Cannabis in 2024: HHS Rescheduling Recommendation and SAFER Banking

Key Points

• The scientific review supporting HHS’s recommendation to DEA that cannabis be reclassified from a Schedule I to a Schedule III drug was published on January 12, 2024.
• Classifying cannabis as a Schedule III substance would have significant implications for state-legal cannabis businesses, including eliminating certain tax burdens for state-legal businesses and easing research restrictions. DEA continues to review the recommendation and potentially initiate a rulemaking process that includes a public comment period before any scheduling action is finalized.
• The Senate continues to labor over the SAFER Banking Act (2860). Enactment of the Act would ensure that state-legal cannabis businesses have access to banking services.

Overview

On August 29, 2023, the U.S. Department of Health and Human Services (HHS) issued a recommendation to the U.S. Drug Enforcement Administration (DEA) that cannabis be reclassified from Schedule I to Schedule III under the Controlled Substances Act (CSA).¹ In January, a review detailing the scientific findings underpinning this recommendation was provided to a Texas lawyer, Matthew Zorn, who had sued HHS for its release. While HHS Secretary Xavier Becerra previously confirmed that his agency had made a recommendation in light of President Biden’s October 2022 Executive Order, neither the text of the recommendation nor any accompanying documentation had been made public.

Senate leadership has expressed continued interest in taking up the SAFER Banking Act. Passage of the bill remains in question, however, given outstanding concerns over changes made to several provisions.

HHS Rescheduling Recommendation

Agency/Congressional Authority

Both Congress and the executive branch, through its agencies, have the ability to reclassify drugs with respect to scheduling. With regard to the agencies, the CSA authorizes DEA (by delegation from the Attorney General) to “transfer between [] schedules” any drug that meets the criteria for inclusion in the “schedule in which such drug is to be placed,” or to “remove any drug…from the schedules” if it “does not meet the requirements for inclusion in any schedule.”²

Before rescheduling a drug, DEA is required to request from the HHS Secretary a binding “scientific and medical evaluation” along with a recommendation for appropriate scheduling.³ The Secretary has delegated the authority to conduct these evaluations to the U.S. Food and Drug Administration (FDA). FDA and DEA have also entered into memorandums of understanding (MOUs) that dictate procedures for the sharing of information and collaboration between the two agencies.

Alternatively, should Congress determine that a drug requires rescheduling, it may do so by amending the CSA. In recent years, lawmakers on both sides of the aisle have questioned the Schedule I status of cannabis, though consensus on the topic has not been reached. Indeed, some proponents of federal legalization would prefer that cannabis be removed from the CSA altogether, which would allow Congress to further regulate and, importantly, to tax the cannabis industry.

Schedule III: Significance and Potential Impact

As a Schedule I substance, cannabis is currently deemed to have no medical value and a high potential for abuse.⁴ FDA’s recommendation that it be moved to Schedule III reflects a determination that instead, cannabis has a moderate to low potential for abuse, an accepted medical use in the United States and a moderate or low potential for physical dependence or a high potential for psychological dependence.⁵ In other words, FDA no longer believes it is appropriate for cannabis to be included with drugs like heroin, LSD and Ecstasy under Schedule I and instead that it should be classified as Schedule III along with certain acetaminophen products that include codeine, as well as ketamine and anabolic steroids.

While FDA’s recommendation does not require DEA to reclassify cannabis as Schedule III, the recommendation from FDA is nevertheless historic. As previously noted, in addition to their high potential for abuse, Schedule I substances are not considered to have an accepted medical use in the United States, nor is there an accepted safety for use under medical supervision. In its 2016 denial of two petitions to reschedule cannabis, one submitted by the governors of Rhode Island and Washington State and the other submitted by a New Mexico health provider, DEA concluded that “the drug’s chemistry is not known and reproducible; there are no adequate safety studies; there are no adequate and well-controlled studies proving efficacy; the drug is not accepted by qualified experts; and the scientific evidence is not widely available.” FDA’s recommendation that cannabis be reclassified as Schedule III represents a significant shift in the agency’s perception of both the safety and available medical uses of cannabis.

Were DEA to accept FDA’s current recommendation, it would have significant implications for state-legal cannabis businesses, though the rescheduling would not change the ultimate conflict between state and federal law with respect to the sale and distribution of cannabis and its derivatives. For example, though rescheduling would not federally legalize these businesses, it would eliminate the burden of Internal Revenue Code 280E (IRC 280E), allowing state-legal cannabis businesses to take credits or deductions other than those for costs of goods sold. Currently, cannabis businesses cannot make these deductions because they are prohibited for businesses that are “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).”

Additionally, the recommendation would likely ease restrictions on research pertaining to cannabis. Currently, the CSA imposes stringent controls on this research and it is further limited by a strict licensing regime administered by DEA as to both growers and producers of marijuana for research, as well as for the researchers themselves. Moving cannabis to Schedule III would likely mean a lowered burden for researchers and suppliers working in this space. And while cannabis would still be subject to robust regulations and requirements for its manufacture and distribution under Schedule III, there would be far less severe penalties for related violations than if it were to remain a Schedule I substance.

