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The ‘Effective Spread’ of Order Execution Quality Reporting

On March 6, 2024, by unanimous vote, the Securities and Exchange Commission (SEC) adopted changes to Rule 605 under Regulation NMS, the provision that previously required only entities defined as “market centers” to publish detailed statistics on the quality of execution of “covered orders” in NMS stocks. Amended Rule 605 expands the reporting requirement in many ways:

by reporting party, to (a) broker-dealers with over 100,000 customer accounts (not just “market centers”); (b) Single Dealer Platforms; and (c) Automated Trading Systems (as a stand-alone reporter, separate from any reports by the broker-dealer operator the ATS);
by expanding the scope of “covered orders” to include: (a) non-marketable limit orders received outside market hours and executed during market hours; (b) stop orders; and (c) short sale orders not marked short exempt and not subject to price test restrictions under Reg SHO.
by revising time and size categories to include odd-lot and fractional share orders and measure execution time in microseconds and milliseconds. Timestamps must also contain millisecond granularity.
by expanding execution quality metrics. This expansion is wide-ranging and, among other things, (a) adds effective over quoted spread (“E/Q”) as a reporting metric; (b) requires reporting of average realized spread at multiple periods from 50 milliseconds to five minutes after execution; (c) measures price improvement not only relative to the NBBO, but also relative to the “best available displayed price,” a new baseline that includes available odd-lot liquidity; (d) adds measures of size improvement; and (e) includes fill rate information for non-marketable limit orders.

In the past, Rule 605 reports were practically unreadable for retail investors. They were data-heavy rather than in “plain English” and were reported at the security level, requiring significant data analysis to draw meaningful conclusions. The revised Rule seeks to remedy this deficiency, requiring covered broker-dealers and market centers to provide a Summary Report broken out by S&P 500 and non-S&P 500 securities, by order type (market and marketable limit) and order size, with columns for: average order size (shares and notional), average midpoint, percentage of orders executed at the quote or better, percentage receiving price improvement (both absolute and as a percentage of midpoint); average effective spread; average quoted spread; average effective over quoted spread (or “E/Q” percentage); average realized spread 15 seconds and one minute after execution; and average execution speed, in milliseconds.

While the rule revisions are comprehensive and will require significant programming (or vendor) expense, particularly for broker-dealers newly subject to the rule, many of the changes are welcome. Rule 605 had previously been subject to many increasingly outdated metrics, and firms that route orders will welcome more comprehensive and granular data elements. It remains to be seen whether retail and institutional customers will use the data to demand better execution quality from their broker-dealers or manage order-entry decisions based on the data.

What is meaningful, however, is the timing of this rule revision. These revisions were proposed in December 2022 as part of a package of significant market structure changes, including a proposed Order Competition Rule, a proposed far-reaching SEC best execution requirement known as Regulation Best Execution, and proposals to revise the pricing increments for quoting and trading equity securities and the minimum fees to access that liquidity. These other proposals were very controversial and subject to strong pushback from many parts of the securities industry. Many argued that the SEC should first adopt the proposed amendments to Rule 605 and then use the data from revised Rule 605 reporting to evaluate the other rule proposals. This approach would, of course, delay consideration of the other rule proposals while data were generated under revised Rule 605. The SEC’s adoption of just the Rule 605 revisions does not preclude further consideration of the other rules, but it is a welcome development and a step in the right direction.

The Rule 605 amendments will become effective 60 days after the release is published in the Federal Register. The compliance date is currently set for 18 months after that effective date.

For more news on SEC Regulations, visit the NLR Securities & SEC section.

Cannabis Rescheduling: HHS Findings and Legal Implications

On August 29, 2023, the U.S. Department of Health and Human Services (HHS) made a groundbreaking recommendation to the Drug Enforcement Administration (DEA) – that cannabis should be rescheduled from Schedule I to Schedule III under the Controlled Substances Act (CSA). This recommendation was made pursuant to President Biden’s request that the Secretary of HHS and the Attorney General initiate a process to review how cannabis is scheduled under federal law. In recent days, the unredacted 252-page analysis supporting the August recommendation was released pursuant to a Freedom of Information Act request. While the DEA is presently reviewing HHS’s recommendation and has final authority to schedule a drug under the CSA, it is ultimately bound by HHS’s recommendations on scientific and medical matters.

Why does this matter? Cannabis1 has been a Schedule I substance since the CSA was enacted in 1971. Substances are controlled under the CSA by placement on one of five lists, Schedules I through V. Schedule I controlled substances are subject to the most stringent controls and have no current accepted medical use. As a result, it is illegal under federal law to produce, dispense, or possess cannabis except in the context of federally approved scientific studies. Violations may result in large fines and imprisonment, including mandatory minimum sentences. Comparatively, Schedule III substances are considered to have less abuse potential than Schedule I and II substances, and have a currently accepted medical use in the United States.

