The U.S. Securities and Exchange Commission announced that formerly registered investment firm Madison Capital Funding LLC will pay $900,000 to settle claims that it did not properly gauge the effects of market disruptions related to the COVID-19 pandemic when selling certain loans.

The SEC's order filed on Wednesday states that Chicago-based Madison Capital originated certain senior loans for private equity sponsors that were acquiring companies, and sold portions of those loans to pooled investment vehicles after holding them for one to two months.

At the start of the COVID-19 pandemic, Madison Capital continued to sell performing loans it originated before the market disruptions at par value less the unamortized loan fee, but failed to determine how the disruptions affected the market value of the loans, the SEC alleges.

Madison Capital set up and organized the funds for institutional investors, such as banks, insurance companies, family offices, and other asset managers, and provided advisory services to each of the funds, according to the order.

Madison Capital executed 143 sales to the funds in early 2020 at par value less the unamortized loan fee, without any adjustments that reflected the market conditions at the time, the SEC alleges.

"All of the loans were subject to downward price pressure, and certain borrowers' operations were directly affected by market conditions, such as a franchisee of a national fitness center chain that temporarily paused in-person operations," the SEC said.

The SEC alleges that Madison Capital willfully violated the Investment Advisers Act, which prohibits it from making false and misleading statements to investors of the pooled investment vehicles.

To settle the claims against it, and without admitting or denying wrongdoing, Madison Capital agreed to pay a $900,000 civil monetary penalty. It also agreed to a censure, the order states.

The SEC said that it considered remedial acts "promptly" taken by Madison Capital five years ago when determining the penalty. In May 2021, Madison Capital voluntarily reimbursed the funds over $5 million with interest as compensation for the sale of loans to the funds at purchase price less the unamortized loan fee, and it made enhancements to its disclosures and policies related to its loan transfer practice, according to the SEC.

Representatives of the parties did not immediately respond to requests for comment on Thursday.

The SEC is represented in-house by Ryan Suniga and Jonathan Katz.

Counsel information for Madison Capital was not immediately available on Thursday.

The case is In the Matter of Madison Capital Funding LLC, administrative proceeding file number 3-22599, before the U.S. Securities and Exchange Commission.