The Midwest and North Central/Northeast supplements (and maybe others) describe secondary hydrology indicator D2 - Geomorphic Position as occurring 'at the toe of a slope'. The cautions say this is not applicable 'in areas with functioning drainage systems'.

Is the 'functioning drainage system' assumed to be an installed subsurface tile drain system, or could an adjacent small stream channel be considered a 'functioning drainage system'?

My best guess interpretation of “functioning drainage systems” would be man-made features within the landscape that carry or retain water.

I agree with Eugene. Although you could argue that a natural stream is performing this same function especially if it will affect the outcome. There is no specific wording in the guidance that states "man-made" or "improved".

Hugh asked;
"...Is the 'functioning drainage system' assumed to be an installed subsurface tile drain system, or could an adjacent small stream channel be considered a 'functioning drainage system'?..."

Wetlands typically occur at the bottom of a hill (toe of a slope) where water may pond. Secondary hydrology indicators are used to identify areas of possible wetlands hydrology during dry periods when there is no ponding or saturated soils. If the area at the toe of a slope has been effectively drained by a 'functioning drainage system' such as a stream, ditch, or underground storm sewer, then ponding is eliminated and there is no "wetlands hydrology."

If a stream, ditch, or underground sewer is poorly maintained and clogged with sediment and debris, then the drainage system is temporarily nonfunctional and ponding may result. This is why it important to clean and maintain existing drainage systems prior to evaluating wetlands hydrology, so as to avoid the mistake of misclassifying wetlands that are solely the result of neglected maintenance.

Maintenance of existing drainage systems is authorized under Section 404(f) of the CWA and Nationwide Permit 3.