The SEC’s Growing Focus on Private Credit and Private Market Valuations: What Registered Investment Advisers and Financial Professionals Need to Know

What is a Private Credit Investment?

A private credit investment is a loan or debt instrument that is originated and held outside the traditional public markets. These investments are not traded on a public exchange and are not issued by a bank through conventional syndicated lending channels.

In a typical private credit transaction, a non-bank lender (often a specialized fund managed by an investment adviser) provides financing directly to a borrower, usually a middle-market company that may not have ready access to public bond markets or traditional bank loans. The borrower receives capital, and the lender (or the fund’s investors) earns returns primarily through interest payments, origination fees, and other negotiated terms.

There are several key characteristics that distinguish private credit from public debt investments, including:

• Illiquidity. Private credit investments generally cannot be easily bought or sold on a secondary market. Investors typically commit capital for extended lock-up periods and rely on the borrower’s repayment schedule rather than market trading to realize returns.
• Valuation complexity. Because these loans do not trade on a public exchange, there is no readily observable market price. The fund manager must determine the “fair value” of the investment using internal models, assumptions, and judgment, which is one of the main issues drawing SEC scrutiny right now.
• Negotiated terms. Unlike publicly traded bonds with standardized terms, private credit deals are individually negotiated between lender and borrower, often with customized covenants, interest rates, and repayment structures.
• Limited transparency. Compared to public markets, there is less regulatory disclosure and less price transparency, which can create information asymmetries between fund managers and their investors.

Common examples include direct loans to private companies, mezzanine financing, distressed debt, and asset-backed lending. The asset class has grown dramatically in recent years, with institutional investors (pension funds, endowments, insurance companies) and, increasingly, retail investors allocating capital to private credit funds in search of higher yields than those available in traditional fixed-income markets.

Private credit has emerged as one of the fastest-growing corners of the financial markets, with assets under management now measured in the trillions. But rapid growth has attracted the attention of regulators. In recent months, the SEC has made clear that it is training significant enforcement and examination resources on how private credit investments are valued, distributed, and disclosed to investors. From enforcement settlements and high-profile roundtables to coordinated interagency investigations, the regulatory signals are converging on a single message: registered investment advisers, broker-dealers, and other financial professionals involved in offering, managing, or recommending private credit and illiquid alternative investments should expect heightened scrutiny of their valuation practices, potential conflicts of interest, and investor disclosures.

A Confluence of Regulatory Activity

The SEC’s focus on private credit and private market valuations has intensified through several channels simultaneously, and the implications extend well beyond the largest fund sponsors to reach any registered investment adviser or financial professional with exposure to these asset classes.

Enforcement. On February 25, 2026, the SEC announced a settled enforcement action against Madison Capital Funding LLC, an Illinois-based investment adviser, for selling loans to affiliated private fund clients during the early months of the COVID-19 pandemic without adequately accounting for market disruption in its fair value determinations. According to the SEC’s order, Madison Capital had originated senior loans for private equity sponsors and sold portions of those loans to its funds, typically valuing them at par less the unamortized loan fee — a methodology that may have been reasonable in ordinary market conditions but that the SEC found was not adjusted to reflect the significant disruptions of March through May 2020. Madison Capital agreed to a $900,000 civil penalty, a censure, and a cease-and-desist order. Notably, the SEC brought the case on a negligence theory — meaning the agency did not need to prove the adviser intended to defraud its investors.

The Private Markets Roundtable. One day after announcing the Madison Capital settlement, the SEC announced a public roundtable on private market valuations, which took place on March 4, 2026. SEC Chairman Paul Atkins opened the event by emphasizing the agency’s interest in “responsible retailization” of private market investments and the importance of consistent, reliable valuation practices. The roundtable’s second panel focused specifically on fund governance related to private market assets, including the SEC’s fund valuation rule (Rule 2a-5), and panelists discussed fair-value approaches, governance expectations, and emerging best practices.

