The SEC’s recent enforcement action against Madison Capital Funding LLC highlights a clear and evolving priority: valuation is not merely an outcome, but a process subject to ongoing scrutiny – especially during periods of market disruption. In a recent Law360 article, Michael Longyear and Caleb Ellis detail how the Commission imposed significant penalties without alleging fraud, instead focusing on the firm’s failure to reassess its valuation methodology amid the extreme volatility of early COVID-19 market conditions. The case underscores that adherence to preexisting pricing formulas, without contemporaneous market analysis, may constitute a breach of fiduciary duty.

 

The Commission’s theory reflects a broader enforcement trend – treating valuation processes as an extension of disclosure obligations. Where advisers represent that assets will be priced at “fair value,” that representation imposes a continuing duty to perform a substantive and defensible analysis as conditions evolve. In the Madison Capital matter, the SEC framed the failure to revisit assumptions as negligence under the Advisers Act, even though the firm had implemented other responsive measures and the underlying assets largely performed.

 

For investment advisers and defense counsel, the implications are significant. The decision emphasizes the importance of documenting real-time valuation judgments, ensuring that review mechanisms provide meaningful oversight, and recognizing that formal compliance structures may not insulate against liability. It also reinforces the value of prompt remediation in mitigating enforcement risk. More broadly, the case serves as a practical roadmap for how the SEC is likely to approach valuation-related inquiries – focusing less on intent and more on whether firms can demonstrate a disciplined, adaptive process in changing market conditions.