Kansas banking commissioner pleads for greater oversight of novel financial institution

Executives of lone company in market assures legislators all is well

By: - December 1, 2022 3:00 pm
Kansas banking commissioner David Herndon appears at a legislative hearing at the Statehouse

Kansas banking commissioner David Herndon, center, renewed a request of the Kansas Legislature to strengthen regulatory oversight of a new form of financial management company known as TEFFIs. Executives of the state’s first TEFFI, Beneficient Company Group, has resisted expansion of the role of banking regulators. (Tim Carpenter/Kansas Reflector)

TOPEKA — The top banking regulator in Kansas urged legislators Thursday to embrace bills clearing a path for criminal background checks and fingerprinting of officers, directors and organizers involved in a new type of financial institution catering to wealthy people securing loans with their illiquid assets.

State banking commissioner David Herndon asked a joint House and Senate committee to endorse the reforms and he reiterated frustration with state law inhibiting routine scrutiny of Beneficient Company Group, the state’s first authorized TEFFI or Technology Enabled Fiduciary Financial Institution. Beneficient, with offices in Hesston, is an online trust company offering services typically reserved for large institutional investors.

The state Office of the Banking Commissioner has clashed with Beneficient executives and legislators who argued creation of TEFFIs could be the basis of a profitable financial services sector in Kansas. Advocates point to TEFFIs as a vehicle for economic development in rural parts of the state. The latest forum for this conflict was the special committee meeting to examine status of the TEFFI law and review Beneficient’s activities.

“The concerns I have previously expressed regarding the OSBC’s ability to conduct meaningful examinations remain,” Herndon said. “In particular, the limitations in the TEFFI act that disallow consideration of safety and soundness principles. I once again request consideration by this committee and the Kansas Legislature to allow us to conduct the type of examination as we do for Kansas state-chartered banks and trust companies.”

He said departures from generally accepted accounting principles “have and will hamper” or “diminish our examination activities” in relation to TEFFIs.

Rep. Jim Kelly, a banker, Independence Republican and member of the joint committee, said he couldn’t shake concern Kansas law regarding TEFFIs fell short. There is no justification for establishing a regulatory standard for TEFFIs lower than expectations for chartered banks and trust companies in Kansas, he said.

He said the 2023 Legislature ought to bolster mandatory evaluations of TEFFIs to offer the public, potential investors and the industry confidence in this business model.

“With TEFFIs occupying a new third lane in the financial marketplace, I do not believe the OSBC has the authority in current legislation to truly conduct this same type of fair and comprehensive review,” Kelly said.

Derek Fletcher, president and chief fiduciary officer of Beneficient Company Group, and others with the company told a joint House and Senate committee the novel financial services firm was meeting start-up business and economic development goals. (Tim Carpenter/Kansas Reflector)


‘Safe and sound’

Brad Heppner, founder and chief executive officer of Beneficient, said he wanted legislators to understand the company was developing this industry “the right way.”

“We’re taking a step forward in Kansas to advance an industry, but we’re doing it in a safe and sound way,” he said. “We’re going to have to get regulators, we’re going to have to get commissioners, to understand the points that I’m making. And, hopefully, embrace it.”

Heppner said Beneficient was in the process of transitioning to a publicly held company that would likely be listed on the Nasdaq exchange. The company is a few weeks away from filing documents with the U.S. Securities and Exchange Commission.

“What’s the importance of being able to go public? It fuels our balance sheet. We need to do that through the U.S. capital markets. To do that … we need to be a public company,” Heppner said.

Kansas banking officials said no business entity had approached them to inquire about forming a state chartered TEFFI along the lines of Beneficient.

However, Beneficient executives submitted a letter to the committee from Convergency Partners, an advisory firm in Boston. Jeffrey Miller, a managing partner in Convergency, said the statutory framework in Kansas was “incredibly innovative and a potential game-changer for financial institutions focused on providing management, custody and liquidity services for alternative asset investors.”


Fulfilling promises

Derek Fletcher, president and chief fiduciary officer at Beneficient, said the company pledged in March 2021 to attract investments of $250 million in 2022 and to funnel $10 million to $15 million into rural economic development. Beneficient executives said the investment total had reached $255 million and a total of $16.5 million had been earmarked for a Kansas Department of Commerce rural grant program and for a Hesston-based foundation for local economic growth.

“When we were here a little over a year ago we made promises in terms of the business that we would be able to generate and the benefits to the economic growth zones,” Fletcher said. “Pleased we have been able to fulfill those promises.”

The Department of Commerce is working on allocating $2.9 million in grants to small, rural economic development projects. In Hesston, plans are proceeding to use of funding held by a Beneficient foundation to transform one side of city’s Main Street into a 18,000-square-foot grocery store.

In an attempt to dial back tension regarding Beneficient, it was mutually agreed Tim Kemp, the state’s deputy bank commissioner, would meet in person monthly with Alan Deines, a managing director with Beneficient.

“The discussions have included items that have gone well and those items that have not gone as well,” Kemp said. “It is truly a discovery of what is needed to properly regulate a TEFFI. These meetings have resulted in improved dialogue between the parties.”


Delaying oversight

Herndon, the state banking commissioner, said the agency experienced “material delays” in considering Beneficient’s application to operate in Kansas. That included an inability to secure FBI background checks on Beneficient’s officers, directors and organizers and failure of the company to promptly deliver audited financial statements, he said.

Not until Oct. 27 did Beneficient submit to the banking commission audited financial statements for periods ending Dec. 31, 2020, Dec. 31, 2021, and March 31, 2022.

Herndon said Kansas law leading to issuance of a state charter to Beneficient allowed the company to sidestep a review of the “financial standing, general business experience and character of Beneficient’s organizers, or the character, qualifications and experience of Beneficient’s officers.”

Two banking commission examinations related to the company’s information technology infrastructure and the bank secrecy act were completed this year and a third examination regarding its business operations is expected to begin in mid-December, officials said.

In March, state Sen. Tom Holland, D-Baldwin City, requested state banking regulators suspend operations of Beneficient to allow investigations by banking regulators, the Kansas Securities Commission and the Kansas Bureau of Investigation. Bankrupt GWG Holdings, the former parent company of Beneficient, has been subject of a federal lawsuit for allegedly misleading investors in the sale of “worthless” bonds. GWG Holdings also had been under investigation by the Securities and Exchange Commission since 2020.

GWG Holdings controlled Beneficient until November 2021, when Beneficient was spun off as an independent entity. Beneficient began operations in Kansas in December 2021 under a pilot program.

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Tim Carpenter
Tim Carpenter

Tim Carpenter has reported on Kansas for 35 years. He covered the Capitol for 16 years at the Topeka Capital-Journal and previously worked for the Lawrence Journal-World and United Press International. He has been recognized for investigative reporting on Kansas government and politics. He won the Kansas Press Association's Victor Murdock Award six times. The William Allen White Foundation honored him four times with its Burton Marvin News Enterprise Award. The Kansas City Press Club twice presented him its Journalist of the Year Award and more recently its Lifetime Achievement Award. He earned an agriculture degree at Kansas State University and grew up on a small dairy and beef cattle farm in Missouri. He is an amateur woodworker and drives Studebaker cars.