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The article in brief:

• The SEC issued a joint statement highlighting heightened scrutiny on private credit valuations, focusing on rigor, transparency, and audit support, signaling increased regulatory focus on valuation practices and disclosures.
• Fund managers should calibrate models with market data, avoid stale borrower information, and provide detailed disclosures for Level 3 inputs, NAV practical expedients, and Payment-in-Kind (PIK) interest risks.
• In response to increased auditor skepticism, fund managers should review calibration processes, enhance risk disclosures, and strengthen supporting documentation to defend fair value determinations.

The SEC’s recent joint statement adds to growing regulatory attention around private credit valuations and related disclosure practices. In a joint statement issued on September 28, 2026, the SEC’s Office of the Chief Accountant and the Division of Investment Management outlined heightened expectations for valuation rigor, transparency, disclosure, and audit support for private assets, specifically private credit. The statement applies to all registrants with exposure to private credit assets, not just Investment Company Act funds or business development companies.

While the statement does not introduce new requirements, it highlights areas that regulators and auditors may increasingly scrutinize. While the Staff did not propose new rules, the guidance highlights areas where existing practices may not meet regulatory expectations, focusing on valuation methodologies, documentation, and risk disclosures.

The private credit market has expanded significantly in recent years, along with growing concerns about valuation transparency, liquidity mismatches, borrower stress, and the increasing use of PIK structures. As market conditions evolve and refinancing risks persist, regulators appear increasingly focused on whether fair value measurements appropriately reflect current market participant assumptions.

Key Takeaways for Valuation Professionals and Fund Managers

Valuation Rigor and Calibration (ASC 820, Rule 2a-5)

Management’s Responsibility. Lack of timely, borrower-specific information or bespoke loan terms does not excuse management from estimating fair value at each measurement date.

Market Participant Perspective. Internal expectations must be adjusted or supplemented using reasonably available external market data, including prevailing credit spreads, liquidity conditions, and market risk premiums.

Calibration Practices. Initial transaction prices should generally be considered when calibrating valuation techniques in accordance with applicable fair value guidance. Subsequent measurement models may need to be periodically recalibrated against current market indications (e.g., credit indices, secondary market transactions, public market equivalents).

Enhanced Disclosure Expectations (Regulation S-X)

Portfolio Risk. Fund managers should consider providing greater transparency on:

• Criteria used to classify investments as non-accrual
• Accounting treatment of previously accrued but uncollected interest
• When and how PIK interest is recognized
• The extent to which PIK income contributes to overall portfolio returns
• What increasing PIK balances signal about borrower financial condition or potential increases in credit risk

Level 3 Measurements. Fund managers should avoid boilerplate or overly aggregated language. Specificity is required regarding valuation techniques, significant unobservable inputs (e.g., discount rates, credit spreads), and sensitivity analysis.

Net Asset Value (NAV) Practical Expedient (ASU 2009-12)

Applying the NAV practical expedient remains optional on an investment-by-investment basis, but it cannot be used if a sale at an amount different from NAV is probable as of the measurement date. The SEC’s statement signals greater scrutiny for both buyers and sellers participating in secondary market transactions. Funds selling at a discount to NAV should cease using the practical expedient as soon as a transaction is contemplated rather than continuing to use it until the transaction is completed. Funds purchasing assets at a discount to NAV should consider whether the NAV practical expedient remains appropriate going forward. If they determine that it is, they should document how they concluded the purchase transaction did not represent fair value (for example, because of a distressed or motivated seller).

Management must maintain an ongoing, evidence-based process to evaluate secondary market activity, investee valuation policies, and changing market conditions when determining whether NAV remains an appropriate practical expedient.

Management retains ultimate responsibility for concluding that an investment meets the required criteria to apply the practical expedient.

Areas Likely to Receive Greater Auditor Scrutiny

In practice, auditors are less likely to challenge a valuation methodology itself than the evidence supporting key assumptions. The SEC and PCAOB expect auditors to exercise heightened professional skepticism, particularly during times of market disruptions. As a result, auditors may increasingly question:

• Stale borrower financial information
• Unexplained changes in discount rates or credit spreads or a lack of corresponding adjustments during periods of significant market disruption.
• Reliance on transaction prices established in different market conditions
• Limited support for Level 3 assumptions
• NAV elections that are inconsistent with observable secondary market transactions

Action Plan for Fund Managers

Fund managers may need to enhance reporting requirements, maintain stronger evidence for valuation conclusions, reassess valuation inputs when market conditions change, disclose material private credit risk indicators more clearly, and ensure boards have sufficient information to oversee fair value determinations in good faith.

Reassess Valuation Processes. Ensure all Level 3 model inputs are re-grounded in observable market reference points at each reporting period.

Enhance Reporting Specificity. Update disclosures, where appropriate, to ensure entity-specific detail on PIK interest, credit risk shifts, and loan restructurings.

Document Practical Expedient Eligibility. Confirm continued eligibility and document supporting evidence, particularly where secondary market activity exists.

Conclusion

The SEC’s latest statement does not create new valuation rules, but it clearly raises expectations for how existing fair value requirements should be applied to private credit assets. Fund managers that rely heavily on judgment, Level 3 inputs, or NAV-based valuations should expect greater scrutiny from both examiners and auditors. Organizations that maintain disciplined valuation processes, robust valuation policies and governance documentation, sound calibration practices, transparent disclosures, and well-supported valuation conclusions will be better positioned to address evolving regulatory and audit expectations.

How VRC Can Help

As the private credit market continues to grow in both size and complexity, fund managers, boards, and auditors increasingly require well-supported, market-based valuation of private debt instruments. VRC’s Portfolio Valuations practice group assists clients with the valuation of private debt instruments, calibration analyses, governance reviews, valuation policy assessments, and independent fair value opinions across a wide range of private credit strategies.

Whether you are evaluating valuation methodologies, enhancing documentation practices, or addressing evolving auditor and regulatory expectations, VRC can provide independent, defensible valuation support. We welcome you to contact the article authors or a VRC professional near you.