Enforcement Leadership Statements. On May 13, 2026, newly installed SEC Enforcement Director David Woodcock delivered his first public remarks at the Managed Funds Association Legal & Compliance Conference. Woodcock announced a “back-to-basics” approach and specifically identified private funds and investment advisers as a priority area. He stated that the Enforcement Division would “remain active” in the private funds space and would continue to “pursue matters involving misappropriated client assets, inadequate safeguarding of assets; misleading strategy disclosures; undisclosed fees and expenses; fraudulent valuations and mismarking; prohibited trading practices; and undisclosed conflicts of interest.” As Reuters reported, Woodcock said the SEC is “attuned to potential risk relating to liquidity, fees, valuation and conflicts of interest, not only at the private fund adviser level, but throughout the distribution chain.” That reference to “throughout the distribution chain” is particularly significant for RIAs and broker-dealers who recommend or allocate client capital to private credit strategies, as it signals that regulatory exposure is not limited to the managers who originate these investments.

Coordinated Investigations. In April and May 2026, reports emerged that the SEC has opened multiple enforcement investigations into major private credit fund managers, with probes focused on how managers value the loan assets they hold and whether they are complying with the valuation policies disclosed to investors. SEC Chairman Atkins confirmed at the Milken Institute Global Conference in May 2026 that the SEC, in coordination with the U.S. Treasury Department, is investigating allegations of fraud in the private credit market. The U.S. Attorney’s Office for the Southern District of New York has also signaled a parallel focus. U.S. Attorney Jay Clayton publicly warned that the Department of Justice is scrutinizing private credit valuation practices, including the “mismarking” of assets to generate fees, and specifically flagged situations where firms move positions between affiliated funds at internally determined prices.

2026 Examination Priorities. The SEC’s Division of Examinations released its fiscal year 2026 examination priorities in November 2025, expressly listing managers with private credit strategies, private funds with extended investment lock-up periods, and valuation as areas of focus. The priorities signal that examiners will assess the methods and controls surrounding fair valuation of illiquid assets, especially during periods of market volatility, and will scrutinize side-by-side management conflicts where advisers manage both private funds and separately managed accounts. Importantly, the 2026 priorities also emphasize recommendations of alternative investments to retail investors and those saving for retirement — placing RIAs and broker-dealers who recommend these products squarely within the examination crosshairs.

What the SEC Is Scrutinizing

Taken together, these developments paint a clear picture of the types of conduct and practices that are drawing, and will continue to draw, regulatory attention. For registered investment advisers and other financial professionals, many of these risk areas arise not only in managing private credit assets but also in recommending, distributing, and overseeing them on behalf of clients:

• Valuation Methodologies and Rigor. The Madison Capital case illustrates that the SEC expects advisers to apply valuation procedures that respond to changing market conditions. Relying on static approaches, such as valuing loans at par or at historical cost without accounting for shifts in credit markets, may be deemed a breach of fiduciary duty, even absent any intent to deceive. The SEC is examining whether firms have robust, well-documented processes for determining the fair value of illiquid assets, including whether those processes incorporate multiple data inputs and are subject to regular back-testing.
• Conflicts of Interest. Advisers that engage in principal transactions, such as selling assets from their own accounts to affiliated funds, face particularly intense scrutiny. The SEC’s concern, echoed by the DOJ, is that when a firm can “name a price internally,” as U.S. Attorney Clayton put it, the opportunity to select a price that benefits the adviser over its investors is significant. Cross-fund transfers, seed investments, and inter-affiliate transactions are all areas where conflicts can arise and where regulators will expect meaningful safeguards.
• Disclosures to Investors. The SEC is evaluating whether the valuation policies and procedures that advisers disclose to investors in offering documents, advisory agreements, and Form ADV filings accurately reflect what the adviser actually does in practice. Gaps between disclosed policies and actual practices, or failures to update disclosures when practices change, can form the basis for fraud charges under the Investment Advisers Act, as the Madison Capital case demonstrated.
• Fraudulent Valuations and Mismarking. Director Woodcock specifically identified “fraudulent valuations and mismarking” among his enforcement priorities. This signals that the SEC will pursue cases where managers intentionally or recklessly inflate portfolio valuations to generate higher management fees, improve reported performance, or delay recognizing losses.
• Retailization and Investor Protection. The SEC’s roundtable and examination priorities reflect a growing concern about what happens as private market investments become more accessible to retail investors, including through 401(k) plans, following the August 2025 Executive Order opening the door to alternative assets in retirement plans. With retail capital flowing into products backed by illiquid assets, the SEC is focused on ensuring that valuation governance is adequate to protect investors who may lack the sophistication or bargaining power of institutional allocators. For RIAs who recommend these products or allocate client portfolios to private credit strategies, this creates a distinct layer of regulatory risk: advisers must conduct adequate due diligence on the valuation practices of the funds they recommend and ensure that suitability and best-interest obligations are satisfied before placing clients in illiquid, hard-to-value investments.

