[House Hearing, 105 Congress] [From the U.S. Government Publishing Office]AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND RELATED AGENCIES APPROPRIATIONS FOR 1998 ======================================================================== HEARINGS BEFORE A SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTH CONGRESS FIRST SESSION ________ SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND RELATED AGENCIES JOE SKEEN, New Mexico, Chairman JAMES T. WALSH, New York MARCY KAPTUR, Ohio JAY DICKEY, Arkansas VIC FAZIO, California JACK KINGSTON, Georgia JOSE E. SERRANO, New York GEORGE R. NETHERCUTT, Jr., Washington ROSA L. DeLAURO, Connecticut HENRY BONILLA, Texas TOM LATHAM, Iowa NOTE: Under Committee Rules, Mr. Livingston, as Chairman of the Full Committee, and Mr. Obey, as Ranking Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees. Timothy K. Sanders, Carol Murphy, John J. Ziolkowski, and Joanne L. Orndorff, Staff Assistants ________ PART 2 AGRICULTURAL PROGRAMS Page Farm Credit Administration....................................... 1 Commodity Futures Trading Commission............................. 91 Food and Drug Administration..................................... 309 ________ Printed for the use of the Committee on Appropriations ________ U.S. GOVERNMENT PRINTING OFFICE 40-179 O WASHINGTON : 1997 ------------------------------------------------------------------------ For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 COMMITTEE ON APPROPRIATIONS BOB LIVINGSTON, Louisiana, Chairman JOSEPH M. McDADE, Pennsylvania DAVID R. OBEY, Wisconsin C. W. BILL YOUNG, Florida SIDNEY R. YATES, Illinois RALPH REGULA, Ohio LOUIS STOKES, Ohio JERRY LEWIS, California JOHN P. MURTHA, Pennsylvania JOHN EDWARD PORTER, Illinois NORMAN D. DICKS, Washington HAROLD ROGERS, Kentucky MARTIN OLAV SABO, Minnesota JOE SKEEN, New Mexico JULIAN C. DIXON, California FRANK R. WOLF, Virginia VIC FAZIO, California TOM DeLAY, Texas W. G. (BILL) HEFNER, North Carolina JIM KOLBE, Arizona STENY H. HOYER, Maryland RON PACKARD, California ALAN B. MOLLOHAN, West Virginia SONNY CALLAHAN, Alabama MARCY KAPTUR, Ohio JAMES T. WALSH, New York DAVID E. SKAGGS, Colorado CHARLES H. TAYLOR, North Carolina NANCY PELOSI, California DAVID L. HOBSON, Ohio PETER J. VISCLOSKY, Indiana ERNEST J. ISTOOK, Jr., Oklahoma THOMAS M. FOGLIETTA, Pennsylvania HENRY BONILLA, Texas ESTEBAN EDWARD TORRES, California JOE KNOLLENBERG, Michigan NITA M. LOWEY, New York DAN MILLER, Florida JOSE E. SERRANO, New York JAY DICKEY, Arkansas ROSA L. DeLAURO, Connecticut JACK KINGSTON, Georgia JAMES P. MORAN, Virginia MIKE PARKER, Mississippi JOHN W. OLVER, Massachusetts RODNEY P. FRELINGHUYSEN, New Jersey ED PASTOR, Arizona ROGER F. WICKER, Mississippi CARRIE P. MEEK, Florida MICHAEL P. FORBES, New York DAVID E. PRICE, North Carolina GEORGE R. NETHERCUTT, Jr., Washington CHET EDWARDS, Texas MARK W. NEUMANN, Wisconsin RANDY ``DUKE'' CUNNINGHAM, California TODD TIAHRT, Kansas ZACH WAMP, Tennessee TOM LATHAM, Iowa ANNE M. NORTHUP, Kentucky ROBERT B. ADERHOLT, Alabama James W. Dyer, Clerk and Staff Director AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND RELATED AGENCIES APPROPRIATIONS FOR 1998 ---------- Wednesday, March 5, 1997. FARM CREDIT ADMINISTRATION WITNESSES MARSHA MARTIN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER DOYLE COOK, BOARD MEMBER AND CHAIRMAN, FARM CREDIT SYSTEM INSURANCE CORPORATION Opening Remarks Mr. Skeen. The committee will come to order. I see two familiar faces and good friends of American agriculture; Marsha Martin, Chairman and CEO of the Farm Credit Administration and Doyle Cook who is the Board Member and Chairman of the Farm Credit System Insurance Corporation. The good news is that FCA is again proposing a reduction in its budget. The bad news is that the money comes from member institutions and not appropriations. So, we don't get any credit for it. That's the sad fact about all of this balancing the budget over here. We don't know where the center is. Ms. Martin, please proceed with your presentation and make any introductions that you'd like to. The floor is yours and we're delighted to have you. You're always great to work with. Ms. Martin. Well, thank you very much. I appreciate that. And I would like to, of course, as you have already done, welcome to this table my colleague Doyle Cook. And yes, we are two familiar faces. I guess this is our third year here. We appreciate the opportunity, Mr. Chairman. Mr. Skeen. You have seniority. Ms. Martin. Oh, we have seniority; three years. Mr. Skeen. You're tenured. Ms. Martin. Tenured? We're glad to know that. I will read my statement and welcome any questions after that. I would like to recognize, though not individually, that I do have several staff members here. The whole Agency would have liked to have come to this hearing, but because of our cost effectiveness we chose not to bring them all, but I do have some of them. Mr. Skeen. You're very wise. On the other hand too, a lot of folks don't realize how good these staffs are that we have and how much we depend on them. Ms. Martin. I certainly would support that also and recognize that we do have a very, very capable staff. Thank you for agreeing with us. I will now read my statement and I'll highlight the Agency's accomplishments during the past year. I'll also leave with you FCA's budget request for fiscal year 1998. I would echo, Mr. Chairman, what you've already said that FCA's administrative expenses are paid by the institution it regulates or examines. The Agency does not receive a federal appropriation. I present today our fiscal year 1998 budget request that is more than $3 million below our 1997 budget. This 8.2 percent budget reduction demonstrates the Board's commitment to cost efficiency. I emphasize, however, this in no way indicates there is any sacrifice of program effectiveness. mission of the farm credit administration The FCA continues its mission of promoting a safe and sound, competitive Farm Credit System so that agriculture and rural Americans, farmers, ranchers, and their cooperatives will continue to have a permanent source of farm credit in good times and bad. We are proud of our performance in carrying out this mission and pleased with the continuing progress the System is making in strengthening its financial condition. current activities and issues This past year at FCA we continued to reduce costs, streamline operations and reduce regulatory burden without compromising our ability to oversee the safety and soundness of System institutions. We place a high priority on creating innovative examination and supervisory programs that meet our needs as well as those of our customers and at the same time improve efficiency. For example, our examinations are based on a level of risk in each institution. Off-site examinations are conducted on low-risk institutions. In 1993 when this program began we completed six off-site examinations. This grew to 96 off-site examinations in 1996. We also have established a Quality Assurance Program to ensure that quality control in the examination process is maintained as we close regional offices and streamline operations. Our Office of Examination has instituted several internal projects that will improve operating efficiency and enhance risk evaluation. One of these projects is evaluating ways to directly access loan account information systems at Farm Credit System institutions. A related project establishes a uniform system to identify and respond to deteriorating trends in highly rated institutions. These projects could improve significantly the Agency's ability to foresee and counteract risks to the System. Also last year the Board adopted a policy statement on association structure that provided more flexibility for association mergers. It will encourage, we think, still more efficiency and effectiveness for System institutions. The Board also adopted a policy statement on disaster relief efforts encouraging System institutions operating in disaster affected areas to work to alleviate pressures on borrowers under stress. We know that in New Mexico with the drought, that was a part of the problem. And the information we had was that the Associations there were very appreciative of that effort on the part of FCA. The Board adopted final regulations concerning customer eligibility and stricter capital standards for FCS institutions. The previous customer rule had not been updated in 25 years and imposed many restrictions not required by law. I firmly believe that coupled together, the new customer and capital regulations strengthen financial standards and ensure a continuing competitive source of credit for agriculture and rural America. A major Agency action in 1996 was implementing our five- year staffing and structure plan that positions the Agency to move smartly into the next century with the right mix of jobs and talent to accomplish the Agency's mission and strategic plan. Achieving this right mix included organizational changes in headquarters, the closing of two regional offices and two of the seven field offices and staff reductions of 48. Our staffing level today is 328 and by July 1, 1997, it will be 314. Our fiscal year 1998 budget reflects a further reduction of full-time equivalents to 309, nearly one-third less than the 450 full-time equivalents in 1993. We were pleased to see the enactment last year of the Farm Credit System Reform Act which provided some statutory relief to System institutions. Among other measures, it extended the mandatory examination cycle from 12 to 18 months for most System institutions and repealed a provision requiring