In recent years, nearly all the states within the U.S. have revised their laws to permit medical cannabis use. And 24 states, as well as the District of Columbia, have eliminated certain criminal penalties for recreational cannabis use by adults. However, under the U.S. Constitution’s Supremacy Clause, federal law takes precedence over conflicting state laws. Thus, states cannot actually legalize cannabis use without congressional or executive action, and all unauthorized activities under Schedule I involving cannabis are federal crimes anywhere in the United States.2

Notable Findings in HHS’s Recommendation

For HHS to recommend that the DEA change cannabis from Schedule I to Schedule III, HHS had to make three specific findings: 1) cannabis has a lower potential for abuse than the drugs or other substances in Schedules I and II; 2) cannabis has a currently accepted medical use in treatment in the U.S.; and 3) abuse of cannabis may lead to moderate or low physical dependence or high psychological dependence. HHS considered eight factors to make those findings, some of which include: cannabis’s actual or relative potential for abuse; the state of current scientific knowledge regarding the drug; the scope, duration, and significance of abuse; and what, if any, risk there is to public health. The unredacted analysis provides further insight into HHS’s determination to make the forementioned findings.

CANNABIS HAS A POTENTIAL FOR ABUSE LESS THAN THE DRUGS OR OTHER SUBSTANCES IN SCHEDULES I AND II.

To evaluate cannabis’s potential for abuse,3 HHS compared the harms associated with cannabis abuse to the harms associated with other substances, such as heroin (Schedule I), cocaine (Schedule II), and alcohol.4 HHS reported that evidence shows some individuals take cannabis in amounts sufficient to create a health hazard to themselves and the safety of other individuals and the community. However, HHS also reported evidence showing the vast majority of cannabis users are using cannabis in a manner that does not lead to dangerous outcomes for themselves or others. From 2015 to 2021, the utilization-adjusted rate of adverse outcomes involving cannabis was consistently lower than the respective utilization-adjusted rates of adverse outcomes involving heroin, cocaine, and other comparators. Further, cannabis was the lowest-ranking group for serious medical outcomes, including death. Overall, the data indicated that cannabis produced fewer negative outcomes than Schedule I, Schedule II drugs, and, in some cases, alcohol.

CANNABIS HAS A CURRENTLY ACCEPTED MEDICAL USE IN TREATMENT IN THE UNITED STATES

To determine whether cannabis has a currently accepted medical use (CAMU) in the U.S., HHS evaluated a two-part standard: 1) whether “[t]here exists widespread, current experience with medical use of the substance by [healthcare providers] operating in accordance with implemented jurisdiction-authorized programs, where medical use is recognized by entities that regulate the practice of medicine”; and 2) whether “[t]here exists some credible scientific support for at least one of the medical uses for which Part 1 is met.”

Under Part 1, HHS confirmed that more than 30,000 healthcare providers across 43 U.S. jurisdictions are authorized to recommend the medical use of cannabis for more than six million registered patients for at least 15 medical conditions. The Part 1 findings, therefore, supported an assessment under Part 2. Under Part 2, HHS reported that, based on the totality of the available data, there exists some credible scientific support for the medical use of cannabis. Specifically, credible scientific support described at least some therapeutic cannabis uses for anorexia related to a medical condition, nausea and vomiting (e.g., chemotherapy-induced), and pain.

Overall, while HHS reported that cannabis has a currently accepted medical use in the U.S., the Food and Drug Administration (FDA) underscored that such a finding does not mean that the FDA has approved cannabis as safe and effective for marketing as a drug in interstate commerce under the Federal Food, Drug, and Cosmetic Act.

ABUSE OF CANNABIS MAY LEAD TO MODERATE OR LOW PHYSICAL DEPENDENCE OR HIGH PSYCHOLOGICAL DEPENDENCE.

Lastly, HHS concluded that research indicated that chronic, but not acute, use of cannabis can produce both psychic and physical dependence in humans. However, while cannabis “can produce psychic dependence in some individuals,” HHS emphasized that “the likelihood of serious outcomes is low, suggesting that high psychological dependence does not occur in most individuals who use marijuana.”

Legal Ramifications of New Scheduling

Changing cannabis from Schedule I to Schedule III may potentially allow cannabis to be lawfully dispensed by prescription5 and states’ medical cannabis programs may now be able to comply with the CSA. However, it would not make state laws legalizing recreational cannabis use in compliance with federal law without other legal changes by Congress or the executive branch. Under the change, medical cannabis users may be eligible for public housing, immigrant and nonimmigrant visas, and the purchase and possession of firearms. They may also face fewer barriers to federal employment and eligibility to serve in the military. Researchers would face less regulatory controls, and the DEA would no longer set production quota limitations for cannabis. Because the prohibition on business deductions in Section 280E of the Internal Revenue Code only applies to Schedule I and II substances of the CSA, changing cannabis from Schedule I to Schedule III would allow cannabis businesses to deduct business expenses on federal tax filing.

