SEC calls for rigor in private credit valuation practices, disclosures

The US Securities and Exchange Commission’s (SEC’s) Office of the Chief Accountant and the Division of Investment Management (collectively, the staff) recently issued a statement addressing fair value measurement and disclosure considerations for private assets, with a particular focus on private credit.

Although this valuation statement does not create new legal obligations, it provides yet another reminder of the SEC’s continued focus on the private credit valuation process and calls for rigor in how private credit assets are valued and disclosed to investors. The statement follows other recent SEC activity focused on valuation practices of private fund managers, including increased scrutiny of valuation practices during examinations and enforcement settlements involving mismarking and valuation practices in private credit.

SEC Staff Statement on Fair Value Measurement and Disclosure Considerations for Private Assets

The valuation statement addresses accounting and disclosure considerations associated with determining fair value of typically illiquid private credit assets.

The staff notes that private credit receives particular attention because of both the significant growth of private credit investments and the specific valuation challenges associated with individually negotiated illiquid instruments for which market quotations may not be readily available. The staff emphasizes that the judgment and inherent complexity in valuing these assets calls for thoughtful policies and procedures and clear disclosure to investors.

Among other things, the valuation statement emphasizes that:

• Information quality and timeliness matters. Because of the bespoke nature of covenants and reporting requirements in borrower arrangements, information necessary to form the basis for fair value measurement may not be sufficient to support timely monitoring and financial reporting obligations. The “lack of timely borrower information does not relieve management of its responsibility to estimate fair value.” Managers should evaluate whether reporting provisions in a particular credit arrangement are sufficient to support timely monitoring and financial reporting.
• Broader market developments may affect valuation. Fair valuation requires supplementing or adjusting borrower-specific information if it differs from reasonably available information a market participant would use when pricing an asset. This may require consideration of whether factors such as prevailing credit spreads, liquidity conditions, and compensation a market participant would demand for bearing the risks associated with the investment are consistent with assumptions that a market participant would use and are reasonably available.
• Robust calibration is an important element of valuation processes. Calibration practices such as periodic reassessments of model outputs in light of comparable transactions, public market equivalents, secondary market indications, or relevant credit indices are an important element of a well-functioning valuation process.
• Disclosure matters. Level 3 investments require meaningful and clear disclosure of valuation techniques and significant inputs, as well as asset characteristics such as interest rates, maturity dates, income producing stats, and payment-in-kind (PIK) interest status, in order for investors to better understand the quality of reported income, impacts to fair value, and changes to risk characteristics within a portfolio. In particular, the staff shared a word of caution around use of “boilerplate” disclosures that are overly aggregated or that otherwise obscure significant valuation judgments and uncertainty.

The message is consistent with the SEC’s February 2026 enforcement action: Valuation is a process, not a formula. A methodology that may be reasonable under ordinary circumstances should be reassessed when borrower-specific facts or market conditions change.

Use of NAV as a practical expedient requires ongoing assessment

The staff noted that its ongoing dialogue with market participants has highlighted the need to issue a reminder that the use of net asset value (NAV) as a practical expedient is available only when certain conditions are met and may result in a measurement that differs from the fair value that might be realized in a transaction between market participants on the measurement date. Managers are reminded to treat this assessment as an iterative, evidence-based process; to identify reasonably available secondary-market information and evaluate what that information indicates for using the expedient; and to document the basis for the manager’s conclusions.

Audit considerations

The staff expressly acknowledges the role of auditors in enhancing the credibility of information received by investors related to the fair value of private credit assets. The staff calls on auditors to perform robust risk assessment procedures that take into account external factors, including industry and market conditions, to evaluate whether changing circumstances and new information may require an auditor to modify its audit response and reconsider whether management’s reliance on prior assumptions in valuing a private credit asset is consistent with market participant assumptions as of the reporting date, especially in times of market disruption. Highlighting auditors’ requirements to evaluate the reasonableness of significant assumptions and reliability of data supporting the fair value conclusions reflected in financial statements, the staff also reminds auditors that audit evidence includes all information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. This information consists not only of information that supports and corroborates management’s assertions but also information that contradicts such assertions.

Continued SEC focus

The valuation statement does not stand alone. The SEC’s recent examination priorities and enforcement activity continue to highlight valuation as an important consideration for investment advisers, particularly where advisers manage illiquid or difficult-to-value assets.

• Private credit managers should review their valuation processes and disclosures. Managers may wish to pressure-test their valuation policies, committee procedures, escalation protocols, and third-party valuation arrangements now, including whether actual practices (that may have changed as a result of circumstances or market factors) are consistent with written policies and investor disclosures.
• Valuation is a process, not a formula. Managers should consider whether valuation methodologies and assumptions remain appropriate as borrower-specific facts and market conditions change. Amendments, extensions, PIK features, covenant stress, restructurings, and other developments may warrant reassessment rather than continued reliance on a prior mark. When publicly traded or otherwise quoted debt of the same issuer – or debt elsewhere in the issuer’s capital structure – is available, that pricing may provide particularly relevant market evidence. While differences in seniority, collateral, maturity, covenants, liquidity, or other terms may support a different valuation for the credit, managers should consider relevant evidence as part of the overall valuation assessment.
• Documentation matters. Managers should expect examination staff to consider not only the ultimate valuation but also whether contemporaneous records demonstrate what information was considered, how assumptions were challenged, the disclosures that were made, how disagreements were resolved, and why the resulting valuation was reasonable.