a separate Board of Directors for the Farm Credit System Insurance Corporation. Both of these measures translate directly into cost savings for the System. The Reform Act also amended certain provisions relating to the Federal Agricultural Mortgage Corporation, better known as Farmer Mac, by removing hindrances to its operational flexibility and competitiveness. condition of the farm credit system Mr. Chairman, I am pleased to report that the System has continued to make progress in regaining its financial strength. The System's total capital increased to $10.6 billion at the end of 1996, which represented 14 percent of total assets. In addition, Farmer Mac showed a net profit of $775,000 for 1996; its first profitable year. Farmer Mac also had a successful stock subscription of nearly $32 million allowing it to exceed the $25 million capital level required by law by February 1998. fiscal year 1998 budget request Mr. Chairman, having summarized recent events and accomplishments of the Agency, I now propose a budget of $34.4 million for fiscal year 1998. As I said earlier, this amount is $3.1 million, 8.2 percent less than the $37.5 million presented to the committee for fiscal year 1997. We continue our commitment to FCA's effectiveness and cost efficiency. And we regularly review how further progress can be made in meeting this objective. We continue to be proud of our accomplishments as a safety and soundness regulator of the Farm Credit System, and in keeping with our discussion of the budget today, we are also proud that we continue to hold the line on costs while achieving our mission. Mr. Chairman, thank you. Mr. Cook and I will receive any questions you would have. [Clerk's note.--Ms. Martin's written testimony appears on pages 40 through 47. Ms. Martin's and Mr. Doyle's biographical sketches appear on pages 48 and 49. The Farm Credit Administration's budget justification appears on pages 50 through 90.] fca board vacancy Mr. Skeen. Thank you, Ms. Martin. At this time I believe we expected the nomination of someone to replace Gary Byrne at FCA. Would you bring us up-to-date on what's happened? Ms. Martin. Yes, I'd be happy to. We understand that the White House has made a nomination; that the name is going forward. Ann Jorgensen, who is a swine producer from the State of Iowa--you might recognize the name. I believe her spouse is a former President of the American Soybean Association. Ms. Jorgensen in her own right speaks across the country on financial management. We will welcome her to the Board, when confirmed. Mr. Skeen. Well, that should be forthcoming. Ms. Martin. Yes. Very soon we understand. capital adequacy and customer eligibility regulation Mr. Skeen. We know through the press last month that FCA dropped two proposed changes that were opposed by the commercial bankers. One would allow farmers to borrow money for non-agricultural purposes and the other would have changed the definition of farmer which would increase the number of people that become eligible for the loans. Can you give us your view of the story and tell us if these proposals might come back for future consideration? Ms. Martin. The proposal right now and from the standpoint of the FCA Board is in its final days. It's now before the Congress for review. From the standpoint of expanding the eligibility, the FCA Board's view of this customer and capital regulation was that it was merely an updating. It was allowing some things for the Farm Credit System that the law did not restrict them from doing, but FCA when it wrote this rule in 1972 had been very narrow in its interpretation. So, in our opinion, this is merely a very badly needed update of an old rule that had been on the books for 25 years. Mr. Skeen. It gives you a lot more flexibility as I understand it. Ms. Martin. It gives the Associations more flexibility. Mr. Skeen. Because if you narrow the definition of a farmer down, you're getting into real trouble. You've only got one ditch going through the whole field. Ms. Martin. That's exactly right. And if you think back, agriculture has changed tremendously as has the farmer/rancher. Mr. Skeen. They certainly have. Ms. Martin. Since 1972. farm credit banks joint management agreement Mr. Skeen. I understand that the AgAmerica and the Western Farm Credit Banks have arranged some kind of a joint operating agreement. Several of the subcommittee members come from States in the territories of those two banks. What are the effects of this agreement and is this a change that needs FCA approval? Ms. Martin. My colleague was the former President of the Spokane Farm Credit Bank and knows this issue very well. So, I'm going to ask Doyle to respond to that please. Mr. Cook. No, this is not a change that needs FCA approval. The Western and the AgAmerica banks have entered into a joint management agreement. And what this will amount to at the present time is that they will have one staff with one President serving both banks. They will continue with two separate Boards of Directors. My opinion is that it will eventually lead to a merger of those two banks. But that is not the current plan. At least it's not in writing yet. The Farm Credit Administration does not approve joint management agreements. If Western and AgAmerica proceed to the point where a merger occurs then we would be required to approve that. We also have authority to approve the headquarters location. And in this case they have elected to make Sacramento the headquarters. And we have authorized Sacramento as the headquarters. farm credit system market share Mr. Skeen. Thank you. I appreciate that update. The chart that you have on page S15 of the budgetsupplement indicates that the Farm Credit System and the Farm Service Agencies are losing market share in real estate and that the Farm Service Agency is losing its market share in the non-real estate market. Could you elaborate on the present competitive situation for FCS and the so- called non-traditional lenders mentioned in your budget supplement? Tell us how you see this competitive situation operating in this next year. Ms. Martin. Let me respond to that by making a general statement. We've become very aware of the competitive aspect, the many entities, the many people that would like to finance agriculture. Mr. Skeen. That's a switch. Ms. Martin. That's exactly right. And I wanted to make that point because I think it's certainly a good thing for the farmer and rancher if there are lenders out there competing for his or her credit. And that's exactly what's happening. From the standpoint of the Farm Credit System, since about 1983 or 1984, the System's market share has gone from almost 40 percent down to 25 percent. The commercial banking market share in the interim has gone from 25 percent to about 40 percent today. So, there has been exactly a switch in terms of the amount of the market financed by those two segments. In terms of the nontraditional credit, what is referred to as trade credit, there is a competitive aspect there from the standpoint of the John Deeres of the world and the entities that are financing agriculture. But, Mr. Chairman, again this is good for agriculture because the farmer and rancher have a choice. So, I think we are beginning to see the Farm Credit System regain some of the borrowers they lost during the 1980s when things got so rough for agriculture. But it's going to be a slow process, or at least it has been the past two years when they've increased their market share slightly. It has been only slightly. So, I don't think you will see the big jump back to the 40 percent level that was financed by the System before the down-turn in the 1980s. Mr. Skeen. Well, it certainly is a switch because the agriculture borrowers have become a pariah to the commercial institutions because when the examiners come in the first thing they want to look at is do you have any agriculture on your books because they can classify those loans almost automatically. It is a sad state of affairs. The bubble is beginning to come up again and get a level playing field because we're losing more and more people everyday in agriculture. We're down to like 2 percent of our population to produce it. I don't know how you get into an agricultural enterprise unless it's willed to you or default or somebody walked off and left or whatever. It just hasn't been that attractive. We're not getting the young people in there to replace these folks because it's been so difficult. I think the lending policies we have now encourage them at least to some of that effort. They've still got to make a living. Ms. Martin. That's right. farm credit system insurance corporation Mr. Skeen. Mr. Cook, you serve as the Chairman of the Board of Directors of the Farm Credit System Insurance Corporation. Would you give us a brief description of FCSIC, how it sees its mission and its relationship to the FCA. Mr. Cook. The Insurance Corporation was established about 1986 or 1987. And it was established to help be a cushion from any losses that might occur in the System institutions. It was set up by Congress to insure the debts that the Farm Credit System had in financing the farmer. It was established that this would go to 2 percent of the outstanding debts of the System. And we are approximately 90 percent there now. So, that provides a cushion to offset any losses the System would have to take care of the bondholders, the people that are financing the Farm Credit System. Mr. Skeen. I imagine that's what's changed the complexion on the lending field. Mr. Cook. It's helped. It's helped. Mr. Skeen. It's a good tool. Mr. Cook. Right. It's assurance