Cosmetics, Hemp, and CBD: Legislative and Regulatory Update

Seyfarth Synopsis: Through a reintroduced House bill, Congress is taking strides to push for cosmetic regulation reform and, separately, through the SAFE Act, it is seeking to establish a safe harbor for financial institutions to support the burgeoning cannabis industry. Plus, the USDA just issued an interim rule for hemp production.

USDA Issues Proposed Rule for Hemp Production

The 2018 Farm Bill, which federally legalized hemp (formerly a Schedule I drug like its close cousin, marijuana), opened the gates for mass hemp production—well, almost. While the law set the record straight between hemp and marijuana, it also tasked the US Department of Agriculture (USDA) with promulgating regulations and guidelines to establish and administer a program for the production of hemp in the US. On October 29, 2019, the USDA issued its proposed rule for hemp production. Publication in the Federal Register is expected later this week. As noted by the USDA, “[t]he effective date of the interim final rule is, and the comment period will not begin until, the date of publication in the Federal Register.”

The proposed rule creates a process by which States and Indian Tribes can submit plans to monitor hemp production in their respective territories. The plans must incorporate procedures for sample and testing hemp to ensure that the cannabis grown and harvested does not exceed the acceptable hemp THC level. In addition, the plans must include procedures for the disposal of non-compliant plants (i.e. those with THC levels above 0.3%). Other plan requirements include establishing information sharing procedures and obtaining a certification of resources. Alternatively, the rule establishes a Federal plan for producers in States or territories of Indian tribes that do not have their own USDA-approved plan.

Exercising its authority from the 2018 Farm Bill, the USDA sets forth in the rule the process by which producers can apply for and be issued a license for hemp production by the USDA. USDA has also established specific compliance requirements for USDA licensees, including the USDA’s ability to conduct random audits and issue corrective action plans for producers’ negligent violations. Actions deemed violatory could result in a suspension or revocation of a USDA license. The rule further provides an appeal procedure for applicants who are denied a license.

Within the announcement of the rule, the USDA cautions that “hemp production in the US has seen a massive resurgence in the last five years; however, it remains unclear whether consumer demand will meet supply.” This consideration will likely be influenced by how quickly the federal government mends the patchwork of rules and regulations both at the state and federal level governing the legality of marijuana and CBD. Until then, the USDA seeks to add some clarity to the conversation so that States, Indian Tribes, and cannabis producers can plan accordingly.

Schakowsky Re-Introduces Consumer Protection Bill

On September 12, 2019, Illinois Representative Jan Schakowsky introduced H.R. 4296, the Safe Cosmetics and Personal Care Products Act of 2019, which aims to set guidelines for cosmetics and personal care products labeling. As characterized by Congresswoman Schakowsky, the bill “will provide cosmetics safety that consumers and workers want and deserve; address the over-exposure to toxic chemicals that communities of color and professional salon workers experience every day; and hold companies accountable for the safety of ingredients in their products.” While this bill bears many similarities to its previous iterations, there are several new aspects of this bill that are worth considering.

To begin, the bill places greater accountability on the cosmetics industry. Cosmetics and personal care products brands¹ would have to register with the Department of Health and Human Services (HHS), providing their name, location, list of cosmetic products, their function, and their gross sales receipts. Brands would be required to update this information annually for display on the Food and Drug Administration (FDA) website, as well as, disclose the ingredients used in a product (both professional and retail). Additionally, the manufacturer would be required to publish the product’s ingredient list on its website if the product can be purchased online. They would also have to provide the ingredient list for any products sold online, along with any products sold on third-party vendor’s websites.

The bill, if passed, would also give the HHS and the FDA expanded regulatory authority and a number of new responsibilities. Under H.R. 4296, the Secretary would have the ability to issue several different kinds of recalls for products in violation of the bill under certain circumstances and make public notice of these recalls. The bill also prompts the HHS Secretary to place ingredients on one of four lists: (1) Prohibited; (2) Restricted; (3) Safe Without Limits; or (4) Priority Assessment. The bill requires a number of ingredients—proven to be toxic—to be immediately added to the Prohibited list and outlines a roadmap for populating the other three lists with ingredients. This provision of the bill varies from the Personal Care Products Safety Act (S. 726), a similar bill introduced in the Senate by US Senators Dianne Feinstein and Susan Collins. The Senate bill would require the FDA to review a minimum of five ingredients a year to determine their safety. H.R. 4296 instead requires 20 ingredients to be placed on a Priority Assessment List within the first year of enactment, and the Secretary must then evaluate a minimum of 10 additional agreements a year (until all ingredients actively being used in cosmetics and personal care products have been categorized). H.R. 4296 seemingly seeks to move fast right out of the gate and aims to keep up that momentum in the years following its enactment.