Importantly, some criminal penalties for CSA violations depend on the schedule of the substance. Thus, if cannabis were to be reclassified as a Schedule III substance, some criminal penalties for CSA violations would no longer apply or be significantly reduced. However, CSA penalties that specifically apply to cannabis, such as quantity-based mandatory minimum sentences, would not change under a new rescheduling.

Many advocates consider HHS’s findings a step in the right direction. Specifically, supporters consider the findings further evidence that cannabis should be removed from the CSA altogether and regulated akin to tobacco and alcohol (referred to as descheduling). Given the momentum of cannabis legalization across U.S. states and breakthroughs in the medical and scientific advantages of cannabis, Congressional or Executive legalization, or – at very least – descheduling of cannabis may be on the horizon.

1 The CSA classifies the cannabis plant and its derivatives as “marijuana.” The CSA definition of marijuana excludes (1) products that meet the legal definition of hemp and (2) the mature stalks of the cannabis plant; the sterilized seeds of the plant; and fibers, oils, and other products made from the stalks and seeds.

2 Congress has granted the states some leeway in the distribution and use of medical marijuana by passing an appropriations rider preventing the Department of Justice from using taxpayer funds to prevent states from “implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” Courts have interpreted this as a prohibition on federal prosecution of state-legal activities involving medical cannabis.

3 In its report, HHS defined “abuse” to mean the “intentional, non-therapeutic use of a drug to obtain a desired psychological or physiological effect.”

4 Alcohol is not a scheduled controlled substance, but was used as a comparison because of its extensive availability and use in the U.S., which is also observed for the nonmedical use of cannabis.

5 Although the FDA has approved some drugs derived from cannabis, cannabis is not presently an FDA-approved drug.

Beltway Buzz, January 20, 2023

Union Membership Decreases. The percentage of workers who are union members dropped to 10.1 percent in 2022 from 10.3 percent in 2021, according to data released this week by the U.S. Bureau of Labor Statistics (BLS). In the private sector, the unionization rate fell to 6 percent last year from 6.1 percent in 2021. According to BLS:

The 2022 unionization rate (10.1 percent) is the lowest on record. In 1983, the first year where comparable union data are available, the union membership rate was 20.1 percent and there were 17.7 million union workers.

Thus, despite some splashy headlines and a few high-profile examples, the great majority of employees continue to reject unionization. Expect labor unions and their allies in Washington, D.C., to spin these numbers as a reason to double down on efforts to tilt the labor policy field in favor of labor unions.

D.C. Circuit Issues Ruling on NLRB 2019 Election Regs. This week, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision relating to five specific provisions of the National Labor Relations Board’s (NLRB) 2019 changes to its regulations governing union elections. In a May 2020 decision, the U.S. District Court for the District of Columbia (in an opinion by then-judge Ketanji Brown Jackson) invalidated the five provisions as contrary to the Administrative Procedure Act because the NLRB did not seek public comment on the changes. (The Board argued that the changes were procedural, not substantive, in nature and that public comment was not necessary.) In this week’s decision, the D.C. Circuit agreed that the district court was correct in invalidating three provisions: “the rules regarding the eligible employee-voters list, the timeline for certification of election results, and election-observer eligibility.” However, the D.C. Circuit ruled that the two remaining provisions—regarding pre-election litigation of voter eligibility and the timing of the date of an election—are “‘internal house-keeping’ rules” that are exempt from notice and comment requirements.

House Republicans Seek Information From Federal Agencies. Representative Virginia Foxx (R-NC) is wasting no time exercising her authority as chair of the House Committee on Education and the Workforce. Late last week, Foxx resent to federal labor agencies a series of previous information requests that were answered while Republicans were in the House minority in 2021 and 2022. The requests include the following:

Letters to Secretary of Labor Martin Walsh regarding, among other issues, his involvement in various high-profile labor disputes; documents and communications relating to the development and implementation of the Occupational Safety and Health Administration’s (OSHA) 2021 vaccine-or-test emergency temporary standard; and information surrounding the February 2022 report offered by the Task Force on Worker Organizing and Empowerment, such as attendance lists, meeting minutes, rejected policy proposals, involvement of outside organizations.
A letter to National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo regarding her April 2022 memorandum relating to employer speech. Specifically, the letter asks for information about the possible involvement of outside organizations, other agencies, and the White House, in the drafting of the memo.
A letter to NLRB Chair Lauren McFerran inquiring about potential conflicts of interest that Member Gwynne Wilcox and Member David Prouty may have regarding the Board’s joint employer policy.

The Buzz suspects that these letters are just the first examples of what will be at least two years of aggressive agency oversight by the committee.

