WSLCB - Listen and Learn Forum - True Party of Interest
(May 20, 2020)

Wednesday May 20, 2020 1:00 PM - 3:30 PM Observed
WSLCB Enforcement Logo

The Washington State Liquor and Cannabis Board (WSLCB) has rescheduled a Listen and Learn forum on draft conceptual rules regarding marijuana true party of interest regulations described in WAC 314-55-035 to accommodate concerns around the COVID-19 outbreak.

During the summer, and into the fall and winter of 2019, WSLCB held multiple meetings with industry association representatives, licensees, and others to draft the conceptual rules we’ll be discussing during this Listen and Learn session. These conceptual draft rules reflect an engaged and inclusive developmental process that embodies not only WSLCB’s commitment to regulatory stability and consistency, but to listening to and learning from the input of licensees. They also represent a significant agency policy shift in the removal of the spousal vetting requirement.

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Virtual participation will be structured to allow one speaker at a time though a hand-raising feature on WebEx.

https://content.govdelivery.com/accounts/WALCB/bulletins/28b3064

Observations

Over 60 participants signed in to observe or provide comments on draft conceptual rules developed during a lengthy CR-101 stage for the True Party of Interest rulemaking project.

Here are some observations from the Wednesday May 20th Washington State Liquor and Cannabis Board (WSLCB) Listen and Learn Forum on the True Party of Interest rulemaking project.

My top 3 takeaways:

