Kansas’ top banking regulator says he still lacks sufficient authority to ensure a new financial institution is operating safely in the state, though he said the company had met requirements set by the Legislature to operate fully.
Kansas lawmakers on Thursday questioned the Office of the State Banking Commissioner and Beneficient, the first company to create a Technologically Enabled Fiduciary Financial Institution, or TEFFI, about the novel program.
The lawmakers recommended the full Legislature re-evaluate the law based on recommendations from the commission and Beneficient after the examination is completed.
The groups provided an update on the program, a first-of-its-kind way to allow wealthy investors to access fast cash using assets that are typically difficult to quickly convert into cash, such as art portfolios or hedge funds.
Beneficient launched a pilot program for the financial institution in January after lobbying lawmakers to legalize the practice last year. State Banking Commissioner David Herndon told lawmakers Thursday the pilot program had ended and other companies could seek licenses for such institutions in Kansas.
Regulating a TEFFI
Under the Kansas law, Beneficient paid the state a $1 million fee for the Office of the State Banking Commissioner to develop regulations for TEFFIs. A cut of the revenue generated from the project would be funneled into economic development for rural communities in Kansas.
Herndon has repeatedly raised alarms that he is unable to fully evaluate the company’s safety and soundness as he would for traditional banks. In communications obtained by The Star earlier this year Herndon and the company traded barbs over whether the company had provided Herndon with enough information to examine the bank.
Last month, Herndon said, Beneficient sent over the full financial information he needed to examine the company. However, he said, state law prohibited him from making a full determination on whether the company was safe and sound for investors, as he would a traditional bank.
“We can look at the financial statements to determine viability but that’s one thing we cannot express an opinion on as to the overall examination,” Herndon said. After conducting an examination, Herndon said, he would simply be permitted to say whether Beneficient abided by the law they helped write.
The TEFFI law requires intangible assets to be included in the examination and does not allow the commission to consider a TEFFI company’s earnings.
Brad Heppner, the CEO of Beneficient, told lawmakers Herndon’s concerns came down to comparing apples and oranges. Because TEFFI does not take deposits like a traditional bank, he said, it cannot be evaluated as one. Intangible assets, Heppner said, are a key component of the TEFFI model.
“A company like ours is required to value its intangibles. We have to do that,” Heppner said, referencing the online system that makes the system technologically enabled. “That’s why we wrote the law the way we wrote it.”
Heppner went on to explain that the financial industry as whole is relying more on intangibles.
Lawmakers seek recommendations
Nevertheless a committee of lawmakers voted to recommend the Legislature reevaluate the law around examinations once the full examination of Beneficient was completed.
Rep. Jim Kelly, an Independence Republican retiring at the end of the year, urged careful consideration.
“We’re told that TEFFI customers are financially sophisticated but I don’t believe this should mean the public or the Kansas financial system are owed any less regulatory insurance,” he said.
Senators Jeff Pittman, a Leavenworth Democrat, and Jeff Longbine, an Emporia Republican, each said Beneficient should not be treated as a normal bank.
“We’re hoping for recommendations from both the company and the OSBC on things that could make the examination process smoother, more complete and more comprehensive,” Longbine said.
The challenge, Pittman said, is allowing room for innovation while ensuring soundness and safety.
“Perhaps we need to look at some other states and say, OK, are there alternative ways of measuring banks,” Pittman said. “It might not be that we need to measure them exactly the same but we still want to ensure the safety and security.”
In the past, Herndon has also raised concern about dual lawsuits brought against the company or its executives. Heppner was removed earlier this year from a lawsuit alleging his prior company had defrauded investors. Court records did not explain the reason for the removal.
In a Delaware case, a private equity firm has alleged that Beneficient defaulted on a 2019 agreement that specifically called for the company to “cease to finance or otherwise acquire future private equity or other alternative.” That lawsuit is still active.
Clarification: An earlier version of this story included a quote that lacked context to show the speaker was referring to the financial industry rather than Beneficient. The story has been updated.