DHS Announces Deferred Action for Workers Involved in Labor Investigations. Late last week, the U.S. Department of Homeland Security (DHS) announced a new streamlined and expedited process for undocumented workers seeking deferred action as a result of their cooperation in investigations into potential violations of labor laws. The new policy further implements provisions of DHS’s October 2021 memorandum, “Worksite Enforcement: The Strategy to Protect the American Labor Market, the Conditions of the American Worksite, and the Dignity of the Individual.” According to the announcement, DHS will “provid[e] new guidance to labor agencies regarding processes to seek deferred action for certain workers” and will create a “single intake point for deferred action requests from noncitizen workers.” As such, “[t]he centralized intake process will allow DHS to efficiently review these time-sensitive requests, provide additional security to eligible workers on a case-by-case basis, and more robustly support the mission of labor agencies.”

OFCCP Proposes Changes to Complaint Intake Process. This week, the Office of Federal Contract Compliance Programs (OFCCP) proposed changes to its complaint intake process. OFCCP is proposing to add a preliminary step to evaluate the timeliness of allegations, whether it has jurisdiction over a matter, and how the matter should proceed. If OFCCP determines that an investigation is warranted, it will direct the complainant to fill out a more detailed form. According to the proposal, this two-step procedure “will improve the efficiency of [OFCCP’s] complaint intake process.” Comments are due by March 20, 2023.

Days of Hayes. President Rutherford Birchard Hayes passed away this week (January 17) in 1893. Hayes, the nineteenth president, was a former congressman and three-time governor of Ohio before he ran for president in 1876. His election against Democrat Samuel Tilden, the governor of New York, was mired in controversy and allegations of voter intimidation, resulting in disputed Electoral College votes. This led to the creation of an electoral commission, which eventually swung the Electoral College votes to Hayes by a margin of 185–184. The process earned Hayes the nickname “Rutherfraud” from Democrats. While Hayes hasn’t been the subject of popular movies or Broadway shows, he was a very interesting president:

Although twelve presidents who served before him were lawyers, Hayes was the first president to graduate from law school.
At almost forty years old, with no previous military experience, Hayes volunteered to fight for the Union during the Civil War. He was wounded several times, and served in the same infantry unit as fellow future president, William McKinley.
In 1879, Hayes signed the “Lockwood Bill,” which permitted women to practice law in federal court.
Hayes was the first president to make a trip to the West Coast and the first president to have both a telephone and a typewriter in the White House.

Hayes is responsible for the first Easter Egg Roll on the White House lawn, a tradition that will celebrate its 145th anniversary in just a few weeks.

Article By James J. Plunkett of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For more labor and employment legal news, click here to visit the National Law Review.

How to Practice Law in a Different State

There are plenty of benefits to being a multi-state lawyer. Besides the most obvious advantage which is expanding your client base, it can also be practical when you live near a border between two different states. So, if you find yourself asking how to practice law in multiple states, you’re certainly not the first.

In this article, we’ll detail how to become a multijurisdictional lawyer as well as some of the perks and drawbacks involved.

The Benefits of Practicing Law in Two or More States

Greater Client Base

It’s understandably appealing to be able to take on clients in different states. It’s economically advantageous to generate more business in multiple locations. Not to mention one state may have more demand for a certain practice area than another which can be practical for tapping into your niche market.

Furthermore, you may have clients that need representation in different states who don’t want to have to hire multiple lawyers. Being able to offer all-in-one legal services can give you an edge over the competition. Of course, it goes without saying that you’ll need to allocate a bigger law firm marketing budget to market in not just one but multiple states. Or, just be more savvy with marketing strategies, such as familiarizing yourself with email marketing for law firms.

Greater Flexibility

Life events can spring up suddenly, forcing lawyers to relocate to a different state. Some states may only offer bar exams as little as twice a year, and as such, it can cause a significant delay before being able to accept clients. For many lawyers, anticipating the possibility of relocation without the worry of having to lose a second of work is an important advantage. So, ensuring they can practice anywhere is a nice added security to their business.

Ethical Responsibilities of Practicing Law In Multiple States

As more and more lawyers are working remotely since the onset of COVID, many are accepting clients in other states. Unfortunately, in many cases, these lawyers are violating the rules.

Rule 5.5 of the American Bar Association Model Rules of Professional Conduct states that lawyers may not practice in jurisdictions where they are not admitted. The consequences of violating these rules can range from a fine to disbarment depending on the gravity of the violation. That being said, there are some exceptions to this rule.

For example, a licensed attorney may provide legal services temporarily in a different jurisdiction as long as they are associated with a lawyer who is admitted in that state.

How to Practice Law In Multiple States

Check For States That Offer Reciprocity

Some states offer reciprocity if you meet certain conditions. Usually, these conditions depend on the amount of time you’ve been practicing and they may consider you eligible to practice in their state depending on the state bar that you’ve already passed.

It’s important to note, however, that you should never assume that just because a state offers reciprocity, you’ll be qualified. It’s always important to contact the reciprocity state bar to ensure you are up to date with the latest policies otherwise you could risk serious disciplinary consequences.