  • True Parties of Interest (TPI) had been the subject of a long running rulemaking project at the WSLCB.
    • The Board adopted the CR-101 to consider the issue of “changes to WAC 314-55-035 What persons or entities have to qualify for a marijuana license” on October 31st, 2018. Earlier, TPI had been “part of the rulemaking for 2017 cannabis legislation implementation. Many stakeholders commented on the proposed rule and requested the board re-evaluate the proposed changes. The proposed rule was removed from the 2017 cannabis legislation implementation rulemaking to allow staff to work with stakeholders.” At that time, the new TPI rules were projected to be formally adopted by April 2019.
    • Policy and Rules Manager Kathy Hoffman met with some stakeholders directly throughout 2019 and into 2020 while a TPI work group convened several times
      • At publication time, Cannabis Observer had not been able to identify all meetings of the private work group.
    • Several sticking points challenged consensus among members of the TPI work group.
    • Hoffman led a round of introductions (audio - 23m) which took some time as there were over 60 participants on the call. WSLCB’s recently expanded Policy and Rules team hosted the event:
      • Kathy Hoffman, Policy and Rules Manager
      • Casey Schaufler, Policy and Rules Coordinator
      • Audrey Vasek, Policy and Rules Coordinator
    • Other observers from the WSLCB:
      • Amy Becker, Licensing
      • Josh Bolender, Enforcement Marijuana Unit Lieutenant
      • Brent DeBeaumont, Licensing Senior Policy and Education Manager 
      • Jennifer Dzubay, Enforcement Marijuana Unit Commander
      • Henry Gill, Enforcement Marijuana Unit Lieutenant, Pierce and King Counties
      • Matt McCallum, Enforcement Marijuana Advertising Coordinator
      • Kevin Milovac, Licensing Marijuana Manager
      • Nicola Reid, Licensing Compliance and Adjudications Manager 
      • Lee Slemp, Enforcement Marijuana Unit Lieutenant, Northeast Region
      • John Wilson, Enforcement Marijuana Unit Lieutenant, Northwest Region
    • Observers from the Washington State Office of the Attorney General (OAG):
      • Geoffrey Allen, Assistant Attorney General
      • Penny Allen, Assistant Attorney General
      • Stephen Manning, Assistant Attorney General
      • Josh Orf Rodriguez, Assistant Attorney General
      • Bruce Turcott, Assistant Attorney General
    • Remote participants and observers included:
  • Policy and Rules Manager Kathy Hoffman walked participants through each section of the conceptual draft rules to offer opportunities for comment.
    • WAC 314-55-035(1) - Qualifying for a Marijuana License. Hoffman explained that there were numerous changes to this section, including revisions to the “section that talked about true parties of interest and who qualified.” The first was that TPIs “must qualify to be listed on the license and meet residency requirements consistent with the chapter.” Prior language was “struck” in favor of new language with a “pared down” table of business entity types and their corresponding TPIs. Hoffman called attention to the fact that the “spousal [vetting] requirement” around “who was a true party of interest” had been removed following “great discussions” in the agency’s TPI work group (audio - 3m).
      • David Otto (audio - 2m)
      • Emily Gant (audio - 2m)
        • Gant was in favor of removing the spousal vetting requirement, deeming it a “good choice from a policy perspective.”
        • Noting that “residency issues” were a contentious topic, Gant called it a “statutory issue rather than a regulatory one.” She said that her clients had expressed confusion about whether residency was “merely for purposes of qualifying” to apply for a cannabis business license, or if there was “a continuing obligation to maintain residency.”
        • Looking at the wording about "control," Gant noted that in WSLCB investigations there “isn’t necessarily an examination of whether or not someone is exercising control, it's really just ‘are they a member in an LLC, are they a shareholder in the corporation? Ergo, they’re on the license.’” She recommended the rule change “flesh that out a bit.”
      • Crystal Oliver (audio - <1m)
        • Oliver, a TPI work group member, signaled WSIA’s approval of the removal of the spousal vetting requirement.
      • Lukas Hunter (audio - 1m)
        • Like Gant, Hunter offered concerns about residency requirements, specifically language in the section saying “and meet residency requirements consistent with this chapter.” He believed the wording should reference RCW 69.50 as it would “provide for a little bit more leniency if there is a change legislatively” to residency requirements.
          • At publication time, RCW 69.50.331(1)(b)(ii) stated a license could not be issued to “A person doing business as a sole proprietor who has not lawfully resided in the state for at least six months prior to applying to receive a license.”
      • Jim MacRae (audio - 2m)
        • Assuming the draft rules were adopted, MacRae wondered if a married couple could control twice the number of licenses permitted under RCW 69.50.325(3)(b) if each spouse acquired the maximum number of licenses legally allowed. Hoffman was uncertain and indicated she would get back to MacRae with an answer.
      • David Otto (audio - 3m)
        • Otto told the agency there was “no reason to have a publicly traded corporation as a potential TPI” as vetting all the shareholders was “not practical.” He suggested distinguishing “shareholders with a control position” and those meeting a “stockholder threshold” could be vetted instead of attempting to track all shareholders who could change “hourly.”
