Kansas banking commissioner still not sold on Beneficient’s unusual business model • Kansas Reflector

TOPEKA — The Kansas banking commissioner renewed apprehension about regulatory limitations in state law that inhibit thorough examination of the unusual business granted a banking charter by order of the Kansas Legislature.

State banking commissioner David Herndon said Kansas law adopted in 2022 provided the charter to Beneficient Fiduciary Financial LLC of Hesston and simultaneously forbid the Kansas Office of State Banking Commissioner from applying international evaluation standards to BFF. The statute blocked the commissioner from rating BFF in terms of capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk.

Kansas kept state banking regulators from fully examining operations of BFF, Herndon said, despite his belief BFF’s debt instruments should be considered a “substandard asset.” Two recent limited evaluations of BFF by Herdon’s staff remain confidential, he said.

In addition, Herndon last week told the Kansas Joint Committee on Fiduciary Financial Institutions that state law failed to meet requirements established by the Federal Bureau of Investigation for background checks of organizers at BFF or any other technology-enabled fiduciary financial institution, or TEFFI, authorized by the state. So far, BFF is the lone TEFFI in Kansas.

“Those concerns remain, and in some cases, have deepened,” said Herndon, who had sounded alarms since inception of the TEFFI concept. “It is still impossible to conduct a meaningful safety and soundness examination.”

The U.S. Securities and Exchange Commission launched an investigation of Beneficient, the Dallas-based parent company of BFF. In July, Beneficient said the SEC closed that inquiry and wouldn’t recommend enforcement action by the SEC. However, Herndon said, financial problems at the parent company could bleed into BFF and other Beneficient subsidiaries.

‘Turned a corner’

A series of executives associated with Beneficient and BFF offered the bipartisan House and Senate oversight committee a contrary perspective on work to implement a TEFFI law unique to Kansas. The executives said the company had faced challenges, but were bullish on prospects of generating revenue, contributing to economic development in Kansas and serving as a positive example for how business could be conducted under a TEFFI model.

The heart of the operation involved Beneficient assisting wealthy individuals and business owners to exchange illiquid assets locked in investment funds for liquid assets such as cash and stock. Beneficient has no interest in the deals on expensive artwork, antique vehicles or wine collections, but has targeted private equity assets that hold value but don’t produce regular cash flow.

The Kansas-endorsed business earns fees for work with these alternative assets. Twenty percent of a 2.5% cut in fee revenue must be diverted to the Kansas Department of Commerce for distribution to economic development projects across the state. The remaining 80% of this slice of fee revenue must flow to the Beneficient Heartland Foundation for economic development in Hesston.

Brad Heppner, CEO and board chairman of BFF, said constraints in the U.S. economy inhibited mergers and acquisitions that would have contributed to Beneficient’s TEFFI business model. After taking Beneficient public on Nasdaq in 2023, the financial services company’s stock crashed. The 52-week high in Beneficient stock value was $51.14 per share and the 52-week low was less that $1 per share. On Tuesday, it sat at 82 cents per share.

Heppner told state lawmakers he was optimistic there would be a surge during the next year or so in U.S. mergers and acquisitions. He said the forecast was based, in part, on promises made by President-elect Donald Trump.

“We have turned the corner,” Heppner said. “Finally, after a pretty disastrous previous year.” He said there were no guarantee of a stronger market for alternative asset deals, “but there’s general euphoria.”

In April 2022, Heppner predicted as many as 50 companies eager to operate as a TEFFI could open offices in Hesston within two years. None have done so.

Rep. Stephen Owens, a Hesston Republican and legislative champion of BFF and Beneficient, said when the TEFFI law was created that it could attract alternative asset businesses to Kansas in the same way the credit card issuing industry boomed in South Dakota.

He said two years ago a business-friendly TEFFI model could drive as much as $1 billion over a decade into Kansas. Owens is on the joint legislative oversight committee responsible for monitoring BFF.

Democratic Sen. Jeff Pittman of Leavenworth, another member of the committee, said he was concerned the TEFFI concept hadn’t taken off in the way Heppner and Owens predicted in the past. He said members of the Legislature would benefit from testimony by independent experts in the banking industry who might explain what was holding back investment in the TEFFI market.

During the joint committee’s recent hearing at the Capitol, testimony came from BFF associates, the state banking commissioner and the state Department of Commerce.

Heppner said it was true BFF remained the lone TEFFI in the United States, but he asserted there was interest from two out-of-state groups that might be willing to enter the alternative asset business in Kansas. He didn’t identify those entities.

The state banking commissioner said he’d had no inquiries from companies intrigued by Kansas’ first-of-its-kind alternative asset framework.

Sen. Michael Fagg, R-El Dorado, praised BFF’s distribution of several million dollars in economic development seed grants through the Department of Commerce. The third round of grants were released by the Department of Commerce in September.

Fagg lauded plans to move ahead with revitalization of Main Street in Hesston, including development of a grocery store. That work is funneled through the Beneficient’s foundation.

“We wouldn’t have any of this economic development without BFF,” Fagg said. “We’re trying to promote a new idea. I wanted to personally and publicly thank them (BFF) for that.”