Take the Uniform Bar

You might need to brush up on your legal education to retake the Uniform Bar Exam. The Uniform Bar exam, also known as UBE, is a version of the bar exam that lets you practice between states with greater ease. It’s important to note, however, that each state has its own bar admission requirements for the examination, and the passing score may vary by state. So, although it can be a solution in some scenarios, it’s not a sure thing. This is certainly more convenient than taking New York State, North Carolina, or any other state’s bar exam each time.

Take The Bar Exam For The States You Want to Work In

The most practical way to practice in another state is to pass the bar for that state. However, there are significant costs and challenges involved which may not be ideal for everyone, and taking the UBE or opting for a state that offers reciprocity is much more common.

Take on Federal Court Cases

In theory, if you’re allowed to practice law in any state then you should be able to do so out of state. Yet, there is still some debate around this topic, and it’s still possible to find yourself in hot water with the state bar if you take this route.

Is Getting Licensed in Multiple States Right For You?

In the big picture, it’s much more convenient to practice in one jurisdiction for your entire career. Yet, lawyers looking to take their practice to the next level may choose to pursue the route of becoming a multi-state lawyer despite the challenges.

The good news is that thanks to advancements like the UBE and reciprocity laws (as well as advancements in law firm technology), practicing law in another state is much easier than it was 20 years ago. Deciding whether to get licensed in multiple states will come down to your unique circumstances and above all, how much time you have on your hands.

Getting licensed out of state requires a time commitment and administrative pile-up that may be difficult depending on your firm’s current workload. Putting in the work it takes to acquire additional state licenses will be much easier if your practice is streamlined with the help of modern legal technology like a CRM and client intake software. Not only can you access your firm from wherever you are thanks to cloud technology, but automation can help you stay on top of your most important tasks, and put your firm on autopilot while you’re focusing on passing the bar in another state.

FOOTNOTES

Shari Davison, Reciprocity: What States Can You Practice Law?
https://www.onbalancesearch.com/reciprocity-what-states-can-you-practice-law/

Richard J. Rosensweig, Unauthorized Practice of Law: Rule 5.5 in the Age of COVID-19 and Beyond August 12, 2020
https://www.americanbar.org/groups/litigation/committees/ethics-professionalism/articles/2020/unauthorized-practice-of-law-rule-55-in-the-age-of-covid-19-and-beyond/

Article By Sarah Bottorff of Lawmatics

For more business of law legal news, click here to visit the National Law Review.

Federal Cannabis Reform – Is 2022 the Year?

Hope soared with the possibility of federal cannabis reform in 2021. And for good reason – the induction of a new, more liberal administration, rapid state-level legalization, broad support by Americans,[1] and growing bipartisan backing led many to believe that 2021 was going to be the year where federal decriminalization of cannabis would become a reality. But, as 2021 continued on, optimism dwindled as any advancement in federal cannabis reform was hobbled by the inability of Congress to agree on the appropriate level of reform and the proper mechanics for passage. Specifically, tension rose amongst the elected Democrats on whether to support incremental reform (like access to banks or removal of cannabis from the list of Schedule 1 drugs) or comprehensive legalization with provisions to address social inequities stemming from the legacy of the War on Drugs. And so 2021 came to an end, and the cannabis industry saw yet another year of failed meaningful change on the federal level.

Still, momentum for reform has not been lost. If anything, last year saw more bills introduced into Congress (including two new federal legalization proposals) than ever before – clearly indicating its import to our nation’s leaders. Justice Clarence Thomas from the Supreme Court even subtly advised Congress to address legalization, noting that the Federal Government’s current “half in, half out regime” on cannabis strained the principles of federalism.

And so, as we move forward in 2022 with hope, we review the bills before Congress and their progresses to assess which of these may have some traction for passage during this upcoming year.

Secure and Fair Enforcement (“SAFE”) Banking Act of 2021[2]

Considered modest reform, the SAFE Banking Act of 2021 mainly focused on granting cannabis-related businesses access to federally-backed financial institutions. The bill was introduced early in 2021,[3] and passed in the U.S. House of Representatives on April 20, 2021 by a vote of 321 to 101. At the time of the House’s passage, many believed the SAFE Banking Act of 2021 would easily move its way through the Senate, due – in part – to its demonstrated bipartisan appeal with 106 Republican votes in the House. Congressman Ed Pearlman, one of its drafters, even remarked:

After years of bringing up this issue, I’m thrilled to see overwhelming support for this bipartisan, commonsense legislation in the U.S. House once again. I feel optimistic about the path forward for the SAFE Banking Act and, more broadly, reforms to our federal cannabis laws.[4]

However, after its passage in the House, the SAFE Banking Act of 2021 languished in the Senate’s Committee on Banking, Housing and Urban Affairs. Momentum for the bill slowed, with those opposing it campaigning for more comprehensive legalization. In late September 2021, fervor for the SAFE Banking Act of 2021 arose again when the House passed, by voice vote, an amendment to the National Defense Authorization Act for Fiscal Year 2022 (“NDAA”) to add the SAFE Banking Act of 2021. Many hoped that by couching the SAFE Banking Act of 2021 in the NDAA, it would make it easier to pass through the Senate. On November 23, 2021, 4 Senators[5] penned a letter to the Senate’s Armed Services Committee urging them to retain the SAFE Banking Act of 2021 in the NDAA. Despite these efforts, the SAFE Banking Act of 2021 was stripped from the NDAA on December 10, 2021 – stalling its progress once more.

