We are officially past the half-way mark of 2019. Where has the year gone? Recently, my free time has been wrapped in following the U.S. Women’s National Team in their pursuit of gold at the World Cup. Did you watch the women sweep their competition? Congratulations to Jill Ellis and company, four-time Women’s World Cup Champions!
Miriah’s Take: Mind on Marijuana
One of the most common talking points is that over half of the states allow for some type of marijuana usage, whether it be medicinal and/or recreational. As each state makes progress in its own marijuana scheme, the national conversation continues to develop, which is why it is important to keep a pulse on the issue. State-legalized marijuana affects all facets of the economy (from banking, job growth, and tourism to child development and community safety).
Side note: Another interesting state to keep an eye on is West Virginia, which enacted a medical marijuana program in 2017. Subsequently, West Virginia passed HB 2538 to address a banking issue. BB&T which holds the state’s checking account will not handle any marijuana money (the illegality of marijuana at the federal level has caused banking issues.). Thus, the bill created the Medical Cannabis Program Fund to receive license fees, penalties, and taxes. Under the law, financial institutions will submit bids to the state to handle the funds received through the program. Five financial institutions submitted bids to provide general and banking services on behalf of West Virginia’s program.
Interestingly, JP Morgan was one of the five entities who submitted a bid. Previously, JP Morgan’s CEO, Jamie Diamond, had publicly stated that it would “not be banking pot.” Perhaps, JP Morgan has changed its tune or has made a distinction between (directly) banking the pot industry and banking indirectly the ancillary pot industry? To date, no large scale national financial institution has expressed interest or plans to actively bank the industry. If JP Morgan or its kind (banking behemoths) ventured into the arena, it will intensify competition for early entrants into the marijuana banking industry, including credit unions.
Last month, The Financial Brand explored whether the banking industry is going to pot. The biggest take away highlights what is commonly understood in the financial services industry: it is hard to be in business (as a marijuana company) with no access to banking services.
But even with that acknowledgement, there are a lot of reasons why the banking industry isn’t going to pot.
- The Bank Secrecy Act, which requires financial institutions to file a report with the Financial Crimes Enforcement Network (FinCEN) every time there is a transaction tied to marijuana money, generally. What do you think the cost of compliance is? The answer, not cheap. As of March 31, 2019, FinCEN received a total of 81,725 SARs related to marijuana banking. Data illustrates that 493 banks are providing banking services to marijuana related businesses compared to 140 credit unions across the nation. Likely, these pioneering financial institutions have priced their marijuana related business services for both cost and margin.
- Rescission of the Cole Memo, which removed a form of protection from federal prosecution. Under the Obama Administration, the Department of Justice issued the Cole Memo which directed U.S. Attorneys to exercise discretion and refrain from prosecuting individuals and businesses who operate under a state marijuana regulatory scheme despite violating federal law. On January 4, 2018, the Trump Administration’s Department of Justice rescinded the Cole Memo removing one form of regulatory/legal cover for financial institutions operating under a state marijuana regulatory scheme.
- Conspiracy law is the legal catchall. Generally, a conspiracy occurs when two or more people agree to commit an illegal act and take a step towards completion, regardless of whether the illegal act was actually completed. Conspiracy can also involve acting as an accessory after the fact. Because the Controlled Substances Act (CSA), which lists marijuana as a Schedule I drug, prohibits manufacturing, distributing, or dispensing marijuana, there is a concern for all legitimate state-marijuana schemes that some part or form may be scrutinized by the federal government. Under conspiracy law and the CSA, it is also illegal to aide in any of these activities. A hardened prosecutor may question whether a financial institution who knowingly accepts marijuana deposits (revenue from marijuana distribution) is acting as an accessory after the fact. (If this interests you, check out a law review article on the topic.) While, to my knowledge, there hasn’t been any prosecution of financial institutions violating the CSA, it is important to understand the worse case scenarios in marijuana related banking, so anticipated risks can be mitigated.
- Lending is fundamentally challenging. Because bankruptcy court is based on federal law, which does not recognize the marijuana industry as legitimate, any and all lending may in practice be unsecured.
Reverting back to one our original questions, is the banking industry going pot? Despite the prevalence of states with some form of legalized marijuana, there are quite a few hurdles for financial institutions to get into the marijuana banking business. The tide does seem to be turning, but how strong is the rip current that flows opposite of the tide?
The state-legalized marijuana industry nationwide is estimated to be valued at $9 billion. However, only a third of marijuana related businesses hold a bank account. Could a new federal law change this?
Introduced by Rep. Perlmuttler (D-Colorado), the Secure and Fair Enforcement (SAFE) Banking Act would prevent federal banking regulators from punishing banks for working with cannabis (some folks say cannabis; some say marijuana, and some even say weed; we can go with the flow and use all three) related businesses that are following state law or limiting a depository institution’s access to its deposit insurance fund. Additionally, the act would require FinCEN to create guidance on how to provide financial services and products to this industry. This would be a great step forward and likely propel more financial institutions to provide banking services to marijuana related entities.
