ARTICLE
23 May 2024
On May 16, 2024, the U.S. Drug Enforcement Administration (DEA) released the proposed rule (Proposed Rule) to reschedule marijuana from Schedule I to Schedule III...
United States Cannabis & Hemp
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On May 16, 2024, the U.S. Drug Enforcement Administration (DEA)released the proposed rule (Proposed Rule) toreschedule marijuana from Schedule I to Schedule III under theControlled Substances Act (CSA). The Office of Legal Counsel (OLC)also provided a memo to the Department of Justice (DOJ) mostlysupporting the DOJ's position on rescheduling. The DOJ overseesthe DEA and grants the DEA authority to make rules under theCSA.
According to Marijuana Moment, the Proposed Rule will bepublished on May 21, 2024. Once that occurs, the notice and commentperiod will open. Interested parties, including those currentlyinvolved in the cannabis industry as well as the many industrieswhich cannabis rescheduling will affect, should start consideringnow whether they wish to submit a comment and request ahearing at which to speak and present a comment.
This post provides details about the Proposed Rule and theprocess of submitting comments.
For more on the topic of marijuana rescheduling, see ourprevious posts:
- Marijuana Rescheduling is Here: How DEA'sDecision Will Impact Cannabis Businesses
- What is the Timeline for ReschedulingMarijuana?
- DEA Likely to Reschedule Marijuana Based onCongressional Report
- From Schedule I to Schedule III: Potential Shiftin Marijuana's Legal Status
- Rescheduling Marijuana: Understanding the LegalImpacts
- Federal Legalization of Marijuana May Be CloserThan You Think
Will the Proposed Rule Change the Definition of Marijuana Underthe CSA?
No. While the DEA has the authority to change the definition ofmarijuana under its regulations, it cannot change the definition ofmarijuana under the CSA. Making that change to the CSA wouldrequire an act of Congress. For reference, the CSA definesmarijuana as follows:
(16) (A) Subject to subparagraph (B), the terms"marihuana" and "marijuana" mean all parts ofthe plant Cannabis sativa L., whether growing or not; the seedsthereof; the resin extracted from any part of such plant; and everycompound, manufacture, salt, derivative, mixture, or preparation ofsuch plant, its seeds or resin.
(B) The terms "marihuana" and "marijuana" donot include— (i) hemp, as defined in section 1639o of title7; or (ii) the mature stalks of such plant, fiber produced fromsuch stalks, oil or cake made from the seeds of such plant, anyother compound, manufacture, salt, derivative, mixture, orpreparation of such mature stalks (except the resin extractedtherefrom), fiber, oil, or cake, or the sterilized seed of suchplant which is incapable of germination.
In summary, marijuana includes all cannabis other than hemp andits derivatives, seeds incapable of germination, and stalks of theplant.
It is also worth noting that the Proposed Rule will not changeInternal Revenue Code 280E. Instead, rescheduling marijuana toSchedule III makes 280E inapplicable to marijuana businesses. IRC280E only applies to the trafficking of Schedule I and IIsubstances; therefore, marijuana businesses will now be able totake standard deductions.
How will the Definition of Marijuana & THC Change Under theProposed Rule?
Under the Proposed Rule, tetrahydrocannabinols would be definedas follows:
(i) [T]etrahydrocannabinols, except as in paragraphs (d)(30)(ii)and (iii) of this section [the two following paragraphs], naturallycontained in a plant of the genus Cannabis (cannabis plant), aswell as synthetic equivalents of the substances contained in thecannabis plant, or in the resinous extracts of such plant, orsynthetic substances, derivatives, and their isomers with similarchemical structure and pharmacological activity to those substancescontained in the plant.
(ii) Tetrahydrocannabinols does not include any material,compound, mixture, or preparation that falls within the definitionof hemp set forth in [the Farm Bill].
(iii) Tetrahydrocannabinols does not include any substance thatfalls within the definition of marijuana set forth in [theCSA].
Marijuana would in turn be defined as:
(h) Marijuana, as defined in [the CSA].
(i) Marijuana Extract, meaning an extract containing one or morecannabinoids that has been derived from any plant of the genusCannabis, containing greater than 0.3 percentdelta-9tetrahydrocannabinol on a dry weight basis, other thanthe separated resin (whether crude or purified) obtained from theplant.
(j) Naturally Derived Delta-9-Tetrahydrocannabinols.
(i) Meaning those delta-9-tetrahydrocannabinols, except as inparagraphs (j)(ii) and (j)(iii) of this section, that are naturallycontained in a plant of the genus Cannabis (cannabis plant).
(ii) Naturally derived delta-9-tetrahydrocannabinols do notinclude any material, compound, mixture, or preparation that fallswithin the definition of hemp set forth in [the Farm Bill].
(iii) Naturally derived delta-9-tetrahydrocannabinols do notinclude any delta-9tetrahydrocannabinols contained insubstances excluded from the definition of marijuana as set forthin [the CSA].
