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Banking & Financial Regulations of Cannabis

States Regulation on Cannabis Usage

The National Conference of State Legislatures (NCSL) recognizes that the majority of states and territories have legalized medical cannabis usage. Further, NCSL recognizes that a growing number of states have legalized adult-use recreational cannabis. Many of these states are creating substantial regulatory regimes with respect to the cannabis industry to ensure compliance with the law, prevent diversion into the illegal market and provide transparent financial oversight of licensed businesses.

Harm to Financial Institutions

These new regulatory schemes relating to cannabis have created a significant expansion of the cannabis industry authorized under state law. NCSL acknowledges that due to the expansion of legal cannabis, legitimate business enterprises need access to financial institutions that provide capital, security, efficiency, and record keeping. Despite many states passing their own regulations, cannabis remains illegal at the federal level as a Schedule I drug under the federal Controlled Substances Act. NCSL is concerned that under this law, the federal Bank Secrecy Act and concordant regulations impose substantial administrative and operational burdens, compliance risk and regulatory risk that serve as a barrier to banks and credit unions providing banking services to businesses and individuals involved in the cannabis industry. NCSL believes that this form of federal prohibition on cannabis jeopardizes the financial services industry as well as the cannabis industry. Providing banking services to cannabis related businesses entails additional risk to banks and credit unions because cannabis is a Schedule I drug under the Controlled Substances Act, substantially increasing risk of civil or criminal liability.

Business Protection

Current federal regulations force financial institutions to incur inordinate risk, should they decide to provide banking services to licensed cannabis businesses. The National Conference of State Legislatures recognizes that allowing access to banking services will improve the regulation of cannabis businesses. NCSL recognizes that the current federal guidance for providing financial services to cannabis businesses is insufficient, as it does not change applicable federal laws, imposes significant compliance burdens and is subject to change at any time. NCSL recognizes that without banking options, cannabis related businesses are forced to operate exclusively in cash, while a large and growing cash-only industry attracts criminal activity and creates substantial public safety risks. NCSL acknowledges that a cash-only industry reduces transparency in accounting and makes it difficult for states to implement an effective regulatory regime that ensures compliance. NCSL is concerned with the inability of cannabis related businesses to pay taxes in a form other than cash, which may only be remitted in person. NCSL acknowledges that this creates a substantial burden for state governments to develop new infrastructure to handle the influx of cash and for business owners who may have to travel long distances with large sums of cash. States have been forced to take expensive security measures to mitigate public safety risks to taxpayers utilizing the system, state employees and the public at large. NCSL is concerned that states do not have any control over the enforcement of federal laws and cannot enact legislation that provides banks and credit unions with protections necessary to secure their business interests in light of federal law.

Controlled Substances Act

National Conference of State Legislatures calls on Congress to amend the Controlled Substances Act to remove cannabis from scheduling, thus enabling financial institutions the ability to provide banking services to cannabis related businesses. NCSL additionally acknowledges each of its members will have differing and sometimes conflicting views of cannabis and how to regulate it, but in allowing each state to craft its own regulations, we may increase transparency, public safety, and economic development where there is support to do so.

Banking and Financial Services

State Sovereignty in Financial Services

The National Conference of State Legislatures (NCSL) is concerned that Congress, the federal financial services regulators, and the federal courts have sought to nationalize control of financial services in Washington, D.C. NCSL has consistently and strongly advocated for state sovereignty in financial services regulation. NCSL has opposed any federal preemption of state legislative or regulatory authority in financial services. A high threshold that federal action is necessary, such as a national financial crisis, should be met before any preemption of state financial services laws and regulations is warranted.

