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 under the Controlled Substances Act (CSA). The Office of Legal Counsel (OLC) also provided a memo to the Department of Justice (DOJ) mostly supporting the DOJ’s position on rescheduling. The DOJ oversees the DEA and grants the DEA authority to make rules under the CSA.
According to Marijuana Moment, the Proposed Rule will be published on May 21, 2024. Once that occurs, the notice and comment period will open. Interested parties, including those currently involved in the cannabis industry as well as the many industries which cannabis rescheduling will affect, should start considering now whether they wish to submit a comment and request a hearing at which to speak and present a comment.
This post provides details about the Proposed Rule and the process of submitting comments.
For more on the topic of marijuana rescheduling, see our previous posts:
Will the Proposed Rule Change the Definition of Marijuana Under the CSA?
No. While the DEA has the authority to change the definition of marijuana under its regulations, it cannot change the definition of marijuana under the CSA. Making that change to the CSA would require an act of Congress. For reference, the CSA defines marijuana as follows:
(16) (A) Subject to subparagraph (B), the terms “marihuana” and “marijuana” mean all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.
(B) The terms “marihuana” and “marijuana” do not include— (i) hemp, as defined in section 1639o of title 7; or (ii) the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.
In summary, marijuana includes all cannabis other than hemp and its derivatives, seeds incapable of germination, and stalks of the plant.
It is also worth noting that the Proposed Rule will not change Internal Revenue Code 280E. Instead, rescheduling marijuana to Schedule III makes 280E inapplicable to marijuana businesses. IRC 280E only applies to the trafficking of Schedule I and II substances; therefore, marijuana businesses will now be able to take standard deductions.
How will the Definition of Marijuana & THC Change Under the Proposed Rule?
Under the Proposed Rule, tetrahydrocannabinols would be defined as follows:
(i) [T]etrahydrocannabinols, except as in paragraphs (d)(30)(ii) and (iii) of this section [the two following paragraphs], naturally contained in a plant of the genus Cannabis (cannabis plant), as well as synthetic equivalents of the substances contained in the cannabis plant, or in the resinous extracts of such plant, or synthetic substances, derivatives, and their isomers with similar chemical structure and pharmacological activity to those substances contained in the plant.
(ii) Tetrahydrocannabinols does not include any material, compound, mixture, or preparation that falls within the definition of hemp set forth in [the Farm Bill].
(iii) Tetrahydrocannabinols does not include any substance that falls within the definition of marijuana set forth in [the CSA].
Marijuana would in turn be defined as:
(h) Marijuana, as defined in [the CSA].
(i) Marijuana Extract, meaning an extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, containing greater than 0.3 percent delta-9tetrahydrocannabinol on a dry weight basis, other than the separated resin (whether crude or purified) obtained from the plant.
(j) Naturally Derived Delta-9-Tetrahydrocannabinols.
(i) Meaning those delta-9-tetrahydrocannabinols, except as in paragraphs (j)(ii) and (j)(iii) of this section, that are naturally contained in a plant of the genus Cannabis (cannabis plant).
(ii) Naturally derived delta-9-tetrahydrocannabinols do not include any material, compound, mixture, or preparation that falls within the definition of hemp set forth in [the Farm Bill].
(iii) Naturally derived delta-9-tetrahydrocannabinols do not include any delta-9tetrahydrocannabinols contained in substances excluded from the definition of marijuana as set forth in [the CSA].
The definition of Marijuana Extract may be troubling to stakeholders in the hemp space as it does not exempt hemp under its definition. It also does not state that the extracts must come from marijuana but instead states that they are extracts from “any plant of the genus Cannabis.” There are currently hemp products that contain more than 0.3% delta-9 THC that are being sold in multiple states outside of tightly regulated state-legal systems. These products are presumptively legal to sell based on the fact that they fall under the definition of hemp, which falls outside of the jurisdiction of the DEA. As written, the Proposed Rule could be interpreted to bring those products into the purview of the DEA because they would fit the definition of Marijuana Extract, which could result in a massive shift in the federal government’s treatment of these products.
How Can the Public Comment on the Proposed Rules and Request a Hearing?
From the date of publication in the Federal Register, which is anticipated to be May 21, 2024, the public will have 60 days to comment and 30 days to request a hearing. Assuming that the Proposed Rule is published on May 21, a hearing request must be submitted by June 20 and comments must be submitted by July 20.