The Marijuana Opportunity Reinvestment & Expungement (“MORE”) Act

The MORE Act is the oldest comprehensive legislative proposal. It was passed in the House in December 2020, during a lame-duck session, but never made any headway in the Senate.[6] On May 28, 2021, Representative Jerrold Nadler reintroduced the MORE Act into the House and much of its substance provided the legislative stepping stones for the Cannabis Administrative and Opportunity Act (“CAO”).

The MORE Act aimed to end criminalization of cannabis by removing it from the list of controlled substances, eliminate related past criminal penalties and convictions, and provide essential criminal justice reform, social justice and economic development for those affected by the War on Drugs. The MORE Act also would tax cannabis products starting at 5% to 8% (increasing by 1% over 5 years) to help fund social reform projects, make Small Business Administration loans and services available to cannabis-related businesses, and prohibit denial of federal public benefits (like housing) and protections under immigration law on the basis of cannabis-related conduct or conviction.

After sitting in the House Judiciary Committee, the bill was finally approved in the Committee on September 30, 2021, with 2 Republican Representatives voting yes. This act sent the measure to the House floor for another vote before it could make its way to the Senate.

The Cannabis Administrative and Opportunity Act

Embracing the MORE Act’s goals for comprehensive reform, Senate Majority Leader Chuck Schumer (along with Senators Cory Booker and Ron Wyden) introduced the long awaited draft of the CAO into the Senate on July 14, 2021. Considered a historic and ambitious bill, the CAO aimed to implement a full-scale federal scheme for cannabis reform that reaches beyond just decriminalization. It hopes to provide restorative measures “to lift up people and communities who were unfairly targeted in the War on Drugs.”[7] Specifically, the CAO seeks to do the following:

Decriminalize cannabis by removing it from the Controlled Substances Act and automatically expunge any arrests and convictions for non-violent federal cannabis offenses;
Transfer primary agency jurisdiction over cannabis to the Food and Drug Administration (“FDA”), the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), and the Bureau of Alcohol, Tobacco and Firearms (“ATF”) so that cannabis can be federally regulated similar to alcohol and tobacco;
Establish a Center for Cannabis Products responsible for regulating the “cannabis aspect of all products containing cannabis,” and implementing requirements related to cannabis products (g., good manufacturing practice, product standards, product labeling, product distribution and recall, etc.) within the FDA;
Mandate federal research and studies regarding the impact of cannabis (including any benefits and/or impairments) on the human brain and health conditions and its impact on drivers under its influence;
Permit movement of cannabis products through channels of interstate commerce;
Establish Opportunity Trust Fund Programs funded by federal cannabis tax revenue to restore and reinvest in communities greatly impacted by the War on Drugs (including funds for job training, reentry services, legal aid, and youth recreation/mentoring programs) and to help level the playing field by granting entrepreneurs of color access to the cannabis industry through small business loans;
Prohibit denial of federal benefits or immigration protection due to a past cannabis-related offense; and
Impose federal excise tax on sale of cannabis products, starting at 10% and increasing up to 25% in a span of 5 years, with certain favorable tax credit for cannabis producers with less than $20 million sales.

Though the CAO has lofty goals, it does not force states to legalize cannabis, emphasizing the integrity of state-specific cannabis law.

As a draft bill, the CAO was subject to a review period in which its authors requested public comments by September 1, 2021. At the expiration of this review period, the drafters of the bill received numerous comments from both supporters and those criticizing the CAO as overly ambitious and a big-government approach. In particular, many critics take issue with the bill’s tax structure, calling the imposition of an ultimate 25% federal excise tax burdensome. Indeed, the CAO – as it stands – implements the highest tax structure for cannabis products of all the bills proposed in 2021. Many allege that the high federal tax in addition to any state-imposed tax could promote the illicit cannabis market rather than encourage business owners to engage legally. Additionally, the high federal tax could force states to reduce their own tax requirements, negatively affecting their own ability to fund state-run social equity and education initiatives.

For now, the public comments have been taken under advisement as the cannabis industry waits to see what the drafters decide to incorporate. Once formally filed, the CAO will be sent to a committee for continued discussions and revisions before it can be advanced to the Senate floor for a vote.

