For banks, cannabis rescheduling would change little

Bloomberg News

WASHINGTON — The Department of Health and Human Services' recommendation that cannabis be reclassified as a less dangerous drug has renewed interest in Congress in bringing legalized cannabis businesses into the economic fold, but offers cannabis businesses and their banks little relief in itself, experts say.

HHS issued a recommendation to the Drug Enforcement Administration that the DEA reschedule cannabis, also known as marijuana, as a Schedule III substance under the Controlled Substances Act rather than a Schedule I substance — placing it alongside Tylenol and codeine rather than harder drugs like heroin and LSD. 

But Vince Sliwoski, an attorney with Harris Bricken, said rescheduling won't immediately change how cannabis firms do business or expand the universe of banking partners they can choose from. 

"At Schedule III, marijuana would still be a controlled substance and state-licensed businesses would still be "trafficking" in a controlled substance, contrary to federal law," he wrote in a recent piece. "The analysis for financial institutions won't fundamentally change."

Sliwoski added that the main vehicle for normalizing cannabis' relationship to the broader economy is for Congress to pass the Secure and Fair Enforcement Act, or SAFE Banking Act, which has been stalled in one chamber of Congress or the other for years.  

"We need the perpetually stalled SAFE Banking Act or some other act of Congress to fix this, so long as cannabis remains on any CSA schedule," Sliwoski said. "Even if marijuana is moved to Schedule III, cannabis businesses would be stuck with current options — which aren't as bad as advertised."

The SAFE Banking Act would establish federal protections for financial institutions that provide financial services to State-sanctioned marijuana businesses, but the legislation has failed to get tacked onto any of the various must-pass bills late last year.

The rescheduling effort initiated by HHS last month would bring cannabis under the regulatory umbrella of the Food and Drug Administration, alongside other drugs that require a prescription. Companies also need FDA approval before they can offer a Schedule III drug.

Shane Pennington, a partner at Porter Wright, said these stipulations mean firms will still be hesitant to bank companies which technically still violate federal law, even if the violations are less severe.

"Until marijuana is clinically proven and approved by the FDA to safely and effectively address medical conditions such as chronic pain or aiding cancer patient recovery, marijuana producers, distributors, and dispensaries will likely continue to have limited access to the financial services industry even if marijuana is rescheduled," Pennington said.

He also noted that DEA's process for rescheduling is long and multifaceted, making it a long shot to happen before the 2024 presidential election. The DEA may need to submit its proposed rule to the Office of Management and Budget before publication in the Federal Register, allowing other executive agencies to weigh in on whether and how the rule contradicts other administration policy initiatives. And after publication, the DEA is required to accept and respond to public comments and hold public hearings on the rule, further delaying the process.

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"The OMB review, the number of comment letters received, and the number of public hearing requests are elements of the rescheduling review and rulemaking process that cannot be controlled by DEA," he said. "Each element by itself could extend DEA's review and rulemaking process [making] it challenging for DEA to publish a final rule prior to the 2024 presidential election, in our view."

And a Republican victory in the presidential election would likely quash any effort — regulatory or otherwise — to reconsider the federal ban on cannabis, according to Ed Groshans, senior policy and research analyst at Compass Point Research & Trading. 

"If President Biden is re-elected, marijuana will likely be placed on Schedule III in 2025," Groshans said. "If President Biden loses, the rescheduling process will likely cease to be expedited and the likelihood of the Drug Enforcement Agency using international narcotic treaties to maintain Schedule I status increases significantly."

While HHS' recommendation could take some time to make its way through the DEA rulemaking, the announcement has reignited interest in Congress. Bri Padilla, executive director of The Chamber of Cannabis, said in a recent interview with Forbes that while not a panacea, rescheduling is a step in the right direction, and could pave the way for the kinds of broader measures SAFE Banking could provide. 

"Rescheduling might indeed pave the way for the passage of the Safe Banking Act, offering a partial solution to the banking problem that has plagued the industry," she said. "While federal legalization would provide the most comprehensive remedy, rescheduling could serve as an intermediate step to ease financial hurdles for cannabis businesses, allowing them to operate more transparently within the existing financial system."

Indeed, shortly after the HHS memo, Senate Banking Committee Chair Sherrod Brown (D.-Ohio) indicated the marijuana banking legislation was a priority as Congress returned from its August recess.

Jaret Seiberg, managing director at TD Cowen, said he expects the committee to vote on SAFE as soon as September 20, opening up the possibility of a full Senate floor vote late in the year. He believes the SAFE Act has a filibuster-proof 60 vote consensus, a potential pathway to passage through the chamber.

"It is likely that Senate Majority Leader Chuck Schumer (D.-N.Y.) will seek to pass SAFE through the full Senate in Q4 2023," he wrote in an email. "We believe it is likely to get a vote as we expect there will be at least 60 senators backing it — enough to overcome a filibuster."

While Democratic-led Senate could very well pass the Act, the Republican-held House is another story according to Seiberg. He said the majority GOP chamber will oppose certain social justice clauses in the Act, since its leadership has been lukewarm at best towards the measure.

"Passage in Senate Banking would be a positive, as would passage by the full Senate," he said. "However, the most likely path [to full enactment] will be as a provision included in a broader package that Congress tries to enact next year … often referred to as an omnibus. It usually becomes law during the lame duck session after the election [and is] when the most horse-trading occurs among leadership to get bills enacted before the next Congress takes over."

And that's not to say Senate passage is a fait accompli either. Some Democrats have previously expressed concern with a clause in the bill which would repeal Operation Choke Point — an Obama era policy which critics say the executive branch wielded to discourage banks from doing business with certain kinds of businesses like pawn shops and gun manufacturers. Proponents of the policy believe its repeal would make it harder for regulators to pressure banks to cut ties with certain customers for reputational risk reasons.

SAFE banking lobbyist Don Murphy agreed talk of rescheduling could be pivotal for the legislation, but he hopes Congress can act before the DEA does. Final rescheduling of cannabis in the absence of SAFE, he said, could actually undercut congressional enthusiasm toward its broader reforms.

"The recent recommendation by the Department of Health and Human Services could have significant implications for the bipartisan SAFE Banking Act," he wrote in a message. "If the DEA accepts the HHS recommendation and moves cannabis to Schedule III before the SAFE Banking Act is passed by Congress, it could reduce the urgency and pressure for both Democrats and Republicans to support this legislation."