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The Rough Notes Company Inc.



December 23
08:07 2019

Public Policy Analysis & Opinion

By Kevin P. Hennosy


Congress considers opening financial institutions to cannabis revenue

One evening in the autumn of 1978, I entered a Loews theater on West Henderson Road in Columbus, Ohio, and that night I witnessed a foreshadowing of the “new normal.”

That night, plenty of seats remained open in the theater and most of the audience clustered together in small groups. Those attendees seemed slightly agitated, if not downright nervous. Most fidgeted in their seats as they waited for the movie to begin. As if they wanted to communicate to the projectionist, audience members repeatedly looked back at the window of the projection room. Perhaps with that kinetic energy they could will the film to start.

Now the cannabis sector looks like both a customer for risk transfer products and a target for investment.

Suddenly the lights dimmed. That cue triggered a combination of gasps and giggles that filled the theater. In the darkness, people could be heard shifting in their seats. Then, with ritualistic regularity, one member of each cluster bent forward and a flash of light followed.

The bent-over people rose from their seats, each with a glowing object protruding from the lower front of his or her head. The glow grew in intensity and then faded. Then the object passed among the members of each cluster. Smoke lightly obscured the coming attraction trailers on the screen. A skunky-sweet smell permeated the theater as the feature began. That night, a small audience took great pleasure in viewing Cheech and Chong’s Up in Smoke.

Fear not!

So what in the name of Great Caesar’s Ghost brings that sorry memory of clandestine consumption of an illicit and mood-altering substance to the pages of Rough Notes magazine? No one subscribes to this publication to receive updates on the misspent lives of burnouts!

Gentle readers, please remain assured, Rough Notes protects its well-earned reputation as a beacon for excellence in insurance journalism. Many readers will also observe that the publication projects a rock-solid devotion to social order and the stoical practice of the business of insurance. These pages will never channel the likes of Beat writer William S. Burroughs or the Doctor of Gonzo-Journalism, Hunter S. Thompson.

No one should confuse this publication with some underground newspaper that features lurid tales of hopheads at play! No, never!

Time and change

Rough Notes does, however, provide expert reporting on the business of insurance. In addition, it includes a touch of provocative commentary on public policy related to property/casualty insurance and benefits markets.

Over the four decades since Up in Smoke appeared in American theaters, commercial traffic in cannabis—weed, marijuana, pot—has been transformed into a corporate business sector.

Let’s be clear: If Mr. Burroughs or Dr. Thompson were alive and writing today, they might not recognize the cannabis sector. There is more than a dime bag’s worth of difference between the traditional sale of weed and today’s cannabis sector.

Today’s sector does not consist of nervous meetings in alleys behind jazz clubs or campus beer halls, where patron and client exchange cash for a plastic bag containing an illicit agricultural product. In many states the sale begins with a trip to a “healthcare provider” and a follow-up visit to a strip mall to purchase “gummies.”

We can speculate whether Burroughs and Thompson would welcome the change.

When it comes to the expanding business of cannabis propagation and distribution, risk is risk. Insurers want to transfer and spread that risk of financial loss in return for a premium.

Mostly through the voter initiative process, many states now license some kind of commerce in cannabis. Some states have approved the medical use of cannabis, and a few now regulate commerce in recreational use.

The introduction of legal trade in cannabis requires states to amend aspects of commercial law to recognize that trade. For example, in 2018 California approved the sale of surety bonds to address risks related to commercial cannabis.

The business of insurance generally relishes in its reputation for conservatism, which until recently did not include commercial cannabis operations. Now the cannabis sector looks like both a customer for risk transfer products and a target for investment.

Even conservative business institutions now recognize the change in legal standing enjoyed by cannabis businesses. In September 2019, the Insurance Services Office (ISO) presented five policy form endorsements dealing with commercial trade in cannabis (see the September 2019 issue of Rough Notes).

In a growing number of states, the cannabis sector now conducts legal commercial enterprise. In those jurisdictions, “canna-businesses” are potential customers for the insurance sector. Federal law, however, criminalizes both individual use of cannabis and cannabis-related commerce.

Federal follow-up

Once the states started enacting policies that allowed legal trade in cannabis, the federal government received increasing pressure to reform its draconian treatment of marijuana use and distribution.