    • WAC 314-55-035(2) - Definitions. Hoffman turned to “definitions that we’ve changed or added” in a “completely new definition section” (audio - 2m).
      • Sami Saad (audio - 1m)
      • Lukas Hunter (audio - 2m)
        • Looking at the definition for “control,” Hunter said he knew there had been “a lot of negotiation around the language there,” but still believed that smaller companies had “mid-level managers that would meet this definition of control, yet would never actually be on the license.” He promised to follow up with specific suggested language changes and pushed for a definition that fit “small scale business and all the way upwards.”
      • David Otto (audio - 3m).
        • Regarding control, Otto said most of the business types specified in the conceptual rules relied on voting power and “you have no control without the ability to direct a vote.” He suggested the definition was “rather thin and a little incoherent” and suggested being more “specific and careful about how we are defining control.” Otto agreed with Hunter that control decisions could be made by mid-level managers. Instead, he advised that the definition should be more about who controls “the direction of the business. The policies of the business.”
      • Jeff Anderson (audio - 2m).
        • Anderson, a TPI work group member, addressed “the verbiage of this, or the intent” of the definition for control. He said the language was “not disallowing the managers from managing their team, it's really putting the accountability on the one layer up from the managers.” 
        • Addressing the voting powers recommendation from Otto, Anderson said his company “has a CEO and if it was just the voting of the shareholders, then our CEO is kind of screwed” were anyone with voting power considered to be controlling the license.
      • Mitzi Vaughn (audio - 1m)
        • Vaughn, another TPI work group member, said this single definition represented many hours of work by members in meetings and outside of them. While welcoming input, she stressed that the conceptual draft’s definition was neither “flippant” nor casually determined.
      • Casey Craig (audio - 1m)
        • In contrast to other speakers, Craig suggested that “subjecting mid-level managers” to TPI might have “two positive effects”: exposing “shadow vertical integration or cartel-like behavior” and “limiting the turnover of management which could expose diversion that is being misdirected by frequent staff turnovers.”
    • WAC 314-55-035(3) - TPI Exclusions. Hoffman moved to “this newly written section” which described several examples of what TPI “does not include” and required a “significant amount of time” from the staff and work group (audio - 2m).
      • Emily Gant (audio - 5m)
        • Gant's first comment was on (3)(e) covering “options,” where she observed that it would be “helpful to clarify” whether there was “some consideration for granting of the option at the outset even if most of the payment is made on the back end when the option is exercised...Let's say that someone has an option to acquire a license for $100,000. And they may pay $3,000 up front to secure the option and $97,000 when they exercise the option in a year, or five years.” Gant worried that the “down payment” prior to exercising an option would no longer be permissible. She asked the agency to “buff that language” to ensure the practice could continue.
        • Turning to (3)(f) on a “contract or agreement for services,” Gant explained that with liquor licenses it was common practice to have a ”management company that is operating a premises on behalf of an owner.” She was unclear if the conceptual draft of the rules would allow such a company to perform “day-to-day operations” for a percentage of a cannabis licensee’s revenue. 
        • Also on (3)(f) Gant pointed out that it would help to “talk about whether an [intellectual property] (IP) license counts as this branding company concept” routinely involved royalty payments and “some measure of control.” She asked for explicit wording on whether or not these arrangements would count as TPI “because it comes up so, so, so often in the industry.”
      • David Otto (audio - 3m)
      • Jim MacRae (audio - 1m)
        • MacRae wanted to know if, for active investigations and adjudications, “will the old rules apply or do the new rules take over for those cases?” Hoffman asked MacRae to “comment on the rules.” MacRae rephrased to directly ask that rule revisions “not be retroactively applied” to anyone already under investigation for violating the rules as currently written.
      • Mitzi Vaughn (audio - <1m)
        • Vaughn followed up to share “in general, the date of the offense determines what laws apply.”
    • WAC 314-55-035(4) - Notification. Hoffman moved to another new section conceived for the draft which “speaks specifically to ideas we had around what licensees must disclose with respect to...the proceeds of loans.” This also introduced language regarding “licensees needing to receive board approval before making any ownership changes” (audio - 1m).
      • David Otto (audio - 3m)
        • Otto told Hoffman that “it would be more effective from a business/operations standpoint to have the money vetted” on a “quarterly” basis after money has been invested by a licensee. He posited that licensees had no incentive to “do something that’s inappropriate” but they had “every incentive to make sure the capital is timely and sufficient.” Reporting investments ahead of acquiring them would be “overly burdensome and unnecessarily so” and wouldn’t comport with “business needs in the industry.”
      • Casey Craig (audio - 2m)
        • Craig remarked that under (4)(i) on capital improvements, WSLCB enforcement officers wouldn’t always be given floor plan, TPI, “or source of funds vetting.” Officers had expressed surprise to Craig when they found new equipment on a licensed premises. He wondered if officers could be notified if “a capitally-intensive product has been purchased.”