However, there are obvious limitations in the SAFE Banking Act. The safe harbor in the legislation is only applicable to adverse actions by “federal banking regulators” and not the Department of Justice. To lessen the sting, the bill does not consider proceeds with legitimate marijuana businesses to be “proceeds from an unlawful activity” under federal money laundering statutes. Secondly, there is concern among some parties that the definition of financial services provider is too narrow. The current definition centers around depository institutions. Thus, the legislation would not be applicable (and provide protections to) broker-dealers, underwriters, asset managers, or custodians who serve the industry.
The federal protections would be welcome in Ohio, where the Medical Marijuana Control Program got off to a rocky start (remember the lawsuits?). Since it became operational in January, more than 20,000 patients have signed up for the program (newer estimates suggest 40,000 patients registered). However, it is estimated that only 28% of the patient pool has made a purchase at a dispensary. The low numbers are attributed to high pricing; the average price per ounce is $480, which is more than double the median price in Michigan. In Ohio, there are a limited number of cultivators selling product to a limited number of dispensaries, there is a high licensing fee regime, and there are more restrictive rules leading to several reasons why Ohio’s pricing is above our neighboring states. So with higher prices and lower business volumes, is there a high demand for marijuana banking services in Ohio?
Only time will tell, but reach out privately and share your thoughts.
Miriah’s Hot Topic: Exploring Deregulation
One of the Trump Administration’s primary tenets is creating a regulatory framework that promotes deregulation. At the beginning of his administration, President Trump signed Executive Order 13771 (EO 13771) which is commonly known as the two-for-one rule. The rule requires executive branch agencies to eliminate two regulations for each significant regulation added. As a reminder, an executive branch agency is one where the Secretary belongs to the Cabinet. The Federal Communications Commission, the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration, and the Central Intelligence Agency are considered independent agencies.
The two-for-one rule received a lot of attention when it was signed in 2017. However, EO 13771 also required agencies to include a regulation on the Unified Agenda, generally, before it the regulation can become finalized.
With a flurry of executive orders and much attention around deregulation, it is appropriate to inquire whether there has been deregulation in the Trump Administration, and if so, what does that look like?
When viewing deregulation through the lense of the two-for-one rule, one might view deregulation as the elimination of regulations or as the net negative. But, deregulation can (and should) include reform, recognizing that some rules will remain intact. Deregulation doesn’t have to be a zero sum game, right? Because I am under the impression many of you are tired of the pendulum constantly swinging back and forth.
The Brookings Institution has created a tracker so that anyone can follow rulemaking reform and understand the massive overhaul happening at many agencies. The tracker covers rules from various agencies, such as rules pertaining to goose populations to those involving short term lending. And while the CFPB is an independent agency outside the purview of EO 13771, there has been a deregulation agenda at the agency, nonetheless.
According to the White House Council of Economic Advisors, the group estimates that the Trump Administration’s approach to federal regulation will raise household incomes by $3,100 per year after five to ten years. However, this estimate does not account for tariffs and an increase in consumer prices. Does this sound like a credible estimate to you? (You can also read this article from 2018 reviewing the administration’s deregulatory efforts after the executive order was in effect for 18 months.)
As we are exploring deregulation, let’s take a look at some regulatory items which are deserving of some reform or consideration:
- Americans with Disabilities Act, website accommodation rules: Readers of the blog know this is a frequent topic. The Department of Justice has not promulgated any rules or guidelines (despite immense pressure) addressing two questions: 1. Whether a website is a public accommodation and 2. If a website is a public accommodation, what are the standards. In 2018, the number of federal website accessibility lawsuits nearly tripled from the previous year. More than 2,250 federal lawsuits were filed, which represents a 177% increase year-over-year from 2017. Obviously, this is a litigious topic. Most recently, Domino’s filed a petition for the U.S. Supreme Court to review the Ninth Circuit’s decision in Robles v. Domino’s. Regulatory clarity would be immensely helpful to all parties.
As noted, the Department of Justice is an executive branch agency.
- Minimum Salary Threshold: This rule creates the minimum salary threshold to qualify for exemption from overtime provisions of the Fair Labor Standards Act. Previously, the rule was in place, without modification, since 2004. Under the Obama Administration, the threshold increased significantly and was finalized at $913 per week. However, after litigation and a change in Administration, the rule was reformed and is currently under review (public comments were due this year). The rule proposal sets the minimum at $679 per week (up from the current threshold of $455 per week).
As noted, the Department of Labor is an executive branch agency.
- Payday, Vehicle Title, and Certain High-Cost Installment Loans (otherwise known as the Short Term Loan rule): The final 2017 Short Term Loan rule was enacted under Director Cordray and was set to become effective next month. After interim Director Mulvaney vacated the position, Director Kraninger set forth two rule proposals to reform the Short Term Loan rule, proposing to delay the effective date and remove the underwriting standards. This has received much criticism but is still under review by the agency and moving forward.
As noted, the Consumer Financial Protection Bureau is an independent agency.
Miriah’s Tip : Explore the City (C-Bus) in July
Did you take your vacation early this summer? If you are like me, you’re stuck in the Columbus for July. Don’t fret, there are lot of options for you this month:
- The Lion King (featuring Beyoncé) premiers July 18;
- Jazz & Rib Fest is July 19-21;
- Shakespeare in the Park in German Village; and,
- The Ohio State Fair.
Send your funny regulatory stories, reader feedback, and future topics ideas to email@example.com.