Comments must be submitted either electronically or postmarked by the deadline. All comments should reference Docket No. DEA 1362. Instructions on submitting public comments are available at http://www.regulations.gov. Paper comments and requests for hearings can be sent to Drug Enforcement Administration, Attn: DEA Federal Register Representative/DPW, 8701 Morrissette Drive, Springfield, Virginia 22152. A courtesy copy of any hearing request should be sent to (1) Drug Enforcement Administration, Attn: Hearing Clerk/OALJ, 8701 Morrissette Drive, Springfield, Virginia 22152; and (2) Drug Enforcement Administration, Attn: DEA Federal Register Representative/DPW, 8701 Morrissette Drive, Springfield, Virginia 22152.
Comments submitted will be part of the public record. Comments can be marked as confidential, which may prevent public disclosure subject to the Freedom of Information Act. Comments may also be submitted anonymously. Requests for hearings must include a written statement of position on the matters of fact and law asserted in the hearing.
How will the Marijuana Industry Be Impacted by the Proposed Rule?
It is impossible to predict exactly how the Proposed Rule will impact current marijuana businesses. Traditionally, the Food and Drug Administration (FDA) has not interfered with state-legal programs, and there is no indication that would change any time soon.
However, this is a significant change in federal policy and the impacts will be felt throughout – and beyond – the marijuana industry, both positively and negatively. On the negative side, the FDA could increase its scrutiny of the marijuana industry and impose standards as high as those with which traditional pharmaceutical drugs must comply. On the positive side, the momentum from rescheduling could lead to increased investor interest and infuse much-needed capital into the industry. Additionally, more ancillary service providers, such as banks, insurance companies, payment processors, and others, could decide to increase their footprint or enter the industry in the first place.
As mentioned above, IRC 280E will no longer apply once marijuana is officially rescheduled. In terms of submitting comments, the DEA may not address comments related to the taxation of marijuana as the agency is not authorized to make decisions on taxing. That being said, we expect a number of comments to address taxes even if the DEA lacks authority over taxation.
Additionally, the impact could also light a fire under lawmakers to pass legislation to legalize marijuana federally or to pass legislation such as the SAFER Banking Act.
Will the Marijuana Industry Still Need the SAFER Banking Act?
Following rescheduling, financial institutions may be more willing to take the risk of banking marijuana-related businesses, but exposure to federal anti-money laundering and racketeering laws will persist after marijuana is rescheduled. Financial institutions still need more federal action – such as the passage of the SAFER Banking Act – to close the gap between federal and state law and allow them to service the marijuana industry without fear of enforcement.
In September 2024, the Senate Banking Committee passed the SAFER Banking Act by a notable bipartisan majority of 14-9 (a very similar version of the bill had been passed in the House of Representatives on seven previous occasions since its first passage in 2019). However, little relevant progress has occurred in Congress since then.
Briefly, the “safe harbors” offered by the SAFER Banking Act are its key provisions, providing banking and lending institutions (among others) protection from certain criminal, civil, and administrative penalties – including but not limited to forfeiture – that may otherwise result as long as the institution provides financial services to a “[s]tate-sanctioned marijuana business or service provider.” If SAFER becomes law, the Treasury Secretary will also be required to publish updated guidance, or otherwise issue new FinCEN guidance, within one year of enactment.
Banks will not be required to work with marijuana businesses if the SAFER Act becomes law. Instead, if passed, relevant entities will be expected by Congress to “take a risk-based approach in assessing individual customer relationships rather than decline to provide banking services to categories of customers without regard to the risks presented by an individual customer or the ability of the depository institution to manage the risk.” Sec. 10(a)(5).
In short, the SAFER Banking Act’s passage would not twist entities’ arms into serving the marijuana industry, but it would likely lead to a significant influx in market entry for financial services providers, as well as increased competition among new and existing financial, insurance, and related service participants in the cannabis industry. It remains to be seen whether rescheduling will help push SAFER Banking forward.
What is the Bottom Line?
Rescheduling has loomed over the industry since it was announced in 2022. With the impending publication of the Proposed Rule, the industry can now take action in the form of providing comments. Please contact the authors or McGlinchey’s Cannabis team for assistance or representation in submitting comments, appearing at the hearing, or adjusting your business practices in light of this landmark rescheduling news.