Beginning in the 1930s, the government enacted a criminal enforcement framework to deal with the “dangerous drug” that echoed the approaches developed during Prohibition. Policy-makers placed restrictions on the use of orthodox financial systems to impede commerce in pot and foster prosecution for tax evasion.

Over the decades, whether arguing for a war on drugs or decriminalization, critics have questioned the effectiveness of these federal restrictions on access to financial institutions to reduce the amount of pot on the street.

Now a well-funded lobby is pressuring Congress to change the old rules and bring cannabis revenue into the regular financial system.

In 2013, Congress began serious consideration of normalizing trade in cannabis products under banking law.

The 2018 federal farm bill removed hemp products that contain less than 0.3% THC from Schedule I of Controlled (Drug) Substances. (THC, or Tetrahydrocannabinol, is the principal psychoactive constituent of cannabis.)

Support for reform legislation comes from both major political parties, but legislation did not advance until Democrats gained a majority in the House of Representatives after the 2018 elections. Upon assuming majority leadership in the House, Democrats pushed for passage of legislation designed to open the use of financial institutions—beginning with banking—to the commercial cannabis sector.

Some members of Congress view granting access to banking as a material first step in the decriminalization of cannabis, but others simply want to allow cannabis growers, dispensaries, and related firms to operate like other businesses.

Impact on insurance

As usual in American government, the banks got what they wanted first; however, insurance groups managed to piggyback on the bankers’ success.

Congressional sponsors of The SAFE (Secure and Fair Enforcement) Banking Act of 2019 filed companion bills in both the House and Senate. In the summer of 2019, sponsors amended the bills to include the CLAIM (Clarifying Law Around Insurance of Marijuana) Act, which provides safe harbor to the business of insurance and related enterprises.

Representatives of PIA National (National  Association of Professional Insurance Agents) played a material role in amending the banking-oriented bills with insurance provisions.

In a public statement issued on September 25, 2019, PIA National welcomed the House passage of H.R. 1595—the amended SAFE Act.

“Insurance agents are neither enemies nor supporters of cannabis itself,” said Jon Gentile, vice president of government relations. “They simply provide insurance to businesses that do business with legal entities.”

At a hearing of the Senate Banking Committee, Senator Sherrod Brown (D-Ohio) explained how commerce in cannabis affects the broader economy:

“The legal cannabis industry is one of the fastest growing in the United States. It employs hundreds of thousands of people, many of whom are represented by unions like the United Food & Commercial Workers International Union.

“It also affects people that you might not think of. Plumbers, welders, and electricians service retail locations and other facilities. Lawn care and gardening companies, like Scotts Miracle Gro in my home state of Ohio, sell materials and equipment.”


The effort to normalize commercial cannabis is not without opposition. Some proponents believe that Big Pharma will fight normalization to protect its chemically based products.

In addition, a group that operates under the name Smart Approaches to Marijuana (SAM) testified before the Senate Banking Committee in July. According to SAM’s self-description, former Congressman Patrick Kennedy, current editor of The Atlantic David Frum, and Kevin Sabet, former senior drug policy advisor to three administrations, believe “no one should be locked up or have the rest of their life ruined just because they got caught with a joint, but we should also not create a new addiction-for-profit industry in the model of Big Tobacco.”

The SAM testimony warned that the SAFE & CLAIM acts’ approach covers a broad jurisdiction. “The SAFE Banking Act could have been drafted to narrowly address point-of-sale transactions.” At the same time, SAM argued that the legislation does little to regulate the strength of scientifically augmented cannabis products or the “kid friendly” delivery mechanisms used to market the product, such as “gummies.”

The SAM testimony made dramatic use of the lobbying role that former Speaker of the House John Boehner fills on behalf of the cannabis sector that seeks institutional investors. The testimony drew from a Boehner “marijuana investing seminar.” He boasted:

“With traditional investments, only seventeen and a half percent of the money comes from little fish like you and me. The other eighty-two and a half percent is from the big players, the major investment firms, hedge funds, pension funds, established corporations. Banking restrictions are preventing almost all of those investment firms and funds from diving head first into cannabis. Well, they’re dying to get in. I’m helping some of these bigger fish get ready to invest. There are hundreds of billions of dollars sitting on the sidelines.”

Hundreds of billions of dollars rarely sit on the sidelines very long, and it appears that Boehner and his clients possess the necessary momentum to see reform legislation passed.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.

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