax and other reasons — what are referred to as “season and sell” loans. Its advisory agreements and investor disclosures represented that it would price these principal transactions at fair value.
The SEC alleged that in practice, the adviser would estimate fair market value as par minus the unamortized loan fee, based on its “belief that the closing price of the loan generally represented the fair market value given the limited time period between origination and the sale to the Funds.” While each fund had a third-party agent independently review and consent to each proposed loan sale, the agents were not responsible under their agreements with the funds for conducting their own valuations, and simply relied on the adviser’s certification that the sale was made at fair market value.
The SEC acknowledged that the adviser stepped up its monitoring of portfolio companies and loans when the pandemic hit, but said the adviser should have performed “other analyses” to assess fair market value in light of market disruptions that were causing widened credit spreads, reducing liquidity, and driving down fixed income prices. At bottom, the SEC seemed skeptical that all 143 loans sold to the funds between March and May 2020 were appropriately valued at par minus the loan fee, including a loan to a fitness center franchisee that had suspended in-person operations, and clearly expected more individualized assessments.
Notably, this case began as an SEC examination—a reminder that routine exams remain a primary source of referrals to enforcement. When the adviser received a deficiency notice from the examination staff, it reimbursed over $5 million to the funds. The SEC found violations of fiduciary duty and negligent violations of the antifraud provisions of the Investment Advisers Act of 1940 (Sections 206(2) and 206(4) and Rule 206(4)-8 thereunder), and Madison Capital agreed to pay a $900,000 penalty. The fact that the SEC brought this case even though the funds had already been made whole, the adviser had de-registered, and all but ones of the loans were performing or had fully paid out, shows that the SEC is focused on private funds and private credit as a priority, and is particularly concerned about valuation practices.
SEC Fires Warning Shot to Fund Auditors
On March 6, 2026, the SEC sent a message to auditors through a settled cease-and-desist order to a New York-based audit fund for various alleged audit quality failures related to the Infinity Q Diversified Alpha Funds mutual funds in 2020.[2] The funds’ founder was prosecuted for fraud in the Southern District of New York and in 2023 was sentenced to 15 years in prison for a mismarking scheme that allegedly involved faking inputs and manipulating models used by a third-party pricing service, causing the funds to report NAVs that were artificially inflated by hundreds of millions of dollars and overcharging investors on fees in the process.[3] The SEC also sued the founder and the funds for fraud.[4]
Notably, three years later the SEC brought this action against Infinity Q’s outside audit firm, alleging that it violated a host of professional standards by failing to gain an adequate understanding of the funds’ process for, and internal controls over, the valuation of variance swaps held by the funds that sought to measure volatility in the prices of reference securities. The audit firm also allegedly: hired, but failed to heed the recommendations of, a third-party valuation specialist; failed to find out whether the funds’ third-party pricing agent had adequate controls over its models; failed to use independent models to validate Infinity Q’s; and frequently relied on representations by Infinity Q rather than obtaining first-hand audit evidence. In short, the SEC faulted the auditor for employing too much trust and not enough verification. These failures, according to the SEC, were particularly egregious because the variance swaps were so-called “Level 3” assets, whose valuation is especially difficult given the absence of observable market prices. As such, the audit firm had identified valuation of these assets as a key audit risk.
The SEC censured the audit firm but did not penalize it, instead requiring the firm to undertake a broad array of remedial actions, such as requiring the involvement of its National Office when audits involve tough-to-value derivatives and securities. The case therefore appears designed to send a message that audit firms should take care to adhere to professional standards when it comes to valuation for funds clients, particularly for Level 3 assets. This can include devising and documenting audit procedures to address the valuation issues posed by a client’s holdings; testing access controls for valuation models used by clients and third parties; requiring documentation and verification of model inputs; and testing valuation models. Investment advisers can expect to see, or may already be seeing, their auditors tighten up testing and other procedures around valuation and increasingly involve the firm’s national office and/or third-party specialists.
These Cases are Just the Start — Expect More Cases as Enforcers Focus on Valuation
Several converging signals suggest that enforcement investigations centered on valuation will be a sustained and growing priority.
