Treasury Secretary To Meet With Insurance Regulators Regarding Private Credit Risks

Thin Edge?

The quote above from Reuters was contained in a prosaic article about the prospect of the Treasury Secretary arranging "the first of a ‌series of meetings" with "domestic and international insurance regulators" to discuss Private Credit risks.

The first of the meetings could be ⁠announced as soon as Wednesday, the sources said. Based on the results of that meeting, the participants will determine the ​direction of future engagements, aiming to improve regulators' fact-based, transparent oversight of private credit lenders as their interactions with regulated ​financial institutions increase.

The nominal concern, expressed previously by Secretary Bessent, is that some sort of "contagion" occurs between the Private Credit industry and the regulated banks.

The Treasury has no regulatory control over Private Credit or the insurance sector, for that matter, but has reserved itself the right to get involved in this way:

During remarks to the Economic Club of Dallas in February, Bessent, a former hedge fund manager, said that when assets move from private credit lenders into regulated financial institutions, such as pension funds, banks, or captive insurance companies, "Treasury gets involved."

As noted in the opening quote, the Treasury also sees itself as the champion of the individual investor as well.

Bessent said individual investors through pension or 401(k) retirement accounts should be able ⁠to take ​advantage of private credit assets, but issued a warning that the Treasury ​Department was part of the process for regulating how private assets get transferred to individual investor accounts.

Implications

We are not experts in government regulatory oversight, nor are we certain, from what we've read previously on this subject, that the Treasury has the tools to directly impact the flow of capital into Private Credit directly.

The most potent tool might be the Financial Stability Oversight Council (FSOC), which is chaired by the Treasury Secretary, and can designate a nonbank financial company as systemically important, subjecting it to Fed supervision and enhanced prudential standards.

We have no reason to believe that - at this time - the Treasury has any one institution in its sights, but we could see the government seek to influence industry practices, including around whether non-accredited investors.

However, there's another related path that could be used: New FSOC guidance recently enacted creates an "activities-based" approach — meaning rather than designating a specific firm, regulators can target practices (e.g., fund-level leverage, offshore reinsurance, private letter ratings).

The FSOC could:

1. Issue a formal recommendation to the SEC under Dodd-Frank Section 120, directing the SEC to heighten suitability requirements, disclosure standards, or investor eligibility thresholds for non-traded BDCs
2. Flag fund-level leverage and liquidity mismatches in non-traded BDCs as systemic activities warranting regulatory attention, which would put SEC rulemaking pressure on the industry
3. Bessent's convening role — using Treasury's bully pulpit to push SEC, FINRA, and NASAA to tighten suitability standards in a coordinated way

Precedent

Movement has already occurred elsewhere to limit "retail" investment in non-traded vehicles.

The North American Securities Administrators Association (NASAA) is an umbrella organization for securities regulators across all 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada's provinces and territories, and Mexico — 53 jurisdictions in total. 

On September 7, 2025, NASAA's Board of Directors approved amendments to its Statement of Policy Regarding Real Estate Investment Trusts at its annual meeting. The changes became effective January 1, 2026.

For non-accredited investors, a person's aggregate investment in a REIT and other non-traded direct participation programs — explicitly including BDCs, oil and gas programs, equipment leasing programs, and commodity pools — may not exceed 10% of the person's liquid net worth at the time of investment.

The limitations are relatively loose as they do not include "accredited investors," and privately placed BDCs under Reg D are excluded entirely, as are 1940 Act registered investment companies.

Monkey See

However, the Treasury or other regulators may be inspired to take similar or even broader measures to "protect" Ma and Pa investors from investing in so-called opaque private assets, including non-traded BDCs.

The constant headlines about non-traded BDC shareholders unable to fully redeem their investments might act as an accelerant and roll back years of increasing access to these sorts of assets.

Not Good

We are getting way ahead of ourselves, but diverting away even a portion of retail investors' capital from non-traded BDCs (and other similar vehicles) would be a crushing blow to the asset management sector.

Less capital inflows - or even net outflows - could increase the cost of borrowing for borrowers.

Playing Favorites

To be fair, that impact might be offset by incremental investments by the money center and regional banks.

Treasury Bessent has not been shy in expressing his desire to see the banks recoup some of the ground lost after the GFC.

This would place more of the credit sector under the supervision and control of the Treasury.

Risk Management

Another potential impact of the government's increased scrutiny is that Insurance companies might become more wary about allocating to Private Credit, including investing in BDC common stocks or BDC-issued debt.

The amount of exposure is currently substantial:

According to a Federal Reserve study published in March 2025, the share of life insurers' general account assets exposed to below-investment-grade ("risky") corporate debt has roughly doubled since the 2007-09 financial crisis — and now exceeds the industry's exposure to subprime residential MBS in late 2007. That's a significant benchmark given what followed....BSL("Broadly Syndicated Loans") and MM CLOs ("Middle Market Collateralized Loan Obligations") alone reached a record $212 billion by end-2023. BDC assets managed by life insurer-affiliated asset managers exceeded $100 billion, representing about 40% of all BDC assets.

When Blue Owl "sold" a portion of its investments in three of its private and public BDCs to insurance companies, questions were raised as to whether these were truly "arm's length" transactions, especially as one of the buyers is a wholly owned insurance firm of the asset manager.

Even the perception that asset managers might "stuff" allegedly "rotten assets" into insurers could trigger a tightening of regulations, or just a drop in the pertinent AUM balances involved.

In either case, the impact would be the same: less capital available to BDCs, both public and private.

CONCLUSION

Unclear

This might all be much ado about nothing much and may end up being an exercise in "virtue signalling" by the Treasury and other regulators at a time of high anxiety, if the headlines in Bloomberg are to be believed.

Possibilities

We doubt that any serious attempt will be made to restrict retail investors from investing in the common stock and bonds of public BDCs.

Non-traded BDCs, though, may have a harder time maintaining unfettered access to the general public.

In any case, even without any new limitations, the recent bad press may keep some investors away from this subset of Private Credit for years to come.

Irony

Should that occur, the public BDCs might be the greatest beneficiary as spreads widen on less competition for new loans and as the asset managers re-focus on building up their public vehicles.

The biggest challenge there is the ever-declining profitability and market value of the public BDCs, but that eventually will change.

No Silver Lining

The sector as a whole, though, would feel the pinch if the insurance companies pull back due to new regulations and the damaged reputation of BDC investing.

However, these are early days and much - or very little - could yet happen.