Preservation of Dual Banking System

NCSL is committed to the preservation of the dual banking system. The dual banking system enables state governments to apply laws and regulations to state-chartered banks, thrifts, and non-bank financial services, including financial technology entities that serve the needs of local economies and that respond to the values and concerns of local citizens. In recognition of the advantages of the dual banking system to the public and to the health of the financial services industry, NCSL opposes any efforts by the federal government to restrict state authority to charter, supervise, or regulate the powers of state-chartered banks, thrifts, and non-bank financial services, including financial technology entities. NCSL opposes any federal attempts to tax state banks for federal oversight services already performed by the appropriate state banking agencies and departments. NCSL recognizes that the states have a duty to use their powers responsibly and in a way that does not endanger the deposit insurance system and the nation’s financial stability.

NCSL urges Congress to continue close scrutiny of federal banking regulators to limit preemption of state consumer protections.

Federal Regulatory Consolidation

NCSL recognizes the need for the federal government to reduce the federal regulatory burden that can impede the economic vitality of our nation's financial services industries. In consolidating the federal banking regulators, Congress must ensure that any consolidation does not invalidate the regulatory independence of the dual banking system.

NCSL opposes any federal regulatory consolidation plan that would:

  • Preempt, limit, or interfere with the rights of states to regulate state-chartered banks, thrifts, and non-bank financial services, including financial technology entities;
  • Require federal reporting requirements and examinations that duplicate state efforts;
  • Place state-chartered banks, thrifts, and non-bank financial services, including financial technology entities at a competitive disadvantage with national banks or federal thrifts; and
  • Grant oversight authority for state-chartered banks, thrifts, and non-bank financial services, including financial technology entities to federal banking regulators.

Federal Preemption

NCSL strongly believes that a high burden of proof must be established before federal preemption of state banking authority is justified and that only Congress—and not federal regulatory agencies—can preempt the actions of elected state leaders. NCSL strongly opposes any effort by federal banking regulators to assert regulatory authority to weaken the standard of preemption or shield national banks and bank operating subsidiaries from state consumer protection laws and enforcement.

Dual Chartering of Credit Unions

NCSL believes that state credit union supervisors have the primary responsibility for assuring the safety and soundness of credit unions chartered by and operating under state law and regulation. NCSL supports the authority of state governments to determine how state-chartered financial entities must be insured and opposes any efforts by the federal government to preempt state authority to govern state deposit insurance requirements.

NCSL additionally acknowledges that federal deposit insurance agencies, like the National Credit Union Administration (NCUA), have a legitimate role to play if state authorized powers lead to unreasonable risks for NCUSIF. However, NCUA regulations and policies should be crafted in a way that minimizes the preemption of state authority. NCSL opposes any effort by the Administration and Congress to erode the dual chartering system for credit unions by preempting state credit union laws and regulations that do not adversely impact the financial well-being of state-chartered credit unions and thus the NCUSIF. Any preemption of state credit union laws or regulatory authority should only occur if an imminent risk to the credit unions’ share insurance fund is threatened.

Consumer Protection

There is overlapping state and federal legislative jurisdiction that ensures consumer access to basic financial services; to protect the privacy of consumers of financial services and the security of their personal financial information; to provide protection for consumers from abusive lending practices; to ensure disclosure of information about credit terms, interest rates, fees, and balances; to regulate branch closing; and to otherwise protect the public. In recognition that this is an area of overlapping federal and state jurisdiction, NCSL will ordinarily not oppose such federal consumer protection measures, provided that there is no preemption of complementary state consumer protection legislation.

Financial Services and Economic Development

NCSL recognizes that racial, ethnic, or gender discrimination by financial services entities may have an impact on the ability of residents in distressed communities to obtain financial assistance.  NCSL also recognizes the need for financial institutions to make safe, sound, and profitable investments, recognizing the responsibility that each state has for financial regulation, solvency and ensuring fair lending to their constituents NCSL recognizes that each state legislature has the responsibility to address the unique needs of its state. Congress must not mandate federal guidelines that impede the states' abilities to regulate financial services.

Financial Technology

As online financial services products continue to grow, clear rules must be established as to which jurisdiction’s consumers protections apply to a given transaction. NCSL believes that any such rules should be crafted through a partnership between state and federal regulators and should not place state-chartered financial institutions at a disadvantage in their ability to provide services over the internet. State banking laws provide thorough consumers protections and NCSL strongly opposes any efforts by Congress or federal regulators to preempt state banking authority in regulating financial technology companies that would limit the financial protections states provide to their citizens.