SEC. The SEC’s Division of Examinations mentioned valuation several times in its 2026 Examination Priorities, including valuation practices by first-time advisers to private funds, as well as registered investment companies “that use complex strategies and/or have significant holdings of less liquid or illiquid investments (e.g., closed end funds), including any associated issues regarding valuation and conflicts of interest.”[5] The Examination Priorities also focused on private funds, complex products, and illiquid or less liquid products, all of which involve difficult valuation questions. As the Madison Capital case demonstrates, examinations in priority areas often lead to enforcement investigations.
DOJ. Jay Clayton, the U.S. Attorney for the Southern District of New York (and former SEC Chair during the first Trump Administration) , has expressed increased prosecutorial interest in how private fund advisers value their portfolio assets, particularly whether those valuations are calculated in ways that result in increased fees for investors. Clayton has significant and unique expertise in this space, given his longtime transactional legal practice and service as the lead independent director of a large private equity firm. In a November 2025 Bloomberg interview, Clayton stated that regulators are monitoring how managers assign prices, and specifically called out “marks on assets with no trading when things are moved around from vehicle to vehicle,” observing that “[if] someone is moving a position from Fund A to Fund B and if you can just name a price internally, the opportunity to pick a price that benefits the house over investors is pretty high.”[6] He added that “people should know that the financial regulators and [DOJ] are looking at those.” At the Securities Enforcement Forum New York on February 5, 2026, Clayton was direct: “I want to make sure that everybody in the marketplace thinks robustly about their marks. That is a place where people should know we are watching, the SEC is watching,” particularly as more retail investors get involved in private equity.[7]
Takeaways
Given the increased focus on valuation and valuation procedures, what are regulators likely to focus on in particular?
The SEC’s Examination and Enforcement staff are likely to focus on: (i) valuation of complex or less liquid products;(ii) adherence to disclosed valuation methodologies and procedures; (iii) whether changing market conditions are appropriately accounted for in valuations; (iv) whether adequate controls are maintained over models and inputs; and (v) whether third-party specialists are truly independent and maintain controls over their models and inputs.
Fund managers should expect heightened scrutiny for their valuations, particularly in private credit and industries that have faced negative impacts from market dislocations. Auditors are likely to strengthen their audit procedures around valuation, including by enlisting experts and doing more testing. Importantly, as these recent cases show, valuation enforcement does not require allegations of intentional fraud — negligence is sufficient, making it all the more important to establish and maintain quality procedures.
[1] Press Release, SEC Charges Illinois Investment Adviser for Breaching Its Fiduciary Duty and Contravening Its Disclosures (Feb. 25, 2026), https://www.sec.gov/enforcement-litigation/administrative-proceedings/ia-6948-s.
[2]Press Release, SEC Institutes Settled Order as to Auditor for Failures Related to Audit of Infinity Q’s Mutual Fund (Mar. 6, 2026), https://www.sec.gov/enforcement-litigation/administrative-proceedings/34-104936-s.
[3] See Founder and Chief Investment Officer of Infinity Q Sentenced to 15 Years in Prison (Apr. 10, 2023) https://www.justice.gov/usao-sdny/pr/founder-and-former-chief-investment-officer-infinity-q-sentenced-15-years-prison.
[4] See Litigation Release (June 16, 2023), https://www.sec.gov/enforcement-litigation/litigation-releases/lr-25750.
[5] Cleary Gottlieb, SEC Exam Priorities 2026 Priorities Largely Consistent: Will Approach to Deficiencies and Enforcement Referrals Change? (Nov. 21, 2025), https://www.clearygottlieb.com/news-and-insights/publication-listing/sec-exam-priorities-2026-priorities-largely-consistent.
[6] Bloomberg, Private Credit’s Sketchy Marks Get Warning Shot From Wall Street’s Top Cop, (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.
[7] See Securities Docket, Keynote Q&A Discussion with U.S. Attorney Jay Clayton (Feb. 5, 2026)https://www.youtube.com/watch?v=EaWIqPlebDI.