The definition of Marijuana Extract may be troubling tostakeholders in the hemp space as it does not exempt hemp under itsdefinition. It also does not state that the extracts must come frommarijuana but instead states that they are extracts from "anyplant of the genus Cannabis." There are currently hempproducts that contain more than 0.3% delta-9 THC that are beingsold in multiple states outside of tightly regulated state-legalsystems. These products are presumptively legal to sell based onthe fact that they fall under the definition of hemp, which fallsoutside of the jurisdiction of the DEA. As written, the ProposedRule could be interpreted to bring those products into the purviewof the DEA because they would fit the definition of MarijuanaExtract, which could result in a massive shift in the federalgovernment's treatment of these products.
How Can the Public Comment on the Proposed Rules and Request aHearing?
From the date of publication in the Federal Register, which isanticipated to be May 21, 2024, the public will have 60 days tocomment and 30 days to request a hearing. Assuming that theProposed Rule is published on May 21, a hearing request must besubmitted by June 20 and comments must be submitted by July 20.
Comments must be submitted either electronically or postmarkedby the deadline. All comments should reference Docket No. DEA 1362.Instructions on submitting public comments are available at http://www.regulations.gov. Paper comments andrequests for hearings can be sent to Drug EnforcementAdministration, Attn: DEA Federal Register Representative/DPW, 8701Morrissette Drive, Springfield, Virginia 22152. A courtesy copy ofany hearing request should be sent to (1) Drug EnforcementAdministration, Attn: Hearing Clerk/OALJ, 8701 Morrissette Drive,Springfield, Virginia 22152; and (2) Drug EnforcementAdministration, Attn: DEA Federal Register Representative/DPW, 8701Morrissette Drive, Springfield, Virginia 22152.
Comments submitted will be part of the public record. Commentscan be marked as confidential, which may prevent public disclosuresubject to the Freedom of Information Act. Comments may also besubmitted anonymously. Requests for hearings must include a writtenstatement of position on the matters of fact and law asserted inthe hearing.
How will the Marijuana Industry Be Impacted by the ProposedRule?
It is impossible to predict exactly how the Proposed Rule willimpact current marijuana businesses. Traditionally, the Food andDrug Administration (FDA) has not interfered with state-legalprograms, and there is no indication that would change any timesoon.
However, this is a significant change in federal policy and theimpacts will be felt throughout – and beyond – themarijuana industry, both positively and negatively. On the negativeside, the FDA could increase its scrutiny of the marijuana industryand impose standards as high as those with which traditionalpharmaceutical drugs must comply. On the positive side, themomentum from rescheduling could lead to increased investorinterest and infuse much-needed capital into the industry.Additionally, more ancillary service providers, such as banks,insurance companies, payment processors, and others, could decideto increase their footprint or enter the industry in the firstplace.
As mentioned above, IRC 280E will no longer apply once marijuanais officially rescheduled. In terms of submitting comments, the DEAmay not address comments related to the taxation of marijuana asthe agency is not authorized to make decisions on taxing. Thatbeing said, we expect a number of comments to address taxes even ifthe DEA lacks authority over taxation.
Additionally, the impact could also light a fire under lawmakersto pass legislation to legalize marijuana federally or to passlegislation such as the SAFER Banking Act.
Will the Marijuana Industry Still Need the SAFER BankingAct?
Following rescheduling, financial institutions may be morewilling to take the risk of banking marijuana-related businesses,but exposure to federal anti-money laundering and racketeering lawswill persist after marijuana is rescheduled. Financial institutionsstill need more federal action – such as the passage of theSAFER Banking Act – to close the gapbetween federal and state law and allow them to service themarijuana industry without fear of enforcement.
In September 2024, the Senate Banking Committee passed the SAFERBanking Act by a notable bipartisan majority of 14-9 (a verysimilar version of the bill had been passed in the House ofRepresentatives on seven previous occasions since its first passagein 2019). However, little relevant progress has occurred inCongress since then.
Briefly, the "safe harbors" offered by the SAFERBanking Act are its key provisions, providing banking and lendinginstitutions (among others) protection from certain criminal,civil, and administrative penalties – including but notlimited to forfeiture – that may otherwise result as long asthe institution provides financial services to a"[s]tate-sanctioned marijuana business or serviceprovider." If SAFER becomes law, the Treasury Secretary willalso be required to publish updated guidance, or otherwise issuenew FinCEN guidance, within one year of enactment.
Banks will not be required to work with marijuana businesses ifthe SAFER Act becomes law. Instead, if passed, relevant entitieswill be expected by Congress to "take a risk-based approach inassessing individual customer relationships rather than decline toprovide banking services to categories of customers without regardto the risks presented by an individual customer or the ability ofthe depository institution to manage the risk." Sec.10(a)(5).
In short, the SAFER Banking Act's passage would not twistentities' arms into serving the marijuana industry, but itwould likely lead to a significant influx in market entry forfinancial services providers, as well as increased competitionamong new and existing financial, insurance, and related serviceparticipants in the cannabis industry. It remains to be seenwhether rescheduling will help push SAFER Banking forward.
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