that the bond holders will get their money if something happens in the System again. arkansas pcas' supreme court case Mr. Skeen. It sounds like a good system. I understand the Supreme Court is considering a case concerning Production Credit Associations in Arkansas and immunity from State taxes. Can you tell us more about this and whether or not FCA has a position on the matter? Ms. Martin. I'll start with the last part of that question. We don't have a position. We are watching with interest, particularly if the Supreme Court, and I understand they will, hears this. From the standpoint of the case, the Arkansas PCAs are contending that they should not be paying State taxes which they have been. And that, in effect, has been challenged by the State of Arkansas. So, again, we will watch that with interest and see if indeed the State of Arkansas prevails or the PCA. Mr. Skeen. It will be a monumental piece of legislation. Ms. Martin. It surely will; right. Mr. Skeen. The States are hungry too. Mr. Serrano? Mr. Serrano. Thank you, Mr. Chairman. Mr. Skeen. Thank you for being here this morning. Mr. Serrano. Well, by process of elimination. My plan is just to see how long I can keep the ranking position. I'll just tell them that if they don't show up two days in a row. . . . Mr. Skeen. Well, you're a busy bee. You're the batter. loans to cooperatives Mr. Serrano. Thanks a lot. First of all, I want to thank you for joining us today. I just really have one question that I hope was not asked which is this one. What part of your lending goes to cooperatives? And what role are you playing since--in my part of the world, New York, we hear a lot about cooperatives, and that's an area that we have an interest in. Ms. Martin. Twenty-eight percent of the System's volume goes to agricultural cooperatives. There are two agricultural cooperative banks; one in St. Paul with a national charter and one in Denver with a national charter. So, the agricultural cooperatives, at least from the standpoint of FCA, are well- served by the Farm Credit System. Mr. Serrano. So, it's 20 percent? Ms. Martin. Twenty-eight percent. Mr. Serrano. Twenty-eight percent. And do you see that as staying steady or is the trend for that to grow? Ms. Martin. That will depend on the success of the cooperatives, I think, but certainly that has been going up steadily. It's leveled off within the past year or two. But the demands of the agricultural cooperatives have been met in the past by the banks for cooperatives. And I would expect that to continue. Mr. Serrano. And what in your view has been the success or lack of it with the cooperatives in general? Ms. Martin. From the agricultural cooperative standpoint? Mr. Serrano. Well, no. Ms. Martin. From the bank for cooperatives? Mr. Serrano. Yes. Ms. Martin. Oh, no. I think they have been extremely successful. The large bank for cooperatives is well capitalized. It's financially strong. It's very astute in terms of its understanding of the agricultural cooperative and what its needs are. It has some larger cooperatives and some of the smaller cooperatives. So, it has a nice mix in its portfolio. We watch it with interest though because it is a large bank. We certainly are always aware of the risk that could be involved in such a large bank. fca staff reductions Mr. Serrano. Right. And my next and last question is your budget on page 16 indicates that you intend to decrease your staff from 361 in 1996 to 330 this year, to 309 in 1998. Is that going to be done through layoffs, attrition, both? In the case of layoffs, are we doing anything to prepare those folks for their next step? Ms. Martin. Yes. We certainly have. It's been done mostly through attrition and voluntary buy outs. So, that has been the large majority of the downsizing from our standpoint. In terms of help, we have provided all kinds of services to help these people find jobs who were not going to have jobs in the future. We have career counseling. We are even putting some funds into helping them with counselors to find jobs. So, yes, it has been done. And anything done in the future will continue to be done in a very understanding and humane fashion. Mr. Serrano. I appreciate that. Thank you. Ms. Martin. Thank you, Mr. Serrano. Mr. Skeen. Thank you, Ms. Martin and Mr. Cook. We are adjourned. [The following questions were submitted to be answered for the record:] FCA Staffing Mr. Skeen. Where are the two regional offices and the two field offices that will be closed in FY 1997? Response. The two regional offices are the Western Region in Denver, Colorado; and the Eastern Region in McLean, Virginia. The two field offices are in Atlanta, Georgia; and St. Louis, Missouri. Through these measures, the Office of Examination will be further streamlined by the elimination of one management layer. The remaining five field office directors will report directly to the Chief Examiner. Mr. Skeen. Please provide a list of the remaining offices. Response. The remaining field offices are located in Bloomington, Minnesota; Dallas, Texas; Denver, Colorado; McLean, Virginia; and Sacramento, California. Mr. Skeen. Does FCA plan to close any offices in FY 1998? Response. No. Mr. Skeen. Please provide the total amounts paid for Voluntary Separation Payments in FY 1996 and the amount estimated for FY 1997 together with the total number for each year of individuals accepting the payments. Response. The Farm Credit Administration (FCA or Agency) paid $900,000 for Voluntary Separation Incentive Payments (VSIPs) in FY 1996 to 36 employees. One additional FY 1996 VSIP totaling $25,000 was actually paid in FY 1997. The Agency's FY 1997 budget includes $275,000 for VSIPs for 11 employees. The Agency's FY 1998 budget does not include any amount for VSIPs. Mr. Skeen. Please explain the ``VH'' and ``VG'' employee designations. Response. The FCA Compensation Program has two salary ranges. One range applies to VH employees, who are the Agency's managerial, professional, and technical employees. The other range applies to VG employees, who occupy clerical and support positions. Mr. Skeen. Please provide the Committee with two tables. One table showing the agency's FTE levels for fiscal year 1990 through estimates for fiscal year 1998 and another table showing the ratio of managers and supervisors to other personnel for the same years. Response. Rounded to the nearest whole number, the full-time equivalent (FTE) staffing levels are as follows: FTE STAFFING LEVELS ---------------------------------------------------------------------------------------------------------------- 1990 1991 1992 1993 1994 1995 1996 1997 1998 ---------------------------------------------------------------------------------------------------------------- FTEs........................... 533 515 487 451 425 393 361 330 309 ---------------------------------------------------------------------------------------------------------------- The ratio of managers and supervisors to other personnel are as follows: RATIO OF MANAGERS TO OTHER PERSONNEL ---------------------------------------------------------------------------------------------------------------- 1990 1991 1992 1993 1994 1995 1996 1997 1998 ---------------------------------------------------------------------------------------------------------------- Ratio.......................... 1:5.0 1:5.4 1:5.2 1:5.9 1:6.2 1:5.9 1:6.9 1:8.0 1:7.5 ---------------------------------------------------------------------------------------------------------------- Both tables include actual information through fiscal year 1996 and estimates for fiscal years 1997 and 1998. FCA Operations Mr. Skeen. A footnote on page 18 of the budget justification says that FCA is not able to use the ``Judgment Fund.'' Please explain the Fund and why FCA can not use it. Response. The Judgment Fund is a fund maintained by the Treasury Department that most Government agencies rely on as the source of funds to pay Freedom of Information Act (FOIA) and tort claim settlements entered into on their behalf by the Justice Department. On February 10, 1993, the General Accounting Office (GAO), which must certify payments from the Fund, ruled that the Judgment Fund is not available to pay FCA's judgments or settlements due to FCA's status as a nonappropriated fund agency. The GAO also indicated that, in its view, the proper source of payment for FOIA and tort claim settlements is FCA's Administrative Expense Account. The Agency had sought access to the Judgment Fund as a source of paying the settlement of two claims against the Agency, one brought under the FOIA and one brought under the Federal Tort Claims Act. The FCA subsequently paid the claims using its own funds. Mr. Skeen. The costs of operating the FCA are covered by assessments to the System institutions which, in turn, pass the costs off to the borrower in terms of higher interest rates. Last year, you stated the cost of FCA's operation translated to a cost of about 5.9 basis points. Is this estimate of cost to the borrower still current? Response. The FCA's FY 1998 proposed budget of $34.4 million, plus the estimated assessments of $1.4 million to be made by the FCS Building Association, translate to a cost of 5.0 basis points of the Farm Credit System's (FCS or System) average earning assets. Mr. Skeen. The Office of Government Ethics has published regulations that establish uniform ethical conduct standards for all Executive Branch personnel. FCA has determined thatsupplemental regulations are necessary to address ethical issues unique to the agency. Would you please describe this issue in further detail. Response. The FCA, like