- U.S. Bank is no longer custodian for the ETFMG Alternative Harvest ETF, even though the fund has been soaring lately.
- Banks are reluctant to get involved with cannabis-related stocks while the Justice Department has pledged a renewed effort against marijuana-related crimes.
- Pot stocks have been soaring lately, partly amid hopes that they'll partner with pharmaceutical companies.
While traders are flocking to cannabis-related stocks, one big bank has taken a step away.
U.S. Bank is no longer the custodian for the ETFMG Alternative Harvest exchange-traded fund, which allows investors to get in on the bustling marijuana trade through ownership in a variety of companies.
The $560.3 million fund is the market's best performer by far over the last 30 days, boasting returns of 36.4 percent as a number of pot companies, primarily in the medical marijuana field, have soared. One company, Tilray, which holds the third-largest weight in the fund, jumped more than 50 percent Wednesday amid talk that pharma companies would need to start striking partnerships with cannabis producers. The company later surrendered those gains after trading was halted then resumed.
An announcement that U.S. Bank was stepping away from its custodian role came quietly Friday from ETF Managers Group, which issues the MJ fund. The firm said only that Wedbush Securities would be the new administrator. U.S. Bank declined comment.
While the exact reason that U.S. Bank no longer will be the custodian remains unclear, there's speculation that banks may want to steer clear from marijuana-related companies as long as the federal government still has not approved the drug's legalization.
Banks have been avoiding being tied in with pot stocks because the Department of Justice has renewed its commitment to prosecuting marijuana-related crimes, according to a report on ETF.com.
A spokesman at the Office of the Comptroller of the Currency declined comment on the U.S. Bank move specifically but said it "does not instruct banks on which accounts to open, maintain or close." However, the OCC spokesman said banks are expected to comply with marijuana-related provisions under the Bank Secrecy Act.
The Financial Crimes Enforcement Network's guidelines on the matter instruct banks before doing business with marijuana-related companies to consider "particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment."
Those considerations entail licensing issues and whether the companies are engaged in medical marijuana vs. recreational usage.
Custodians play important roles for ETFs as they hold the underlying stocks that comprise the fund.
There may be some help on the way for banks who want to get involved in marijuana-related securities.
Analysts at Compass Point Research point to a recent case where Wells Fargo shut down an account for a Florida politician who had accepted campaign contributions from cannabis-related donors. The scandal-scarred bank said it had a policy "not to knowingly bank or provide services to marijuana businesses or for activities related to those businesses, based on federal laws under which the sale and use of marijuana is illegal even if state laws differ."
The case is an example of how there needs to be better direction for banks on the cannabis issue, Compass Point said.
"Our sense is that this episode will serve as another mile marker in the long and hazy road to federal cannabis policy clarity," the analysts wrote in a note which also pointed out pending legislation to allow banks to participate in the cannabis trade.
"While we do not see a path to passage for this bill during the current Congress, we view its structure and substance as a clear signal that the broader policy trajectory is bending towards a clarification of federal cannabis policy," Compass Point said.
Cowen Research said this year's midterm elections likely will result in a strong Democratic win, also paving the way for more ease on cannabis restrictions.
"Regardless of election outcome, Attorney General Jeff Sessions is likely to be removed by President Trump. It is hard to imagine his replacement being more hostile to cannabis," the firm's analysts said.