Other noteworthy provisions of the bill include banning the use of animal testing, in favor of non-animal testing alternatives and monitoring any adverse health effects related to the use of nanotechnology² in cosmetics. The FDA already has several programs in place researching and monitoring the use of nanotechnology in FDA products. Under this bill, the HHS Secretary would (1) monitor developments in scientific understanding from any adverse health effects related to the use of nanotechnology and (2) consider the scale-specific hazard properties of ingredients when reviewing and evaluating the safety of cosmetics and ingredients.

Beyond the above-described highlights, the bill further breaks new ground through research and development initiatives. For example, the bill creates a new grant program administered by the FDA in coordination with the Environmental Protection Agency to support the creation of safer alternatives to dangerous chemicals in both the professional use of products and products marketed to women of color. Another grant program, created within the National Institute of Environmental Health Sciences, will focus on supporting research and public outreach on marketing, sale, and use of harmful cosmetics by women of color.

Overall, this bill seeks to significantly increase the amount of regulation in the cosmetics industry, and would likely result in many manufacturers having to modify their operations to meet the new safety standards. Nevertheless, beyond the enforcement mechanisms present in the bill, the creation of grant programs intended to fund research on safer alternatives means cosmetics companies will not be entirely alone in navigating this new regulatory landscape.

In summary, here are the important takeaways from the bill, should it get passed as proposed:

• Cosmetics brands would have to disclose and annually update information about their companies, products, and ingredients for display on the FDA’s website.
• The HHS Secretary would begin actively monitoring, restricting, and prohibiting ingredients for use in cosmetics, placing each ingredient on one of the four aforementioned lists.
• The HHS Secretary could enforce these new provisions by issuing product recalls and making public notice of the recalls.
• Animal testing would be prohibited provided there is a viable, non-animal testing alternative.
• Nanotechnology would be monitored with the same attention as it is with other FDA-regulated products.
• Research grants focusing on finding safer alternatives to certain ingredients could help mitigate enforcement activity. This research would also pay special attention to how the cosmetics industry disproportionately harms communities of color.

Backed by 16 Representatives alongside Rep. Schakowsky and over 50 NGOS and safe cosmetics companies, the bill has been referred to House Committees on Energy and Commerce and Education and Labor.

The SAFE Banking Act May Help CBD Industry

Because cannabis at the federal level is considered an illegal substance, most banks are not servicing cannabis businesses. In addition, there is major confusion surrounding the legalization of marijuana and CBD with growing state laws addressing these topics. In one attempt to manage this conflict, on September 25, 2019, the House passed the Secure and Fair Enforcement (or SAFE) Banking Act of 2019, and it is now with the Senate for consideration.

The SAFE Act was introduced in March 2019, by Colorado Representative Ed Perlmutter, seeking to prohibit the penalization of depository institutions for providing banking services to legitimate cannabis-related businesses by creating a safe harbor. Under the SAFE Act, a federal banking regulator may not (1) terminate or limit the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate cannabis-related business; (2) prohibit or otherwise discourage a depository institution from offering financial services to such a business; (3) recommend, incentivize, or encourage a depository institution not to offer financial services to an account holder solely because the account holder is affiliated with such a business; (4) take any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased or sold to such a business; or (5) penalize a depository institution for processing or collecting payments for such a business. Importantly, Section 3 of the bill makes proceeds from cannabis-related legitimate businesses or service providers exempt from federal money laundering laws.

Despite the large strides made by this bill, it is not a guaranteed path to funding for cannabis companies. Section 5 of the bill explicitly states that there is no requirement for depository institutions to provide financial services or to associate with these companies. While institutional support for the bill exists, not all depository institutions can be expected to engage with the cannabis industry.

Even though there is no requirement for depository institutions to provide funding to cannabis-related companies, the SAFE Banking Act still has the capacity to make a significant change in the cannabis industry by giving businesses added legitimacy, which in turn, can help companies secure requisite financing. Seyfarth Shaw’s Cannabis Law Practice Group and Consumer Financial Services Practice Group continue to monitor this space and are ready to assist both current and prospective clients with navigating this complicated and dynamic regulatory regime.

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1 Applies to foreign and domestic brand owners that receive more than $1 million in gross receipts. The HHS Secretary would also establish a registration fee system for brands that receive over $10 million in sales.

2  Nanotechnology is utilized in a wide array of products including foods, cosmetics, drugs, devices, veterinary products, and tobacco products. Nanotechnology allows scientists to work with materials measured in nanometers, opening up a wide array of new possibilities. Given that these materials can have different chemical, physical, and biological properties from their larger counterparts, the FDA monitors the development and use of these materials in order to safeguard public health.