many other Government agencies and most Federal financial regulators, has developed a small number of additional ethics regulations specifically tailored to the Agency's mission. These regulations supplement the Office of Government Ethics (OGE) standards of conduct to which all Executive Branch employees must adhere and are designed to aid the Agency in avoiding ethics conflicts. For example, under OGE's regulations on financial conflicts of interest at 5 C.F.R. Sec. 2635.402, an employee may not participate personally and substantially in his or her official capacity in any particular matter in which he or she has a financial interest if the matter will have a direct and predictable effect on the interest. Under this provision, if an FCA employee had an ongoing financial relationship with a System institution, the employee would be required to recuse himself or herself from examining the institution because the examination findings could affect the institution and, potentially, the employee's financial interest. Although recusal effectively resolves the potential conflict of interest in this example, if a significant number of examiners regularly recused themselves from conducting examinations, the Agency's ability to carry out its mission would be impaired. Therefore, the FCA's supplemental regulations prohibit examiners, among others, from borrowing from and owning financial interests in System institutions. As the foregoing example illustrates, FCA's supplemental regulations do not alter the OGE standards. Instead, they are designed to implement those standards efficiently, so as not to impede the work of the Agency. Other areas in which FCA has developed supplemental regulations include: the purchase of System institution assets, employment of an employee's spouse or dependent relative with a System institution, involvement in System institution elections, and outside employment and business activities. FCA staff worked closely with OGE in developing its supplemental regulations as, by law, OGE must approve all Agency supplemental ethics regulations. FCA's supplemental regulations were issued jointly by FCA and OGE. Mr. Skeen. Please provide a sub-object class breakdown for ``Consulting and Other Services,'' in the FCA Budget Trends. Response. The information follows: ------------------------------------------------------------------------ Fiscal years-- Sub-object classification -------------------------------------- 1996 1997 1998 ------------------------------------------------------------------------ Consulting Services.............. $73,064 $132,000 $221,550 Tuition, Workshop, Seminar, Instructor Fees and Other....... 321,216 625,996 547,630 Other ADP Services............... 132,644 161,317 161,750 Other Non-ADP Services........... 96,924 114,098 103,800 Membership Fees.................. 3,267 3,520 3,810 Renovation of Office Space....... 2,899 34,000 10,000 Stenographic Services............ 0 0 2,520 Services of Administrative Law Judges.......................... 0 5,000 5,000 Non-ADP Equipment and Auto Repair/ Maintenance..................... 110,032 104,037 122,458 Storage of Household Goods....... 47,500 22,848 14,280 Contracted ADP Equipment Maintenance/Repair.............. 46,483 64,321 53,501 Contractual Software Maintenance. 219,196 159,589 238,315 Late Payment Penalties........... 6,135 0 0 -------------------------------------- Total...................... 1,059,360 1,426,726 1,484,614 ------------------------------------------------------------------------ Mr. Skeen. Please update the table that appeared on page 247 of last year's hearing record showing the amount of refunds or reduced assessments to the Farm Credit System since 1982. Please update that table for us starting with fiscal year 1987. Response. The updated table is provided for the record. Refunds to the Farm Credit System for fiscal years 1987 through 1996 Fiscal year: Refund 1987................................................ $8,309,247 1988................................................ 2,622,583 1989................................................ 1,348,656 1990................................................ 859,209 1991................................................ 4,383,516 1992................................................ 3,523,865 1993................................................ 4,356,581 1994................................................ 5,014,081 1995................................................ 3,122,725 1996................................................ \1\ 3,113,929 \1\ Will be refunded in the 4th quarter of fiscal year 1997. Mr. Skeen. What were your reception and representation expenses during fiscal year 1996. Response. During fiscal year 1996, the reception and representation expenses totaled $454.10. Mr. Skeen. Were there any instances of foreign travel by FCA employees during fiscal year 1996? If so, please provide the purpose of the trip, the cost, and the location? Response. During fiscal year 1996, no employees traveled to foreign countries on behalf of the FCA. Mr. Skeen. Does FCA submit its budget to OMB for approval? Response. While the FCA is a nonappropriated agency, we submit budgetary requests to the Office of Management and Budget (OMB) for inclusion in the President's budget. Sole Source Contracts and Consulting Services Contracts Mr. Skeen. Please provide the Committee with a list of all sole- source contacts and an explanation of each of these contracts for fiscal years 1996 and 1997. Also, provide the details on what consulting services were provided, the contracting officer of each contract, and the contracting officer's technical representative. Response. The FCA has issued two sole-source consulting contracts in fiscal year 1996 and two thus far in fiscal year 1997. One other competitively awarded consulting contract was issued in fiscal year 1996. The following information is provided with regard to these consulting services. ---------------------------------------------------------------------------------------------------------------- Fiscal year Sole source Purpose Amount ---------------------------------------------------------------------------------------------------------------- 1996.................................. Watson Wyatt Company.......... Update Job Evaluation Program $25,000 ---------------------------------------------------------------------------------------------------------------- Since 1989 the Farm Credit Administration has been statutorily exempt from the pay and job evaluation provisions of the Federal government's ``General Schedule'' system. The Watson Wyatt Company was awarded a competitive contract in 1991 to develop the Agency's current job evaluation program using a proprietary process. In 1996, the Agency issued a follow up sole-source contract with the company to reevaluate and revalidate the processes which are used to determine the grade levels of Agency positions. The project is still underway. The Contracting Officer is Philip J. Shebest, Chief, Human Resources Division, Office of Resources Management; and the Contracting Officer's Technical Representative is James T. Judge, Chief, Contracting and Procurement Branch, Human Resources Division. To date, expenditures on this contract have amounted to $4,081.74. ---------------------------------------------------------------------------------------------------------------- Amount Fiscal year Sole (Competitive bid) Purpose not to exceed ---------------------------------------------------------------------------------------------------------------- 1996.................................. William M. Mercer Co.......... Compensation Program $25,000 Evaluation. ---------------------------------------------------------------------------------------------------------------- This contract was competitively awarded to the William M. Mercer Company for purposes of completing a review of the Agency's compensation program. The study report was issued in September 1996. The Contracting Officer is Philip J. Shebest, and the Contracting Officer's Technical Representative is James T. Judge. Total expenditures on this contract amounted to $14,348. ---------------------------------------------------------------------------------------------------------------- Amount Fiscal year Sole source Purpose not to exceed ---------------------------------------------------------------------------------------------------------------- 1996................................ Hayes, Harkey, Smith & Cascio (law legal consulting....... $15,000 firm) Monroe, LA. 1997................................ Hayes, Harkey, Smith & Cascio (law legal consulting....... $25,000 firm) Monroe, LA. 1997................................ Fellers, Snider, et al. (law firm) legal consulting....... $25,000 Oklahoma, City, OK. ---------------------------------------------------------------------------------------------------------------- In fiscal years 1996 and 1997, a total of three purchase orders were issued for sole-source legal consulting services to represent the Agency's interests in renewed litigation related to the Receivership for the former Federal Land Bank of Jackson, which had been dissolved in January 1995, after the Department of Justice advised that it was unable to represent the Agency. Sole-source commitments were arranged because these individuals and law firms had represented the Receivership in extensive litigation prior to its dissolution. Their experience with the complex legal and factual issues involved in the Jackson Receivership, as well as their expertise in Louisiana Civil Code practice, uniquely qualified them to address this new litigation as quickly and cost effectively as possible. The Contracting Officer on these acquisitions is Philip J. Shebest; and the Contracting Officer's Technical Representative is Kathleen V. Buffon, Associate General Counsel, Legal Counsel Division, Office of General Counsel. The amounts expended to date are as follows: 1996 purchase order to Hayes, Harkey, Smith & Cascio--$9,567.00; 1997 purchase order to Hayes, Harkey, Smith & Cascio--$8,922.71; 1997 purchase order to Fellers, Snider, Blankenship, Bailey & Tippens--$218.95. Litigation Involving FCA Mr. Skeen. Please provide a list of all current litigation in which the Farm Credit Administration is a defendant. Please list the outcome of settled suits for the past 18 months and what has been the total cost to FCA for each of these. Response. The following is a description of the only Federal court litigation in which the FCA was a defendant during the past 18 months: IBAA, et al. v. NCUA, et al. On February 28, 1996, the Independent Bankers Association of America, three Wisconsin banks, and a Wisconsin banking association filed a Complaint in the Western District of Wisconsin against the FCA, the National Credit Union Administration, AgriBank FCB, seven Wisconsin Farm Credit associations, and eight individuals to enjoin the state of Wisconsin from issuing a charter to Countryside Credit Union and to compel FCA to prevent the Farm Credit associations from contributing capital to the credit union. On August 25, 1996, the District Court granted FCA's and the other defendants' Motions to Dismiss. The plaintiffs filed a Notice of Appeal tothe U.S. Court of Appeals for the Seventh Circuit on September 12, 1996, and further action on the appeal is pending. The FCA has not incurred any costs, other than personnel costs in defense of the lawsuit, as a result of this litigation. Audit Mr. Skeen. In your 1996 annual reports, the independent auditors note reportable conditions involving internal control structure at FCA including noncompliance with OMB standards on financial management systems, lack of properly designed controls, inadequate segregation of duties over the property management system and about 500 payments to vendors which did not include interest in accordance with federal law. What is FCA doing to change these conditions? Response. The Independent Auditor's Report on Internal Control Structure noted that ``FCA's core financial management system does not comply with relevant Office of Management and Budget standards and lacks properly designed controls.'' The FCA does not agree with the conclusion reached by the auditors when the internal control structure and the results produced by the system are viewed in their entirety. FCA does agree that it has a continuing responsibility to evaluate its financial management system, and it is in the process of reviewing the Agency requirements and looking to improve the Agency's financial management system. Notwithstanding the continuing need to evaluate its requirements and improve operations, the Agency's financial statements for the last three years have received an unqualified opinion by the independent auditors. This opinion means that the financial statements of the Agency present fairly, in all material respects, the financial position of the FCA, and the results of its operations and cash flows, in conformity with generally accepted accounting principles. The second reportable condition concerned ``Inadequate segregation of duties over the property management system.'' The Agency agreed with the auditor's recommendations and has established a working group that is currently reconciling existing property records to the assets themselves. This project should be completed by June 30, 1997. A ``Property System Manager'' will then be designated, and will have the responsibility for keeping the property records and the supporting system current. Subsequent to each formal property inventory, the Director of the Office of Resources Management will ask an independent party to certify that the Agency's inventory control and property management practices are functioning as designed. The Independent Auditor's Report on Compliance with Laws and Regulations reported ``Interest due under the Prompt Payment Act not paid by FCA.'' The Agency performed an analysis of its FY 1996 payments to determine the amount of late payment penalties that should have been paid. These penalties were paid in early FY 1997. Also, in order to ensure that system and management controls are in place to provide that future late payments include interest in accordance with the Prompt Payment Act, the Agency's Fiscal Resources Division (FRD) has already modified the current financial management system to automatically calculate prompt payment penalties owed and is processing payments for FY 1997 in accordance with the Prompt Payment Act. In addition, FRD is conducting a quarterly review of payments made to ensure that the Agency is in compliance with the Prompt Payment Act. Mr. Skeen. What were the principal conclusions of the most recent independent financial audit? Response. The opinion noted in the Independent Auditor's Report on the Financial Statements concluded that the financial statements present fairly, in all material respects, the financial position of FCA as of September 30, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The Independent Auditor's Report on Internal Control Structure noted the reportable condition that FCA's core financial management system does not comply with relevant Office of Management and Budget standard and lacks properly designed controls. This report also noted a second reportable condition relating to inadequate segregation of duties over the property management system. The Independent Auditor's Report on Compliance with Laws and Regulations reported that the FCA did not pay interest to some vendors as required by the Prompt Payment Act. In addition, the auditors reported that material nonconformances of the Agency's core financial management system were not reported as material weaknesses in the annual Federal Managers' Financial Integrity Act report. As stated previously, where appropriate, the Agency has taken steps to address the findings of the auditors contained in the reports. Attached for your information is a copy of the Farm Credit Administration's 1996 Annual Financial Report that contains the reports issued by the auditors as well as FCA management's comments to the auditors' conclusions and recommendations. [Clerk's note.--The Audit Report provided was too lengthy to print and is retained in Committee files.] Office of Inspector General Mr. Skeen. The Inspector General's most recent report says on page 3 that FCA holds FCS institutions to a more stringent standard than it applies to its own internal operations. Please explain the reason for the different standards. Response. FCA's internal operating practices have evolved over time without any conscious thought of applying a dual standard. The FCA Board Chairman requested this audit to identify any differences between what FCA requires of FCS institutions and its own practices so that appropriate corrections can be made. The Inspector General identified four FCA internal functions that should be improved in order for FCA to meet the same standards it imposes on the regulated FCS institutions. The Agency has accepted the Inspector General's recommendations for improving these functions, has completed corrective actions for two of the recommendations, and is developing corrective actions for the other two. Mr. Skeen. What are the four ``open recommendations'' mentioned on page 4 of the Inspector General's semiannual report. Response. The ``open recommendations'' were made in an audit report issued by the Inspector General on September 26, 1996, only four days before the September 30 reporting date for the Inspector General's semiannual report. The four recommended actions were to: 1. formalize the planning process and integrate planning responsibilities into individual performance plans; 2. develop a succession plan for Agency management positions; 3. improve investment practices; and, 4. periodically review and update internal policies and procedures for Agency operations. Agency management has subsequently accepted all four recommendations, completed corrective action on recommendations 2 and 3, and is moving to complete corrective action on the other two. Examination Issues Mr. Skeen. Why are Federal Land Bank Associations not subject to the new 18 month inspection interval? Response. Section 5.19(a) of the Farm Credit Act of 1971, as amended (12 U.S.C. 2254) (Act) specifically states: ``Except for Federal land bank associations, each institution of the System shall be examined by Farm Credit Administration examiners at such times as the Board may determine, but in no event less than once during each 18- month period. Each Federal land bank association shall be examined by Farm Credit Administration examiners at such times as the Farm Credit Administration Board may determine, except that each such association shall be examined at least once every three years.'' The Act requires Federal Land Bank Association (FLBA) examinations only once every three years because FLBAs only service the loans owned by the Farm Credit Banks (FCBs) and because of the uncomplicated nature of FLBA financial statements. However, as a matter of practice, FCA examines FLBAs more frequently as part of FCB examinations. FCA examines FLBAs to assess the condition and performance of FCBs. Because FCA examines FCBs on a 12-month examination schedule, the