SEC Charges Adviser in Connection with a Series of Season and Sell Transactions

Background:

On February 25, 2026, the SEC announced a settled enforcement action against an investment adviser arising from a series of “season and sell” transactions executed during the early COVID-19 market dislocation. The SEC alleged that the adviser transferred loans at prices that did not adequately reflect prevailing market conditions. ⁽¹⁾
The case is significant for several reasons: 1) The mechanics of the “season and sell” transactions were consistent with common industry practice; 2) The transfers were structured as principal transactions but were appropriately approved by an independent third party; 3) Fund disclosures expressly stated that transfers would be made at fair value as determined by the adviser, without obtaining third-party valuations; and 4) Of 143 loans transferred, all but one were fully repaid; investors suffered no losses.
Despite these facts, the SEC obtained a settlement that effectively challenged the adviser’s transfer valuations. The adviser voluntarily reimbursed $5.2 million in an examination and also paid a $900,000 civil penalty as a result of this enforcement action.

Key Facts:

Season and Sell Structure: “Season and sell” transactions are commonly used to address tax considerations for certain offshore investors. Loans are originated and held temporarily on a manager’s balance sheet or in an onshore fund, then sold—typically at or near cost—to an offshore vehicle once the seasoning period is satisfied. Because hold periods are short and loan prices are generally stable, transfers frequently occur at cost.
COVID-Era Season and Sell Transfers: During early COVID in 2020, credit spreads widened materially and secondary market prices declined. During this period, the adviser executed 143 season-and-sell transfers.
- The loans were effectively transferred at cost.
- The transfers were executed in accordance with the adviser’s standard practice and were approved by a third-party representative of the investors. However, the adviser misrepresented to that third party that the loans were transferred at fair market value, notwithstanding the ongoing and evident market dislocation.
Fund Disclosure: The adviser disclosed that loans would be transferred at “fair value as reasonably determined by [the adviser] without any third-party valuation.” This was viewed as insufficient disclosure by the SEC.
- Analysis: The SEC relied on the adviser’s “fair value” disclosure and external communications acknowledging significant spread widening to argue that the transfers were not executed at fair value. The SEC further contended that the third-party representative relied on the adviser’s valuation “misrepresentation”, despite obvious market dislocation that should have prompted additional scrutiny.

Takeaways:

Heightened Valuation for Season and Sell and Other Transactions: Even with robust disclosure and a documented process, advisers may be expected to reassess fair value at each season-and-sell transfer—particularly during periods of market stress. This could be operationally challenging given that season-and-sell transaction volume is typically high and in many situations the adviser may have fiduciary obligations to both buyer and seller. While this may seem daunting, developing enhanced procedures for identifying and reacting to “extraordinary market conditions” may mitigate risk.
Limited Protection from Third-Party Valuation Approval: Independent approvals do not always eliminate valuation risk. No matter what, ultimate responsibility for valuations remains with the investment adviser. If using a third party, the adviser must provide the third party with all relevant information, ensure the third party is qualified to perform the valuation, and properly oversee their work to prevent errors. This principle extends beyond season-and-sell structures and is especially relevant for continuation vehicles and today’s evergreen and retail products.
Disclosure Has Limits: Disclosure that no third-party valuation would be obtained did not protect the adviser because it was paired with a representation that transfers would occur at market value—an assertion the SEC alleged was inaccurate. Disclosure is only effective if it is complete and does not omit material information. However, this may be challenging to achieve in advance because materiality often becomes clear only in hindsight. Advisers must remain focused on their fiduciary obligations and evaluate each situation individually when engaging in potentially conflicted transactions.
Continued Aggressive Enforcement: The near-universal repayment of loans, absence of realized investor harm, and a $5.2 million remediation during the examination did not preclude enforcement. The case underscores that regulatory risk continues to exist.

_{(1) In the Matter of Madison Capital Fund LLC}