Madison Capital and a Decade of SEC Scrutiny of Conflicts in Adviser-Managed Vehicles

A recent SEC enforcement action involving Madison Capital Funding LLC has drawn attention in the private credit market. The case involved a “season and sell” strategy in which the adviser originated loans and later sold portions of those loans to vehicles it managed. According to the SEC, the firm transferred loans to affiliated vehicles at par value less an unamortized fee during the early stages of the COVID-19 market disruption without reassessing whether the transfer price reflected fair value in light of changing market conditions. The firm had previously reimbursed the funds and enhanced its policies following an examination deficiency letter, but the SEC nevertheless pursued enforcement and imposed a civil penalty, underscoring that post-examination remediation does not necessarily preclude enforcement where the Commission concludes that disclosures were inconsistent with actual practices.

The SEC concluded that the adviser failed to reasonably determine fair value and that its practices were inconsistent with disclosures to investors regarding how affiliated transactions would be priced. The firm agreed to a cease-and-desist order, censure, and a civil penalty. Viewed alongside enforcement actions during the last ten years, the Madison Capital order fits into a broader pattern of SEC scrutiny of adviser conflicts.

A Decade of SEC Scrutiny of Adviser Conflicts

During the last decade, the SEC has brought a series of enforcement actions involving conflicts arising from adviser economics surrounding the vehicles they manage. Although the factual circumstances vary, the cases tend to fall into several recurring categories.

In the mid-2010s, the Commission focused heavily on portfolio company fees and expense allocations, bringing actions against firms such as Blackstone, KKR, Apollo, and Goldman Sachs. Those cases examined whether investors were adequately informed about the economic incentives advisers received through monitoring agreements and other portfolio company arrangements.

Later enforcement actions expanded the focus to affiliated services and operating expenses, including cases involving Monomoy Capital and Rialto Capital Management. In those matters, the SEC examined whether advisers had accurately described how expenses and affiliated service arrangements would be allocated among funds and related vehicles.

More recently, the Madison Capital case addressed inter-vehicle principal transactions, with valuation serving as the mechanism through which the conflict manifested.

Across these matters, the Commission has focused on the same underlying question: when advisers benefit economically from arrangements involving the vehicles they manage, were those conflicts fully disclosed and were the adviser’s practices implemented consistently with those disclosures?

Key Takeaways for Investment Advisers

Conflicts involving adviser economics remain a core SEC focus.
Over the past decade, the SEC has repeatedly brought cases involving portfolio company fees, expense allocations, affiliated services, and transactions between advisers and the vehicles they manage.

Disclosure and practice must align.
Many enforcement actions in this area do not challenge the existence of the underlying practice itself. Instead, the SEC focuses on whether the adviser’s practices were fully described and implemented consistently with investor disclosures, reflecting the Commission’s long-standing use of Sections 206(2) and 206(4) of the Advisers Act to police undisclosed or inadequately disclosed conflicts.

Valuation processes matter in affiliated transactions.
The Madison Capital case underscores that the SEC will closely examine how advisers determine pricing when assets move between affiliated entities and managed vehicles, particularly during periods of market disruption.

Affiliated arrangements will continue to draw scrutiny.
As investment strategies become more complex and involve multiple affiliated vehicles, advisers should expect continued regulatory attention to conflicts surrounding fees, expenses, and inter-vehicle transactions.

The Broader Context

None of the underlying practices highlighted in these cases are new. Advisers have long charged portfolio company fees, allocated expenses across funds, and engaged in transactions with affiliated vehicles. What the past decade of enforcement demonstrates, however, is the SEC’s sustained focus on how these arrangements are disclosed and implemented in practice.

The persistence of these enforcement actions may also reflect broader changes in the private investment landscape. Over the past decade, private credit, real estate, and other alternative strategies have grown significantly and have attracted a wider range of investors, including vehicles that are accessible to retail investors. As private markets become larger and more visible, regulators may view conflicts involving adviser economics as increasingly important.

Conclusion

Viewed in isolation, the Madison Capital order may appear to be another enforcement action focused on valuation practices in private credit. But viewed alongside enforcement actions over the past decade, it fits into a broader and consistent pattern of SEC scrutiny of conflicts involving adviser economics.

As private credit, real estate, and other alternative strategies continue to grow and attract a wider range of investors, that scrutiny is likely to continue. For advisers managing affiliated vehicles and complex investment structures, the lesson from these cases is relatively straightforward: conflicts involving fees, expenses, and inter-vehicle transactions should be carefully disclosed and implemented consistently with those disclosures.