examination of FLBAs is on a similar schedule. There are only two FCBs in the Farm Credit System which have FLBAs. Those are the FCB of Wichita and the FCB of Texas. FLBA loan volume comprises 74 percent and 80 percent of total FCB of Wichita and FCB of Texas loan volume, respectively. Thus, one can readily understand the importance of examining FLBAs more frequently than every three years as allowed by the Act. Mr. Skeen. Please identify the Farm Credit System institutions that are in receivership. Response. There are no Farm Credit System institutions in receivership. FCA Regulatory Burden Project Mr. Skeen. Please update the report on the review of regulatory burdens imposed on institutions in the farm credit system by the FCA provided on page 251 of last year's hearing record. Response. In the past year, the Agency accomplished several initiatives that will reduce regulatory burden: The FCA changed the requirement to notify borrowers 10 days prior to a change in interest rate to a 30-day post-notification requirement. This change permitted some System institutions to eliminate certain separate mailings to their borrowers, thereby permitting a direct savings. In addition, the regulatory change permits Farm Credit institutions to react more quickly to the financial markets and thereby be more competitive. If the interest rate is directly tied to an external index that is widely publicized, the notice of change must be made promptly but not later than 30 days after the change in interest rate. The FCA eliminated a number of unnecessary, outdated, duplicative, or burdensome regulatory requirements identified in its regulation review and replaced outdated regulatory language with more current terminology and clarifications. A total of 42 technical changes were made that resulted in more concise, up-to-date, and easily understood regulations. They covered a variety of topics, such as bylaw amendments, Federal records retention, liquidation of associations and banks, interest rate programs, loan servicing requirements, purchasing automobiles through the General Services Administration, retirement of eligible borrower stock, the definition of a bank for cooperatives, disclosure of data regarding borrowers to credit bureaus, disposal of obsolete records, System institution employees being summoned as witnesses, and issues on borrower rights and Agricultural Credit Banks. The final rule implementing these changes became effective on March 4, 1997. In March 1997, the FCA Board approved final amendments to its regulations governing the preparation, filing, and distribution of System bank and association reports to shareholders. The final regulations reduced regulatory burden by implementing a provision of the Farm Credit System Reform Act of 1996 (1996 Reform Act) that effectively eliminates the regulatory requirement that FCS institutions disseminate quarterly reports to shareholders. This rule also added a new provision authorizing the Federal Farm Credit Banks Funding Corporation to incorporate by reference, information contained in offering documents for Farm Credit debt securities into the Systemwide financial reports to investors. This requirement reduces the paper work associated with preparing these documents and eliminates duplicative reporting of information. The Customer Eligibility provisions of the final Capital Adequacy and Customer Eligibility rule simplified and clarified the following eligibility provisions: Removed distinctions between individuals and legal entities that are bona fide farmers and ranchers. Relaxed the requirement that eligible foreign nationals had to be permanent residents in order to be eligible to borrow. Removed the additional compliance requirements for marketing and processing operations that supply 50 percent or less throughput. Relaxed the 100 percent bona fide farmer and rancher ownership requirement for marketing and processing eligibility and replaced it with a requirement that more than 50 percent of the owners must be bona fide farmers and ranchers. Removed the requirements for ``custom-type'' services and the ``on- farm'' requirement for the provision of services and replaced it with the requirement that farm-related services must be related to the farm production. In regulatory efforts that are currently outstanding, the Agency has proposed to reduce additional regulatory burdens in the following areas: The proposed amendments in the Loan Underwriting project address burdens identified in the areas of loan agreements, disclosure of loan terms, collection of financial statements, security requirements for long-term loans, amortization schedules for intermediate-term loans, and utilizing agents for independent credit judgments. The rule would restructure the different regulations addressing security requirements for loans into a single regulation section, reduce the regulatory requirements for loans on commodities covered by Government programs, and extend the loan purchases and sales regulation to pools of loans. In the proposed amendments to the General Financing Agreement regulation, the Agency is removing the requirements that the Agency approve all agreements between Farm Credit Banks or Agricultural Credit Banks and direct lender associations or other financing institutions. Risk Assessment Project Mr. Skeen. As part of an ongoing process to evaluate the systemic risks that could affect the farm credit system, a comprehensive list of risks has been developed. Please submit this list for the record along with a brief explanation of what steps are being taken to address each risk. Response. The FCA has recently revised and updated the list of risks that was developed three years ago. The following is an updated set of potential risks facing the Farm Credit System. Land Price Surge.--High crop prices combined with generous government payments have fueled the farmland market in the mid-western region of the United States. However, some forecasters expect land values to drop after the current farm bill expires. The risk is that underwriting standards may not adequately focus on repayment capacity from current or future income. Highly Competitive Markets/System Loan Growth.--Loan volume has grown in the past two years. Fifty-eight associations experienced loan growth in excess of 10 percent during the 1996 calendar year. Overall, the System grew 7 percent in 1996, a healthy increase. In a highly competitive market undue risks may be taken to gain market share. Implementation of New Farm Legislation.--The Federal Agricultural Improvement and Reform Act of 1996 (1996 Farm Act) ushered in a new era in farm policy. The government has reduced its involvement in the agricultural sector, making farming and farm lending riskier businesses. The 1996 Farm Act has removed supply controls for program commodities and allows nearly complete planting flexibility. This will result in greater year-to-year commodity price volatility and greater variability in farm income, making debt repayment capacity more uncertain over time. New Risk Control Devices for Farmers.--A riskier environment due to the reduced government role in agriculture will lead farmers to seek new ways to control risks on the farm. Such risk control devices include various commodity price hedging contracts, yield futures, insurance, etc. and could lead to unexpected risks for farmers and lenders if not properly understood and implemented. High Concentration Portfolios.--Stress in association lending portfolios with high livestock or crop concentrations could lead to financial deterioration in certain System institutions. Also, many FCS institutions have high concentrations of borrowers producing commodities under Government support programs. Farmer repayment capacity could deteriorate due to the phasing out of these support programs or greater price volatility of commodities. This, in turn, could adversely affect FCS institutions that are heavily concentrated. Commercial Bank Access to FCS Funds.--The commercial banking industry has advanced a proposal to restructure the FCS and give commercial banks access to System funds. The original proposal posed safety and soundness issues and could undermine the long-term viability of the System if such a proposal were adopted. Most of the risks listed above are related to loan underwriting and are addressed by FCA in a variety of ways. Examiners monitor institutions on an ongoing basis while economists and financial analysts located in headquarters evaluate systemic developments that may affect groups of institutions or the entire FCS. Two of the FCA's national examination focus areas for 1997/1998 are underwriting standards and cattle lending and drought conditions. These focus areas emphasize the need to evaluate not only the appropriateness of underwriting standards as developed for new lending products/programs, but also to assess how institutions have reacted to changes in the farm economy. Also, significant parts of the country and several FCS institutions are vulnerable to low cattle prices, high feed costs and drought conditions. Institutions with portfolio concentrations in certain commodities or enterprises or that are located in drought areas are also being monitored closely by the Office of Examination to identify problems at the earliest possible stages of development. We expect several of the identified risks to be addressed through these examination focus areas and our routine risk-based examination approach. These include the risks previously discussed. In addition to the examination focus areas mentioned above, the FCA's 1998-2002 Strategic Plan has established