      • David Otto (audio - 2m)
    • WAC 314-55-035(5) - Disclosure Agreements and Intellectual Property.     Hoffman explained that this “very short section” implemented HB 1794, passed in May 2019, which was now “codified” in RCW 69.50.395. No comments were offered on this section of the conceptual draft rules (audio - 1m).
    • WAC 314-55-035(6) - Financiers. The new financiers section had been pulled out of earlier sections of prior drafts because changes around cannabis penalties and enforcement practices adopted in January continued to “reference financiers within the context of” WAC 314-55-035. “For structural purposes,” Hoffman noted, “we moved this back into this rule section so we wouldn’t have to return back to the enforcement regorganization” to do “a lot of updates.” The section also limits what powers a party can have over a license before being considered a TPI (audio - 2m).
      • In December 2019, Hoffman first addressed the rationale for a separate financiers section. At the February 25th Board Caucus she elaborated that financiers would stay in the rule language “for now...at a later date when we do what I’ve been calling ‘rule hygiene’ we can go in and separate out financiers.” This was necessary as otherwise the agency would need to change cannabis penalty rules again “for one number.” Board Member Russ Huage was supportive of rules distinguishing TPI and financiers, hoping that the agency would “hold to that course” (audio - 6m).
      • Emily Gant (audio - 1m)
      • Lukas Hunter (audio - 1m)
        • Hunter, looking at (6)(a), asked that there be an allowance for “government entities to be able to provide finances.” He reasoned that this was an opportunity for a “non-financial institution or a private entity to be able to provide funds to a cannabis licensee.”
      • David Otto (audio - 3m)
        • Otto was insistent that “demonstrable” control of a business was more important than proof of a gift or loan to that business. Additionally, he found the wording that funds could be given to an “applicant, business, or both” to be “ambiguous.”
      • Jeff Anderson (audio - 2m)
      • Mitzi Vaughn (audio - 1m)
        • Vaughn cautioned that the term “demonstrable” could lead to “a rabbit hole” of confusion for licensees and asked Otto if he had a “fresh take” on how best to define it. 
      • David Otto (audio - 3m)
        • Otto said that he would gladly provide his “version of the definition of ‘demonstrable’” as well as definitions of ‘control,’ ‘revenue,’ ‘gross profit,’ and ‘net profit.’ He indicated that most of the terms had Generally Accepted Accounting Principles (GAAP) definitions already. He somewhat suggested that “any ambiguity gets construed to the benefit of the licensee applicant.” 
      • Lukas Hunter (audio - 4m)
        • Hunter asked for the perspective of WSLCB’s enforcement staff in attendance in the hopes of hearing “that part of the agency’s goals in writing these rules.” Hoffman provided enforcement staff an opportunity to speak.
        • Commander Dzubay responded that she was "not even sure that [WSLCB’s Enforcement division] have opinions" on the conceptual draft rules as they would “go with what the Board wants and what the Board needs.” That said, she stated that enforcement did “want clarity just like industry.” 
  • Hoffman reviewed common themes from participant responses before outlining her team’s next steps to organize comments, consider further revisions, and propose a CR-102.
    • Hoffman said a central theme she had heard from participants was a desire for revised definitions including “different versions of what ‘control’ means” and “more clarity around definitions with revenue” (audio - 2m).
    • Looking ahead, Hoffman asked participants to markup revisions of the conceptual draft rules and send them to katherine.hoffman@lcb.wa.gov or rules@lcb.wa.gov. She expected the agency could offer a CR-102 with proposed rules by “the middle of the summer” (audio - 1m).
      • Hoffman reviewed the agency’s rulemaking process near the end of the forum (audio - 8m).
      • Once proposed rules are filed, the CR-102 stage offers additional opportunities for public comment including a public hearing hosted by the WSLCB. After that, final rules can be put before the Board for adoption in a CR-103 which is formally filed with and added to the Washington Administrative Code (WAC) by the Office of the Code Reviser (OCR).
    • Hoffman concluded by offering her gratitude to participants, particularly for their patience as the agency developed a virtual forum for a traditionally in-person activity. As remote meetings were likely a new normal, Hoffman was optimistic that the agency would be capable of engaging stakeholders “as closely as possible to the way that we were able to engage with you in our in person listen and learn sessions.” Schaufler reported that all comments staff had received in chat would be “saved in a document for [staff] review.” Vasek added that she’d made a note of every follow-up question and would endeavor to respond to the inquiring parties (audio - 2m).
      • At publication time, the next remote listen and learn forum was scheduled for Thursday May 28th to address the Voluntary Compliance Program (VCP) rulemaking project.
      • The agency will also host a webinar on Thursday May 21st to provide general guidance for cannabis licensees.

Engagement Options

Webinar

https://watech.webex.com/...onstage/g.php?MTID=e13ac4927e2202ebbb097b00732f4e5b0

Phone

Number: +1-415-655-0001
Number: +1-855-929-3239
Access Code: 285 815 516

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