The States Reform Act

The States Reform Act (“SRA”) is the latest comprehensive reform bill led by Republican Representative Nancy Mace and introduced in the House in November 15, 2021. Like the MORE Act and the CAO, the SRA also seeks to decriminalize cannabis and provides retroactive expungement for non-violent federal cannabis offense, except for any person involved in a drug cartel. However, the SRA differentiates itself by limiting federal social equity reform programs. Instead, the SRA vests the authority to determine what level of cannabis reform, including outright prohibition, in the individual states. States will also retain authority to regulate the use, distribution, sale and manufacturing of cannabis, with some general federal oversight by the FDA, TTB, ATF and the Department of Agriculture. Specifically, the SRA aims to regulate cannabis like alcohol (and alcohol alone) – another substantial difference from the CAO. The SRA permits each state to determine the appropriate age limit for purchase of cannabis products, but incentivizes states to implement a 21+ limit by eliminating funding for highways for any state with an age limit of under 21 years of age and prohibiting advertisements directed at any person under the age of 21. The bill also seeks to provide veterans with access to medical cannabis without fear of discrimination or denial of Veteran Affairs benefits. The SRA also generally requires that medical cannabis be permitted for treatment of arthritis, cancer and chronic pain. Similar to the CAO, the SRA will also allow the interstate cannabis transportation.

Notably, the SRA provides the lowest tax structure for cannabis products in comparison to other reform proposals, with the proposed imposition of a single tax rate of 3% that cannot be increased for at least 10 years. Revenues from the tax would be used to support SBA programs for cannabis businesses, law enforcement initiatives including reentry programs, and veteran mental health programs.

Given its recency, little is known about the bill’s reception in the House and any progress that has been made. However, the SRA does carry potential bipartisan appeal, particularly because it is sponsored by 4 Republican Representatives. Additionally, it is anticipated that the Congressional Republicans will appreciate the SRA’s straight forward tax structure capped at a low rate for at least 10 years and its stance on states’ sovereignty regarding cannabis reform. The real issue for the SRA is its lack of restorative justice and social equity efforts, which may be its death knell in the current Democrat-controlled House.

Implications for 2022

There are now 4 bills (3 with comprehensive legislation) circulating Capitol Hill that could provide much needed cannabis reform in 2022. Congress will likely continue debating, revising and attempting to compromise on the terms in the MORE Act, the CAO and the SRA. Potentially, if the 3 comprehensive bills remain on the discussion table, they will compete with one another, potentially dividing the Legislators’ support. Congress should thus focus on forging a compromise or middle ground on these reforms to increase bipartisan support and avoid competing and inconsistent bills floating around, resulting in another year of unwanted (and unnecessary) deadlock. Indeed, the CAO could be an example of such needed compromise – especially if the drafters seriously heed the criticisms and comments provided during the bill’s review period and consider incorporating certain bipartisan elements of the SRA, like a more stream-lined and lower rate tax structure. With that said, the status of these cannabis reform bills, particularly the CAO and the MORE Act, face potential change should this year’s mid-term elections change the makeup of who controls the Senate, House or both.

Regardless, until Congress can iron out the kinks on comprehensive cannabis reform, the SAFE Banking Act of 2021 remains a practical law to pass in the interim. The SAFE Banking Act of 2021 is currently the least controversial of all the cannabis-reform bills, has substantial bipartisan appeal, and will provide immediate financial resources and relief to the largely cash-based cannabis industry. Though a small reform, it is still a necessary one that is long overdue. The SAFE Banking Act of 2021 (and its predecessors) has already made its way through the House 6 times, proving that federal lawmakers believe it will help cannabis businessmen. It may not resolve the issue of prohibition on cannabis, but its passage will likely be a great victory for the cannabis industry, signal federal de-stigmatization of cannabis, promote public safety by discouraging participation in the illicit cannabis market, and help cannabis-related businesses comply with tax laws.

Footnotes

[1] https://news.gallup.com/poll/356939/support-legal-marijuana-holds-record…

[2] On February 4, 2022, the SAFE Banking Act passed again in the House – this time, as an included amendment to the America COMPLETES Act.

[3] The bill is the successor to the previously introduced SAFE Banking Act of 2019. See https://www.cannabislawblog.com/2021/09/safe-banking-act-2021/

[4] https://perlmutter.house.gov/news/documentsingle.aspx?DocumentID=5486

[5] Gary Peters, Angus King, Kevin Cramer, and Mark Kelly

[6] https://www.cannabislawblog.com/2020/12/house-representatives-passes-bil…

[7] https://www.democrats.senate.gov/imo/media/doc/CAOA%20Detailed%20Summary

Article By Jennifer N. Le of Sheppard, Mullin, Richter & Hampton LLP

For more cannabis legal news, click here to visit the National Law Review.

Federal Laws Do Not Preempt Connecticut Law Providing Employment Protections to Medical Marijuana Users

Connecticut employees using medical marijuana for certain debilitating medical conditions as allowed under Connecticut law for “qualified users” are protected under state law from being fired or refused employment based solely on their marijuana use. Employers who violate those protections risk being sued for discrimination, according to a recent federal district court decision.