the proactive identification of systemic risks affecting the FCS as an important strategy. Several action items under this strategy will address the timely identification of risks affecting the FCS and appropriate Agency responses. Finally, FCA is currently developing a new underwriting regulation that would shift the focus of the Agency's regulatory approach to lender accountability for the development of prudent loan policies. Under this proposed rule, each institution would be responsible for developing lending policies and written measurable loan underwriting standards. The existing regulations place this responsibility on the district bank. The proposal requires each institution to establish loan underwriting standards tailored to address the strengths and weaknesses of each type of loan portfolio segment and the institution's ability to absorb the risk posed by such loans. Farmer Mac Mr. Skeen. Page S-16 of your budget presentation says that Farmer Mac's ``. . . future viability is not assured.'' Please give the Committee your assessment of Farmer Mac's financial status and tell us why you are cautious about its future. Response. Calendar year 1996 was an exciting year for Farmer Mac. Early in the year, the 1996 Reform Act was enacted giving Farmer Mac broad new authorities. The Farmer Mac management and Board have moved aggressively to implement all of the significant provisions of that legislation. In December 1996, Farmer Mac had a successful stock sale significantly exceeding the requirement that it increase its capital to $25,000,000 by February 1998. Last year, Farmer Mac earned $777,000, its first profitable year since its inception. While these are all encouraging signs, Farmer Mac has not yet reached a level of loan volume where it can be confident of returning a profit from its core business function. Using the authorities granted by the 1996 Reform Act, Farmer Mac entered into a transaction securitizing $120,000,000 of loans accumulated by the Western Farm Credit Bank. Subsequently, Farmer Mac has securitized $46,200,000 of loans purchased directly from lenders. The Farmer Mac Board recently took an action that could assure Farmer Mac of profitable operations even if its core business volume remains low. The board authorized management to increase Farmer Mac's investment portfolio to a maximum of $1.5 billion. To fund this increase the board also authorized management to increase Farmer Mac debt to $2.0 billion. As long as the interest rate earned on investments exceeds Farmer Mac's cost of borrowed funds, it can operate profitably for 1997 and beyond, even if its volume of loan securitizations is not profitable. Farm Credit System Structure Mr. Skeen. What is the difference between Federal Land Credit Associations, Agricultural Credit Associations, Agricultural Credit Banks, Federal Land Bank Associations, and Production Credit Associations? Response. An Agricultural Credit Bank (ACB) is formed from the consolidation of a Farm Credit Bank (FCB) and a Bank for Cooperatives (BC), as authorized under Title VII of the Act. The System's first and only ACB was chartered on January 1, 1995, when the National Bank for Cooperatives, the FCB of Springfield, and the Springfield BC consolidated to form CoBank, ACB. An ACB is authorized to lend nationwide to cooperatives and rural utilities under Title III of the Act, and to lend within a chartered territory to Production Credit Associations (PCA), Agricultural Credit Associations (ACA), Federal Land Credit Associations (FLCA) and, through FLBAs, to farmers, farm related businesses and for rural housing. An FLBA originates and services long-term real estate loans (which are secured by first mortgages on farms and rural real estate) for an FCB or an ACB which owns the loans. The FLBA acts as an agent of the lending bank and is chartered to serve a specified territory within the bank's charter. Long-term real estate first mortgage loans have maturities ranging from 5 to 40 years. An FLCA is an FLBA to which the FCB or ACB has transferred its authority to make long-term real estate loans directly to eligible borrowers within the FLBA's chartered territory. A PCA is a direct lender that makes short-term and intermediate- term loans to farmers, farm related businesses, and to rural homeowners within its chartered territory. Such loans have maturities ranging from one year to 15 years depending on the nature and purpose of the loan. An ACA is formed when a PCA and an FLBA or an FLCA within the same district merge. An ACA is authorized to make both long-term real estate first mortgage loans and short- and intermediate-term loans directly to eligible borrowers within its chartered territory. As of March 1, 1997, there were 142 direct lender associations (PCAs, ACAs, FLCAs) obtaining their funding through one of 6 FCBs. There were 5 ACAs (also direct lender associations) in the former Springfield District obtaining their funds from CoBank, ACB. In addition, the FCB of Texas, working through 36 FLBAs, and the FCB of Wichita, through its 22 FLBAs, provide long-term lending in their respective districts. In total, the Farm Credit System is made up of the following lending institutions: 147 direct lending associations; 58 FLBAs; 6 Farm Credit Banks; 1 ACB; 1 Bank for Cooperatives. Mr. Skeen. Please tell us how many charters were canceled by Farm Credit System institutions during fiscal year 1996 and so far in 1997? Response. In fiscal year 1996, the FCA canceled the charters of 3 associations as a result of mergers. Thus far in fiscal year 1997 (through March 10), the FCA has canceled the charters of 13 associations due to mergers. A majority of the charter cancellations in fiscal year 1997 stem from mergers of Federal Land Bank Associations in the Texas District. Credit and credit-related services in the territory of any association whose charter is canceled as a result of a merger is automatically assumed by the continuing or resulting association whose charter is amended to include the territory of the merged association. Farm Credit System Loan Volume Mr. Skeen. For the record, please update the table that appears on page 258 of last year's hearing record showing the loan value of Farm Credit institutions to include fiscal year 1996. Response. The following table highlights Farm Credit System loan volume trends since 1992. All data presented are as of December 31. 5-YEAR TREND OF GROSS LOANS OUTSTANDING TO FARM CREDIT SYSTEM BORROWERS [In millions of dollars] ------------------------------------------------------------------------ Yearend Amount ------------------------------------------------------------------------ 1992......................................................... 52,407 1993......................................................... 53,909 1994......................................................... 54,676 1995......................................................... 58,589 1996......................................................... 61,178 ------------------------------------------------------------------------ The increase in 1996 resulted primarily from growth in long-term real estate and short- and intermediate-term loans, due in large part to greater overall demand by agricultural producers for such loans, increased System marketing efforts, and competitive pricing programs. Farm Credit System Senior Officer Compensation Mr. Skeen. Please update the table that appears on pages 261 and 262 of last year's hearing record showing the salaries and benefits of Farm Credit System CEOs for all districts and entities for the past 10 years to include fiscal year 1996. Response. The requested information is presented in the table on the next page. Offset Folio 35 Insert here FCS Building Association Mr. Skeen. Please update the table that appears on page 273 of last year's hearing record showing the Building Association's amount of audited cash and short-term investment levels. Response. The updated table is presented for the record. FCS BUILDING ASSOCIATION AMOUNT OF AUDITED CASH AND SHORT-TERM INVESTMENT LEVELS ------------------------------------------------------------------------ Cash and Year ended cash Short-term equivalents investments ------------------------------------------------------------------------ December 31, 1991........................... $364,643 $4,150,272 December 31, 1992........................... 3,813,657 1,372,346 December 31, 1993........................... 1,586,144 0 December 31, 1994........................... 672,791 471,392 December 31, 1995........................... 419,566 628,895 ------------------------------------------------------------------------ In November 1992, the FCS Building Association adopted a capital reserve schedule based on an engineering study of the Farm Credit Building. This had a dual benefit of allowing for higher yielding longer term investments as well as maintaining a safe and suitable level of short-term liquidity. As of December 31, 1995, there was $1,575,654 in U.S. Treasury Notes with original maturities of 3 months or greater being held to repair and replace building components over the next decade. Mr. Skeen. What will your assessment to the Farm Credit System be in 1997 for building fund expenses? Response. The FCS Building Association has budgeted $1,654,200 for assessments to the Farm Credit System in 1997. This amount is subject to review during the third quarter. Mr. Skeen. Please provide a copy of the most recent audit of the Building Association's financial statement. Response. Copy attached. [Pages 20 - 31--The official Committee record contains additional material here.] Farm Credit System Insurance Corporation Mr. Skeen. Please provide an object class table for the Farm Credit System Insurance Corporation, FCSIC, expenses for fiscal years 1996, 1997, and 1998. Response. The following schedule of object class expenses for the FCSIC includes actual FY 1996 data and estimates for 1997 and 1998. OBJECT CLASSIFICATIONS [In thousands of dollars] ------------------------------------------------------------------------ 1996 1996 1997 1998 Budget Actual Estimate Estimate ------------------------------------------------------------------------ 11.9 Total Personnel Compensation............... 