NCSL believes that state banking regulators should maintain primary responsibility of chartering and supervising financial technology companies that operate in their state. States have implemented the Nationwide Multistate Licensing System to make the licensing and registration process more uniform and efficient for companies across the country while still providing rigorous protections to consumers. States have also created standards to protect the data privacy of citizens and reduce discrimination in financial services while encouraging innovation. Regulatory sandboxes are often utilized by states to encourage new technologies and innovation without prohibitive government regulation so that states can determine the best regulatory framework for the new technology. These unique solutions should not be infringed upon so that states can continue to inspire innovation while protecting the public.

Securities Regulation

NCSL recognizes that the federal government has an interest in efficient and fair capital markets. NCSL also acknowledges that state’ securities agencies are indispensable partners with their federal counterparts engaging in the pursuit of fair and efficient capital markets by protecting local investors, workers, and communities by ensuring compliance with securities laws.

NCSL is concerned that the preemption of state securities laws and regulations will serve only to erode investor trust in the capital markets by further weakening a system designed to protect investors and putting the financial well-being of hard-working Americans at risk. NCSL opposes such federal preemption and the creation of self-regulatory organizations that usurp state authority. Instead, NCSL supports congressional efforts to expand the restoration of state securities regulators’ authority.

Mortgage Industry

Currently states regulate a significant portion of mortgage lending. Federal intervention in this area of supervision will displace the state regulatory system and could erode, or even eliminate, the current authority the states have to supervise and license mortgage professionals. The local nature of real estate and consumer protection necessitates direct state authority.

States, through the Conference of State Bank Supervisors (CSBS) and the American Association of Mortgage Regulators (AARMR), developed the Nationwide Multistate Licensing System (NMLS) to improve and coordinate mortgage supervision. This state system enhances consumer protection and streamlines the licensing process for regulators and the industry. NCSL supports the NMLS to encourage a more coordinated system of state and federal supervision.

Financial Information Security

NCSL believes that states should continue to play a vital role in protecting the privacy, confidentiality, and security of sensitive nonpublic personal financial information. States long have sought to balance the economic value of information sharing with reasonable safeguards against the unnecessary disclosure and inappropriate acquisition of sensitive nonpublic personal financial information, such as credit information, account numbers, account balances, and Social Security numbers. Understanding local and regional economic situations and the unique needs of consumers within these markets, states consistently have ensured the protection of sensitive nonpublic personal financial information.

NCSL recognizes that financial information security is an area of overlapping federal and state jurisdiction. Therefore, NCSL does not oppose federal baseline standards for the protection of financial information, provided that these standards generally do not preempt complementary state laws. NCSL believes that states should have the authority and flexibility to adopt standards for the acquisition, retention, disclosure, and sharing of financial information by and among financial institutions and nonaffiliated third parties that address local concerns or respond in a timely way to incidences of neglect or abuse that may be local or regional in nature. NCSL specifically believes that Congress should preserve state authority to exceed federal baseline standards for information sharing among nonaffiliated third parties.

Credit Reporting

NCSL acknowledges the benefit to the nation's economy of a uniform national credit reporting system and does not oppose the limited areas that were subject to federal preemption by the 1996 Amendments of the Fair Credit Reporting Act and made permanent by the Fair and Accurate Credit Transactions Act. In doing so, NCSL supports the continued exemption of the state laws that were in existence prior to the 1996 Amendments and thus are currently exempted from the preemption provisions.

Data Security Breach Disclosure

Consistent with NCSL’s general policy for safeguarding financial information, NCSL does not oppose baseline federal data security breach notification standards, provided that the requirements do not preempt state authority to adopt standards that provide affected consumers additional protection and notification. NCSL also supports allowing state financial regulators and attorneys general to enforce any new federal data security breach notification standards.

