Kansas alternative investment program hits snag with FBI over background checks

Hesston native involved in pilot program predicts state can glean billions from tax-friendly regulations

By: - January 12, 2022 12:32 pm

David Herndon, the Kansas bank commissioner, appears Wednesday before the House Financial Institutions and Rural Development Committee. (Sherman Smith/Kansas Reflector)

TOPEKA — A pilot program designed to lure billions of dollars into Kansas in the form of alternative investments faces an unforeseen obstacle in the FBI’s refusal to conduct criminal background checks, the state’s banking commissioner told lawmakers Wednesday.

The idea behind legislation passed last year is to pioneer a tax-friendly framework of regulations for financial institutions that specialize in non-cash holdings, such as real estate, art, antiques, venture capital or hedge funds. The institutions have to set up operations in a small Kansas town and contribute 2.5% of their transactions to economic development projects in exchange for a tax credit.

Lawmakers created a pilot program for Hesston native Brad Heppner — the founder and CEO of Dallas-based Beneficent Company Group, which specializes in alternative trusts — to commence transactions by Dec. 31.

David Herndon, the Kansas banking commissioner, told the House Financial Institutions and Rural Development Committee that the company has received transactual authority, even though background checks of individuals associated with the company couldn’t be completed. In a letter, the FBI objected to overly broad language in the legislation that asks for a background check of any person related to the application deemed necessary by the state banking board.

Herndon said he has tried since Dec. 16 to contact the FBI and get clarification on how to update the law with acceptable language, but he hasn’t been able to get anyone to return his phone calls. Herndon said he enlisted the help of U.S. Sen. Jerry Moran.

“I don’t want to throw the FBI under any bus, but the reply was they could take up to 150 days to reply to their emails,” Herndon said. “I don’t know how long it takes them to reply to a voicemail.”

The issue regarding background checks would need to be resolved before the pilot program could evolve.

Herndon also recommended changes to the regulatory framework, such as clarifying what happens if one of the alternative investment banks — officially referred to as technology-enabled fiduciary financial institutions, or TEFFIs — stops operating. He also wants lawmakers to clarify to what extent a TEFFI can engage in traditional trust business, and to make TEFFIs mandatory reporters of elder abuse.

Heppner has thrilled lawmakers with his estimates for how much money the state could glean from these investment holdings. At a hearing last month, he told lawmakers that U.S. investors and institutions held $5.8 trillion in alternative assets in 2020, and that the figure could soon grow to $9 trillion because of the fast-paced accumulation of wealth among  mid-to-high net worth individuals.

In Kansas, Heppner predicted, investments could translate to $2.8 billion in annual economic growth and as much as $7 billion in gross domestic product for the state.

He was negotiating with the city of Hesston to acquire a 22-acre abandoned neighborhood to redevelop into a multipurpose commercial property. The city has a population of about 3,800.

The pilot program requires his company to make an initial distribution of at least $9 million. He said the figure could be closer to $15.5 million.

Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our web site. Please see our republishing guidelines for use of photos and graphics.

Sherman Smith
Sherman Smith

Sherman Smith is the 2021 and 2022 Kansas Press Association’s journalist of the year. He has written award-winning news stories about the instability of the Kansas foster care system, misconduct by government officials, sexual abuse, technology, education, and the Legislature. He previously spent 16 years at the Topeka Capital-Journal. A lifelong Kansan, he graduated from Emporia State University in 2004 as a Shepherd Scholar with a degree in English.