Kansas senator seeks suspension of Beneficient’s novel investment mechanism

TOPEKA — Democratic Sen. Tom Holland requested state banking regulators immediately suspend operations of a company unique to Kansas and established to provide wealthy individuals an opportunity to secure loans against assets not easily converted to cash.

Holland’s plea could fall on deaf ears because legislation creating the foundation of Dallas-based Beneficient’s business model in Kansas was endorsed last year by Gov. Laura Kelly and nearly all members of the Kansas Legislature. In the 2022 session, House and Senate members again voted to build upon the state’s relationship with Beneficient.

The State Banking Commission also received part of $1 million from the state-chartered Beneficient to craft rules and regulations serving as guardrails against financial misconduct at Beneficient’s so-called TEFFI or Technology Enabled Fiduciary Financial Institution. TEFFIs are a specialized trust company and offer services typically reserved for large institutional investors.

“I am requesting that your office immediately order Beneficient to suspend operations,” Holland said. “Additionally, I am also requesting that a joint investigation including the Kansas Securities Commission, the Kansas Bureau of Investigation and your office be conducted.”

Holland said the inquiry should include Beneficient and GWG Holdings, which was Beneficient’s parent company during the state-required pilot program for the TEFFI. GWG Holdings and company officials are accused in a federal lawsuit of misleading investors and selling hundreds of millions of dollars in bonds now viewed as “worthless” in terms of market value.

GWG Holdings also has been grappling with an investigation by the U.S. Securities and Exchange Commission. The SEC issued GWG Holdings a subpoena in October 2020 for documents and information.

GWG Holdings controlled Beneficient until November, when Beneficient was spun off as an independent entity. In December, Beneficient completed the pilot program required in state law and began operations in service of investors primarily from outside Kansas. Beneficient’s strategy is to provide liquidity to people with wealth tied up in alternative assets.

In the letter sent Friday to state banking officials, Holland referenced reporting by The Kansas City Star that raised questions about the broad influence Beneficient executives had on details of the state’s regulatory approach to TEFFIs. The article pointed to a flurry of campaign contributions to Kelly, Attorney General Derek Schmidt and legislators tied to formation of the TEFFI.

“I also have a number of questions about the appearance of excessive influence Beneficient and or the Kansas Legislature may have had with your office in establishing regulations of the TEFFI financial tool,” Holland said.

Rep. Stephen Owens, a Hesston Republican and a vocal advocate of the TEFFI experiment, said the evolution of state banking law needed to establish TEFFIs could transform Kansas into an investment magnet in the way South Dakota developed its economy through credit card banking and Utah responded to demand for industrial loan banking.

“The focus of the TEFFI act is to address this new market demand principally from out-of-state investors while generating funding for our rural economies by providing a home for alternative asset investors from across the nation,” Owens said.

Beneficent chose to center its Kansas business operations in Hesston, the hometown of Beneficient chairman Brad Heppner. Investors in Beneficient aim to make money by assessing fees and charging interest on loans made on special assets that include venture capital, structured credit, private real estate funds, natural resources and even paintings or fine wine.

“I’m very excited to where we are right now,” Heppner said in an interview with the Kansas Reflector. “We have developed a framework here to really bring a great industry to our state. And we can carve this out for Kansas and do it right.”

Part of the allure for Kansas lawmakers was the commitment from Beneficient to forward a sliver of revenue to a foundation that would sponsor rural economic development.

In January, Beneficient, also known as Ben, announced it had contributed about $15 million in support of rural Kansas communities.

“I’m proud of Ben’s critical work during our opening days with generating over 99% of its new business from out-of-state investors seeking fiduciary financing from Ben and for making sure the people of Kansas directly benefit from the new home for alternative assets that they’ve helped us create,” Heppner said.

Last week, the Kansas Senate approved a pair of bills modifying state law on TEFFIs. Both received overwhelming support. Holland and Sen. Tom Hawk, D-Manhattan, voted “pass” on both out of concern with the SEC inquiry and lawsuit involving GWG Holdings.

One of the bills — House Bill 2489 — was introduced by the state banking commissioner to place in statute language articulating what would happen if a TEFFI was declared insolvent. Beneficient initially opposed that bill, but endorsed its passage after the insolvency text was deleted.

That bill, also approved by the House, would reduce the initial state fee for specialized companies such as Beneficient from the current $500,000 down to $250,000 through July 2025 and $100,000 thereafter.

Derek Fletcher, president and chief fiduciary officer at Beneficient, urged the Legislature to approve House Bill 2547. This bill has been adopted by the Senate, but not the House.

“We believe that the statutory framework provided by HB 2547 will encourage TEFFIs to form Kansas captives rather than domiciling those captives in other jurisdictions,” Fletcher said. “Doing so will not only meet the needs of the industry but will also lead to the expansion of economic opportunities for the state of Kansas.”