In the event that Congress decides to preempt state law, NCSL urges that the preemption be narrowly construed to preempt only state laws that are inconsistent with the federal standard while preserving state laws that apply to entities that may be excluded from the federal act. Additionally, should Congress decide to preempt state data security breach notification laws, NCSL would support a strong federal law that would require notification of the affected consumers when sensitive personally identifiable information has been, or is reasonably believed to have been, accessed or acquired. In this instance, exceptions should be made only when it is concluded that there is no significant risk that the breach has resulted in, or will result in, harm to the individual whose information has been breached.


Insurance Regulatory Modernization

The National Conference of State Legislatures (NCSL) is committed to state regulation of the business of insurance. NCSL acknowledges the responsibility of states to adjust state systems to meet the needs of the modern economy. NCSL opposes any proposal to establish either a federal or a dual system of regulation of insurance, to cede any state authority to regulate financial institutions involved in the business of insurance or to obtain Congressional ratification of trade agreements that preempt state regulation of insurance.

States and insurance commissioners continue to develop a shared vision of insurance regulatory reform to meet the needs of the modern marketplace while preserving the advantages of the state system. NCSL supports the efforts of states to streamline and simplify insurance regulation. NCSL endorses state participation in the Interstate Insurance Product Regulation Commission, which creates a national state-based system to make regulatory decisions quickly on life insurance products according to uniform national standards. 

NCSL believes that state efforts to enact significant reforms in critical areas represent tremendous progress, and NCSL will continue to support further efforts as states move forward to achieve widespread reform in all areas in the years ahead.

State-Federal Partnership

Individually and at the national level, states work to modernize insurance regulation. However, state legislatures recognize a legitimate federal role in overseeing and promoting well-functioning insurance markets.

Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act established The Federal Insurance Office (FIO) within the U.S. Department of Treasury. While NCSL and other state groups were successful in limiting the scope of the FIO’s authority, concern remains that the FIO will serve as a vehicle to promote a greater federal role in the historically state-regulated industry of insurance.

Therefore, NCSL opposes any administrative action by the FIO or federal legislation that: relies on wholesale preemption of state authority, would compel state compliance with federal standards or those of any non-governmental third party, or conditions, restricts or redirects state insurance revenues, including insurance premium taxes, fees and fines, either directly or as a condition of a state’s refusal to submit to federal standards or federal efforts to commandeer a state executive branch official to participate in a federal regulatory program.

Moreover, some in Congress and industry support federal legislation to establish a single federal regulator of insurance or allow for dual federal and state insurance regulation. NCSL opposes any provision of federal legislation that preempts state authority through the creation of a federal insurance official, commission or entity with the authority to regulate insurance, to implement federal standards, to enforce state compliance with federal standards, or to initiate or participate in judicial proceedings to resolve differences between federal standards and state law.

State legislators perform a critical role in the development of insurance public policy. However, despite this important function, state legislators are oftentimes overlooked for service on federal advisory boards and committees related to the regulation of the business of insurance. Recognizing this recurring oversight, NCSL requests an enhanced effort from the federal government to incorporate state legislators onto associated insurance advisory panels.

Insurance Company Solvency

The safety and soundness of insurance companies operating in the United States are the prime objective of state insurance regulation. State legislatures have endeavored to strengthen state insurance departments and to create standards for financial regulation that have improved the solvency of insurance companies.

NCSL opposes any proposal to establish federal standards for state solvency regulation that cedes any authority to federal agencies to regulate financial institutions involved in the business of insurance, including congressional ratification of trade agreements that would preempt state regulation of insurance for solvency purposes. Although NCSL continues to support the National Association of Insurance Commissioners’ Financial Regulation Standards and Accreditation Program, NCSL acknowledges that state legislatures and governors have the responsibility to enact policy, which state regulators enforce. NCSL recognizes that interstate compact proposals have the potential of addressing binding uniformity and effectiveness in specific areas of regulation.

