On September 18, 2026, the SEC issued a cease-and-desist order (Order) against an investment adviser and its principal for breaching their fiduciary duty during a plan to liquidate registered funds. To alleviate a liquidity crunch, the firm negotiated a transaction to sell its registered funds’ illiquid assets for preferred shares in another firm in advance of an anticipated IPO. The firm failed to perform proper diligence on the counterparty, however, resulting in investors incurring approximately $300 million in losses. The Order is notable as an instance where the SEC applied Rule 206(2) under the Investment Advisers Act of 1940 in the context of investment due diligence to find that fraud occurs when a poor diligence process fails to produce a reasonable basis to believe in the likelihood of an investment succeeding. Although the matter involves registered funds, the lessons therein apply equally to private fund managers. This article summarizes the Order and offers practical takeaways for fund managers, with expert legal commentary. See “SEC’s Approaches to Exams, Enforcement and Retailization Under Atkins” (Jun. 11, 2026); and “SEC’s Latest Enforcement Results and Budget Request Affirm Focus on Fraud” (Jun. 11, 2026).