Even as a Schedule III drug, however, cannabis would still be illegal to produce or sell under current federal law, because it is, at present, an unapproved drug.

Key Considerations

The status of cannabis as a Schedule I substance has remained unchanged for more than 50 years.⁶ However, attitudes about cannabis’s medical and recreational uses have shifted dramatically in the last decade, as demonstrated by passage of the cannabis banking legislation.

International law also impacts DEA’s rescheduling decisions. In particular, the CSA provides that “[i]f control is required by United States obligations under international treaties…the [DEA] shall issue an order controlling such drug under the schedule [it] deems most appropriate to carry out such obligations….”⁷ The United States is party to various treaties that require signatory nations to impose certain controls on cannabis, including the Single Convention on Narcotic Drugs, which requires parties to enact various restrictions on access. In the past, the executive branch has taken the position that in order to comply with these international obligations, cannabis must be categorized as a Schedule I or Schedule II drug.⁸

SAFER Banking Act

Background

The current regulatory status of cannabis prevents those engaging in its sale on a state level from using deposit accounts, insurance and other financial services in the way other businesses do. As such, lawmakers on both sides of the aisle have voiced support for expanding access to banking services for state-legal cannabis businesses. Senate Majority Leader Chuck Schumer (D-NY) recently indicated that in 2024 lawmakers will aim to build on bipartisan progress on several key issues last year, including cannabis banking reform. However, he acknowledged it would be a difficult road ahead, alluding to the challenges of reaching consensus in the Senate and moving the bill through a Republican-controlled House. Some industry stakeholders have expressed optimism that FDA’s recommendation could also help build momentum for cannabis banking.

While Senate leadership initially aimed to move the SAFE Banking Act (S. 1323) through committee in July 2023, members expressed concerns about provisions related to broad banking regulations that they deemed overly broad and delayed the timeline for consideration. Eventually, lawmakers drafted a revised version of the bill—the SAFER Banking Act (S. 2860)—in an aim to facilitate bipartisan agreement (a section-by-section summary is available here).

During the Senate Banking Committee’s subsequent markup of the SAFER Banking Act, Sens. Steve Daines (R-MT), Cynthia Lummis (R-WY) and Kevin Cramer (R-ND) joined most of the committee’s Democrats in voting to report the legislation out of committee, while Sen. Raphael Warnock (D-GA) was the lone Democrat to vote against the Act’s advancement.

As the lead GOP sponsor of the bill, Sen. Daines stressed that while he opposes legalization of cannabis, the measure is intended to narrowly address risks stemming from “the current all cash model of legal cannabis businesses [which] make [them] targets for theft, for tax evasion and for organized crime.”

Sen. Warnock, however, expressed concerns that the bill provides safety only to bankers. He expressed support for efforts to ease restrictions around cannabis, but he said his support for the Act’s provisions hinges on whether they are paired with broader, justice-focused reforms. While other Committee Democrats, including Sen. Elizabeth Warren (D-MA), echoed the need to address the harms of cannabis criminalization, particularly for minority communities, they ultimately voted to advance the bill as “a step in the right direction to a comprehensive cannabis law.”

Next Steps

Regarding the HHS rescheduling recommendation, DEA will have the final authority as to cannabis’s scheduling, and if the agency initiates a rulemaking process it would include a public comment period before any proposed scheduling change is finalized.

As for the SAFER Banking Act, Senate Majority Leader Chuck Schumer (D-NY) has pledged to bring the bill to the floor “as quickly as possible.” However, lawmakers will likely seek further modifications when the legislation reaches the Senate floor and potentially crosses over to the House. And it should be noted that while global events have dominated discussions on the Hill, the interest in cannabis-related legislation remains. Fourth quarter 2023 disclosures indicate that companies such as Amazon, Uber, American Express and the American Bar Association are engaged in lobbying Congress on issues relating to cannabis, including the SAFER Banking Act.

Akin’s health care & life sciences and lobbying & public policy practices continue to closely monitor the evolving cannabis landscape and keep clients apprised of key regulatory and legislative developments.

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^{1 21 U.S.C. § 812.}

^{2 21 U.S.C. § 811.}

^{3 Id.; Letter from HHS to DEA, Basis for Recommendation to Reschedule Marijuana into Schedule III of the Controlled Substances Act (Aug. 29, 2023) at 64-65.}

^{4 21 U.S.C. at § 812(b)(1).}

^{5 Id. at § 812(b)(3).}

^{6 The 2018 Farm Bill removed hemp (cannabis as well as derivatives of cannabis containing no more than a 0.3% concentration of delta-9-tetrahydrocannabinol (THC)) from the CSA’s definition of marijuana, resulting in the regulation of hemp production as an agricultural commodity by the U.S. Department of Agriculture (USDA). See 21 U.S.C. 802(16); see also Agriculture Improvement Act of 2018, P.L. 115-334.}

^{7 21 U.S.C. § 811.}

^{8 Nat’l Org. for Reform of Marijuana Laws (NORML) v. Drug Enf’t Admin., U. S. Dep’t of Justice, 559 F.2d 735 (D.C. Cir. 1977).}