NCSL also objects to actions taken or contemplated by the Internal Revenue Service or other federal agencies to assert priority claims to the assets of failed insurers. The states should first be allowed to distribute an insolvent company's assets to pensioners, family businesses, other policyholders and others protected by the McCarran-Ferguson Act’s delegation of the business of insurance to the states.

In the same vein, NCSL is concerned by federal bankruptcy rulings under the federal bankruptcy code that would allow alien insurers and reinsurers to move certain trust fund assets to bankruptcy proceedings in their domicile country. The trust funds established by alien insurers and reinsurers are to serve as collateral for insurance and reinsurance underwriting in the United States. Federal bankruptcy rulings have allowed such alien insurers and reinsurers to be exempt from state solvency regulation and have placed these collateral trust funds out of the reach of state insurance departments, which are solely responsible for solvency protection. NCSL urges Congress to rectify this situation by amending federal law to eliminate or limit this exemption for alien insurers and reinsurers under the bankruptcy code.

Insurance Information Security

NCSL opposes any federal effort to preempt state laws and regulations or to enact federal standards that address the use of financial and credit information in insurance.

Insurance Fruad-Federal Criminalization

NCSL recognizes the toll that policyholder and claimant initiated fraud has on the cost of insurance and the solvency of the insurer. We applaud the action taken in various states to pass laws that make it more difficult to file a false claim, increase the penalties for those who are guilty of fraudulent activities, and expand state insurance department fraud units.

NCSL believes that the prosecution of policyholder and claimant fraud should and must remain in the jurisdiction of state and local law enforcement officials. However, in cases of internal insurer fraud that may be the result of interstate and international conspiracies to defraud, loot or plunder an insurance company, states and the federal government should cooperate to prosecute such criminal activity.

As a result of financial services modernization, the various federal and state financial institutions regulators need to coordinate anti-fraud activities. However, federal legislation to assist the coordination of state and federal anti-fraud activities should not unnecessarily preempt state anti-fraud laws and regulations nor grant audit or subpoena authority to a federal entity over a state agency operating under appropriate state constitutions and laws.

NCSL's endorsement of federal involvement in the criminal prosecution of certain kinds of insurance fraud does not diminish our support for continued state regulation of the insurance business. Federal criminal sanctions will assist state regulators in state efforts to prevent future insolvencies.

Equal Access to FBI Criminal History Records

State regulators should have efficient access to the Federal Bureau of Investigation’s (FBI) Criminal Justice Information System in order to establish dependable procedures for licensing officers, directors, and agents of insurance companies across the United States.

NCSL calls on Congress to give state insurance regulators statutory access to FBI fingerprint files. This information is currently available to federal and state banking and securities regulators. Access will help safeguard insurance consumers from the unnecessary risk of having known fraud artists or violent offenders engaged in the insurance business.

Natural Disaster Mitigation and Insurance

NCSL urges Congressional action that would: (a) provide federal grants, tax credits or deductions to assist consumers to strengthen their homes to better withstand catastrophic natural disasters; and (b) create a commission to determine what other action is necessary and appropriate to support and enhance the ability of existing insurance and reinsurance mechanisms to cope with catastrophic natural disasters. However, any such action must not displace private sector risk transfer mechanisms, adversely impact a state's ability to levy premium taxes, regulate the business of insurance and set solvency standards for property and casualty insurers.

Terrorism Risk Insurance

NCSL requests Congress work with state insurance regulators to ensure that the property and casualty insurance and group life insurance industries develop the products to protect Americans from financial losses associated with terrorism and to ensure an available and affordable insurance market for American consumers and businesses.

NCSL continues to believe that any reauthorization of the Terrorism Risk Insurance Act should recognize the temporary nature of the program, and therefore encourages efforts to further promote development of the private insurance markets. Any federal plan for a temporary and limited federal backstop for terrorism insurance coverage must not adversely impact a state’s ability to levy premium taxes, regulate the business of insurance and set solvency standards for property and casualty and group life insurers.