Practical Implications for Registered Investment Advisers and Financial Professionals

For registered investment advisers, broker-dealers, compliance professionals, and others in the private credit distribution chain, the implications are many:

Review and Stress-Test Valuation Policies. Advisers who directly manage private credit portfolios should critically evaluate whether their existing valuation methodologies account for the full range of market conditions they may encounter, including periods of dislocation, illiquidity, or credit stress. Policies that were designed for and worked in calmer markets may not withstand scrutiny when conditions deteriorate. Back-testing valuation determinations against subsequent outcomes (such as actual sale prices) can help identify weaknesses. RIAs who allocate client assets to third-party private credit funds should, at a minimum, understand the fund’s valuation methodology and assess whether it is reasonable, appropriately documented, and subject to independent oversight.

Document Everything. The SEC’s examination priorities and enforcement actions consistently emphasize the importance of documentation. Firms should maintain clear, contemporaneous records of how valuations are determined, what inputs and assumptions are used, who is involved in the process, and how valuation committees reach their conclusions. Firms also should maintain clear, contemporaneous documentation of appropriate due diligence analysis and risk disclosure to investors.

Ensure Disclosures Match Practice. Advisers should conduct a thorough review of all investor- and client-facing disclosures—including Form ADV, advisory agreements, offering memoranda, and any marketing materials describing private credit strategies—to confirm that the valuation procedures, risk factors, and liquidity terms described in those documents accurately reflect current practices. Where discrepancies exist, they should be corrected promptly.

Manage and Disclose Conflicts of Interest. Advisers that engage in principal transactions, inter-fund transfers, or other transactions involving potential conflicts should ensure they have robust policies and procedures to manage those conflicts — and that they can demonstrate compliance with those policies. But conflicts are not limited to the fund management level. RIAs who receive revenue sharing, placement fees, or other compensation, including potential non-cash compensation, in connection with recommending private credit products must ensure those arrangements are fully disclosed and do not compromise their fiduciary obligations. Independent oversight, such as the involvement of a valuation committee with members who do not have a financial interest in the outcome, can provide an important additional safeguard.

Strengthen Due Diligence on Private Credit Offerings. RIAs and broker-dealers who recommend private credit investments to clients should ensure their due diligence processes are thorough and well-documented. This means going beyond marketing materials to evaluate a fund’s valuation governance, auditor independence, liquidity terms, track record, and the reasonableness of reported returns. Suitability and best-interest obligations under Regulation Best Interest and the Investment Advisers Act fiduciary standard require advisers to understand the products they recommend—and to be able to demonstrate that understanding to examiners.

Looking Ahead

Private credit has grown too large and too significant to the broader financial system to escape the kind of regulatory attention that public markets have long received. The SEC has moved beyond generalized warnings and is now actively deploying its enforcement resources to address the risks it perceives in this space, and it has made explicit that its focus extends beyond the largest fund sponsors to reach every participant in the distribution chain.

For registered investment advisers and financial professionals, the takeaway is this: proactive preparation is far less costly than reactive defense. Firms that re-underwrite their valuation processes, strengthen due diligence on the private credit products they recommend, tighten conflict disclosures, and ensure that their compliance programs reflect current regulatory expectations will be far better positioned to weather scrutiny than those that wait for an SEC examination letter or enforcement inquiry to arrive.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.