Background

In Noffsinger v. SSC Niantic Operation Company (3:16-cv-01938; D. Conn. Aug. 8, 2017), the federal district court ruled that “qualified users” are protected from criminal prosecution and are not subject to penalty, sanction or being denied any right or privilege under federal laws, such as the Controlled Substances Act (CSA), the Americans with Disabilities Act (ADA) and the Food, Drug and Cosmetic Act (FDCA), because the federal laws do not preempt Connecticut’s Palliative Use of Marijuana Act (PUMA).

PUMA prohibits employers from refusing to hire, fire, penalize, or threaten applicants or employees solely on the basis of being “qualified users” of medical marijuana. PUMA exempts patients, their caregivers and prescribing doctors from state penalties against those who use or distribute marijuana, and it explicitly prohibits discrimination by employers, schools and landlords.

In Noffsinger, Plaintiff was employed as a recreational therapist at Touchpoints, a long term care and rehabilitation provider, and she was recruited for a position as a director of recreational therapy at Bride Brook, a nursing facility. After a phone interview, she was offered the position at Bride Brook and accepted the offer, and she was told to give notice to Touchpoints, which she did to begin working at Bride Brook within a week. Plaintiff scheduled a meeting to complete paperwork and routine pre-employment drug screening for Bride Brook, and at the meeting, she disclosed her being qualified to use marijuana for PTSD under PUMA. The job offer was later rescinded because she tested positive for cannabis; in the meantime, Plaintiff’s position at Touchpoints was filled, so she could not remain employed there.

Litigation

Plaintiff sued for violation of PUMA’s anti-discrimination provisions, common law wrongful rescission of a job offer in violation of public policy and negligent infliction of emotional distress. Defendant filed a Rule 12(b)(6) pre-answer motion to dismiss based on preemption under CSA, ADA, and FDCA. The federal court denied the motion and ruled that PUMA did not conflict with the CSA, ADA or FDCA, because those federal laws are not intended to preempt or supersede state employment discrimination laws. The court concluded that CSA does not make it illegal to employ a marijuana user, and it does not regulate employment practices; the ADA does not regulate non-workplace activity or illegal use of drugs outside the workplace or drug use that does not affect job performance; and the FDCA does not regulate employment and does not apply to PUMA’s prohibitions.

The court’s decision is notable in that it is the first federal decision to determine that the CSA does not preempt a state medical marijuana law’s anti-discrimination provision, and reaches a different result than the District of New Mexico, which concluded that requiring accommodation of medical marijuana use conflicts with the CSA because it would mandate the very conduct the CSA proscribes. The Noffsinger decision supplements a growing number of state court decisions that have upheld employment protections for medical marijuana users contained in other state statutes. These decisions stand in stark contrast to prior state court decisions California, Colorado, Montana, Oregon, and Washington that held that decriminalization laws – i.e., statutes that do not contain express employment protections – do not confer a legal right to smoke marijuana and do not protect medical marijuana users from adverse employment actions based on positive drug tests.

Key Takeaways

Employers may continue to prohibit use of marijuana at the workplace; and qualified users who come to work under the influence, impaired and unable to perform essential job functions are subject to adverse employment decisions. Employers in Connecticut, however, may risk being sued for discrimination for enforcing a drug testing policy against lawful medical marijuana users. In those cases, employers may have to accommodate off-duty marijuana use, and may take disciplinary action only if the employee is impaired by marijuana at work or while on duty.

It remains unclear how employers can determine whether an employee is under the influence of marijuana at work. Unlike with alcohol, current drug tests do not indicate whether and to what extent an employee is impaired by marijuana. Reliance on observations from employees may be problematic, as witnesses may have differing views as to the level of impairment, and, in any event, observation alone does not indicate the source of impairment. Employers following this “impairment standard” are advised to obtain as many data points as possible before making an adverse employment decision.

All employers – and particularly federal contractors required to comply with the Drug-Free Workplace Act and those who employ a zero-tolerance policy – should review their drug-testing policy to ensure that it: (a) sets clear expectations of employees; (b) provides justifications for the need for drug-testing; and (c) expressly allows for adverse action (including termination or refusal to hire) as a consequence of a positive drug test.

Additionally, employers enforcing zero-tolerance policies should be prepared for future challenges in those states prohibiting discrimination against and/or requiring accommodation of medical marijuana users. Eight other states besides Connecticut have passed similar medical marijuana laws that have express anti-discrimination protections for adverse employment actions: Arizona, Delaware, Illinois, Maine, Nevada, New York, Minnesota and Rhode Island. Those states may require the adjustment or relaxation of a hiring policy to accommodate a medical marijuana user. Additionally, courts in Massachusetts and Rhode Island have permitted employment discrimination lawsuits filed by medical marijuana users to proceed.

Finally, employers should be mindful of their drug policies’ applicability not only to current employees, but also to applicants.

For more Health Care Law legal analysis go to The National Law Review

Tag: federal law

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