Memorial Resolution in Support of Position Statement Recognizing Congressional Consent to the Interstate Insurance Product Compact

WHEREAS, it is well established that states have primary jurisdiction and responsibility for regulating insurance products offered by the life insurance industry to consumers in their respective jurisdictions; and 

WHEREAS, the National Conference of State Legislatures (NCSL) strongly supports rights of states to regulate their unique insurance markets while joining together to support targeted modernization initiatives that protect insurance consumers and streamline regulation; and 

WHEREAS, NCSL endorsed the development and implementation of the Interstate Insurance Product Regulation Compact (Insurance Compact) in 2004 and has actively supported its mission with NCSL legislators serving on the Insurance Compact Legislative Committee; and

WHEREAS, the Insurance Compact serves to bring states together to set national Uniform Standards that apply as the product requirements for life insurance, annuity, disability income, and long-term care insurance products, including requirements that in certain cases may differ from state-specific product requirements; and

WHEREAS, the Insurance Compact is an instrumentality of the states serving as a central clearinghouse for prompt and thorough product review and approval while preserving state authority over all other areas of insurance regulation—including agent licensing, market conduct, company licensing and solvency regulation—as well as preserving applicable state filing fee revenues; and

WHEREAS, since it became operational in 2006, the Insurance Compact has demonstrated sustained growth in the number of Compacting States, the number of Uniform Standards for the authorized product lines, the number of filing companies and product filings and has transformed the state-based product filing platform for Compacting States, their regulated entities and insurance consumers.

WHEREAS, the Compacting States represent 46 jurisdictions comprising more than 70 percent of the nationwide premium volume for asset-protection insurance products; and 

WHEREAS, more than 100 product Uniform Standards prepared and adopted by the Insurance Compact member states have fulfilled the promise of stringent and detailed requirements administered by knowledgeable, professional staff, with over 12,000 insurance products reviewed and approved for use in the Compacting States; and

WHEREAS, states’ legislatures determine the extent and authority of participation in the Insurance Compact, and further exercise their sovereign authority and rights, through their legislatively designated representative to the Insurance Compact, who serves on the Compact Commission, its governing body; and

WHEREAS, the Insurance Compact has become an extremely important part of the fabric of state-based product regulation for these authorized insurance products; and

WHEREAS, a recent court opinion by the Colorado Supreme Court found that congressional consent to an interstate compact would affect whether states could join together to embrace provisions in duly promulgated uniform standards that may differ from state laws; and

WHEREAS, it is well-established in interstate compact case law that regulations adopted by states pursuant to an interstate compact with congressional consent can apply when different from state law; and

WHEREAS, the Insurance Compact is considering adoption of a position statement known as Position Statement 1-2022 to document that Congress conferred implied consent for the Insurance Compact in 2006 in the form of Public Law 109-356 enacted by Congress and signed by President George W. Bush, which authorized the District of Columbia to enter the Compact, and approved the delegation of authority necessary for the Commission to achieve the purposes of the Compact; and 

NOW, THEREFORE BE IT RESOLVED that NCSL reaffirms its endorsement of the Insurance Compact as the legislative-regulatory state-based solution to making the product submission, review, and approval process more uniform, efficient, and robust across states; and 

BE IT ALSO RESOLVED that NCSL agrees that the Compact Commission, working with legislators, regulators, and others in Compacting States, should take action to further strengthen and inform on the legal foundation of the Insurance Compact, an interstate agreement among the states requiring passage by their respective legislatures; and

BE IT FURTHER RESOLVED that at the recommendation of the Insurance Task Force of the Communications, Financial Services and Interstate Commerce Committee, NCSL supports the adoption by the Compact Commission of Position Statement 1-2022 acknowledging implied congressional consent was given to the Insurance Compact in 2006; and 

BE IT FINALLY RESOLVED that a copy of this Resolution shall be distributed to the Office of the Interstate Insurance Product Regulation Commission with instructions to distribute to its members, members of the Legislative Committee and members of its Consumer and Industry Advisory Committees.

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