A former investment advisory firm, Madison Capital Funding LLC, settled with the U.S. Securities and Exchange Commission (SEC) amid allegations that it breached its fiduciary duty in the pricing of loans during the market turmoil that accompanied the pandemic.
The SEC filed settled charges against the firm, alleging that between March and May 2020, Madison Capital priced principal trades with investment funds that it advised “without determining whether those trades were at fair market value,” in violation of its advisory agreements and disclosures to investors.
According to the SEC’s order, the firm originated loans for private equity sponsors and sold portions of those loans to the funds. And, during the pandemic-driven disruption to financial markets in early 2020, the firm continued to sell loans it originated before the market turmoil, without first “assessing the effect of the market disruption on the fair market value of those loans,” it said.
At the time, “Credit spreads widened substantially across the fixed-income market, reducing liquidity and market volume in less liquid fixed-income markets such as the loan market in which the funds invested, and resulting in a decline in prices of many existing fixed income investments,” the SEC noted.
While the firm increased its monitoring of its existing portfolio companies and implemented checks to confirm that the loans being sold still maintained their credit ratings, “it did not perform other analyses to determine whether the fair market value of those loans declined as a result of the changing market conditions,” the regulator said.
The SEC noted that the loans sold during the period either continue to perform, or have been fully paid by the borrowers, but by failing to determine the effect of the market disruption on the fair market value of the loans at the time, the regulator alleged that Madison Capital breached its fiduciary duty to the funds and failed to act in line with its disclosures to investors.
The firm agreed to settle the allegations, without admitting or denying the SEC’s findings.
Under the settlement, it agreed to pay a US$900,000 penalty to the SEC, and it agreed to a censure and a cease-and-desist order.
In 2021, it also voluntarily reimbursed the funds more than US$5 million, plus upwards of US$200,000 in interest as compensation; and it voluntarily enhanced its policies and disclosures on loan transfers.