836 896 980 1,020 12.1 Civilian Personnel Benefits................... 160 155 163 169 21.0 Travel Expenses....... 50 19 28 29 23.2 Rental Payments to Others..................... 76 65 87 91 23.3 Communications, Utilities.................. 18 9 19 20 24.0 Printing & Reproduction............... 33 15 28 28 25.2 Other Services \1\.... 630 228 348 361 26.0 Supplies and Materials 19 15 21 22 31.0 Equipment............. 21 26 19 8 ------------------------------------------- Total................. 1,843 1,428 1,693 1,748 ------------------------------------------------------------------------ \1\ We expect the Other Services category to fluctuate significantly. This category includes contract amounts programmed to support the Corporation's insurance responsibilities including its risk identification and management processes and also to support contingent capabilities required by law such as the need to serve as receiver or conservator if necessary. Amounts programmed and outlays are heavily influenced by conditions in the System's insured institution. For example, when the financial condition of the System is improving, contractual expenditures for examinations and modeling and contingency planning decrease. Conversely, deterioration in the financial condition of System institutions can result in higher than anticipated costs in this category. Mr. Skeen. Please provide a breakdown of the numbers of employees, by grade, for FCSIC for fiscal years 1996, 1997 and 1998. Response. The following schedule shows FCSIC permanent staff positions for 1996, 1997 and 1998 by grade. FCSIC PERMANENT STAFF ------------------------------------------------------------------------ 1996 1997 1998 Grade level Actual Estimate Estimate ------------------------------------------------------------------------ Grade 44............................... 1 1 1 Grade 43............................... 2 2 2 Grade 42............................... 1 1 1 Grade 41............................... 1 1 1 Grade 39............................... 3 3 3 Grade 26............................... 1 1 1 Grade 23............................... 1 1 1 -------------------------------- Total............................ 10 10 10 ------------------------------------------------------------------------ Mr. Skeen. What were the reimbursement costs for fiscal years 1995 through estimates for fiscal year 1998? Response. The FCSIC purchases examination and administrative support services from the Farm Credit Administration on a reimbursable basis. The following table shows the FCSIC's reimbursements to the FCA for fiscal years 1995 and 1996 and estimated reimbursements for fiscal years 1997 and 1998. FCSIC REIMBURSEMENT TO FCA [Dollars in thousands] ---------------------------------------------------------------------------------------------------------------- Fiscal years --------------------------------------- 1998 1995 1996 1997 Estimated \1\ Actual Actual Estimated ---------------------------------------------------------------------------------------------------------------- FCA Reimbursements........................................ $283 $170 $238 $248 ---------------------------------------------------------------------------------------------------------------- \1\ Amounts may vary from the FCA Budget Justification due to timing or presentational differences. FCA and the Corporation reconcile amounts and are in agreement as to the total dollar amount of common transactions. Mr. Skeen. Did FCSIC contract for any services outside the FCA last year? Response. Yes. In 1996, FCSIC had the following actual expenses for contract services: (1) Independent audit and accounting advisory services, Coopers and Lybrand, $20,033.16. (2) Maintenance of our insurance risk model, Barry and Associates, $3,167. (3) Maintained contracts with three firms to provide technical support services on a standby basis, to assist in the management of any receivership or conservatorship should the need arise. No expense was incurred. Mr. Skeen. Are FCSIC board meetings publicly announced, open to the public, or is there any public announcement regarding the actions taken by the FCSIC board? Please explain how this differs from the actions of other Federal financial insurance providers, including the FDIC and the NCUA. Response. FCSIC board meetings generally are not publicly announced or open to the public; however, its bylaws provide for the Board of Directors to permit members of the public to make presentations on the basis of a written request. Also, some actions taken by the Board are published in the Federal Register. The FCSIC board announces and accepts comments on actions, such as policy statements that have ramifications for the insured banks, investors in the Farm Credit System debt obligations or other interested parties. The Government in the Sunshine Act, which generally requires an agency in which a majority of the board members are appointed to the agency's board by the President to conduct its meetings publicly, does not apply to FCSIC, because the FCSIC is a separate Federal entity whose board members serve in that capacity by reason of their appointment to the FCA Board. This interpretation is consistent with that of the Farm Credit System Assistance Board, a board composed of the Secretary of the Treasury, the Secretary of Agriculture, and a presidentially appointed agricultural producer, which did not generally publicly announce its meetings or open them to the public. The FDIC complies with the Government in the Sunshine Act because a majority of its members are appointed directly to that board by the President, with only two of five serving by reason of their presidential appointment to another position. However, it often holds closed meetings, as permitted under exemptions to the Sunshine Act, to keep information confidential that might lead to speculation about its insurance actions or endanger the stability of a financial institution. The NCUA has a presidentially appointed Board and acts as both regulator and insurer. We have been advised that it too complies with the Government in the Sunshine Act, but often holds closed meetings on insurance issues, as permitted under exemptions to the Sunshine Act. National Consumer Cooperative Bank Mr. Skeen. Please explain the missions of the National Consumer Cooperative Bank and NCB Development Corporation? Response. The National Consumer Cooperative Bank, doing business as the National Cooperative Bank (NCB), provides financial and technical assistance to eligible cooperative enterprises controlled by eligible cooperatives. A cooperative enterprise is an organization which is owned by its members and which is engaged in producing or furnishing goods, services, or facilities for the benefits of its members or voting stockholders who are the ultimate consumers or primary producers of such goods, services, or facilities. Except under certain circumstances, the National Consumer Bank Act excludes cooperatives eligible for credit from the Rural Electrification Administration, the Rural Telephone Bank, a Bank for Cooperatives or other institutions of the Farm Credit System, and others. Congress specifically directed the NCB to: encourage the development of new and existing cooperatives eligible for its assistance by providing specialized credit and technical assistance; maintain broad-based control of the NCB by its voting shareholders; encourage a broad-based ownership, control and active participation by members in eligible cooperatives; assist in improving the quality and availability of goods and services to consumers; and encourage ownership of its equity securities by cooperatives and others. The NCB initially served cooperatives in retail food, sporting goods and other industries, and housing cooperatives. It now also serves community health centers, health maintenance organizations, worker-owned cooperatives in manufacturing, retail, and service industries, as well as retailer-owned wholesale food and hardware cooperatives. The NCB Development Corporation (NCBDC), an affiliate of the NCB, was established in 1982 in accordance with the National Consumer Bank Act, as amended, to assume the functions previously performed by the NCB's Office of Self-Help Development and Technical Assistance. That office was developed to provide funding for limited equity cooperatives unable to meet conventional lending requirements of the NCB or other commercial lenders. The NCBDC specializes in lending to low-income, low equity, and newly established cooperatives and also provides technical support to established cooperatives. Government Performance and Results Act (GPRA) Mr. Skeen. GPRA, known as the Results Act, requires each executive agency to issue, no later than September 30, 1997, a strategic plan covering at least five years. In addition to a mission statement grounded in legislative requirements, the plans are to contain general goals and objectives that are expected to be outcome or results oriented (such as to improve literacy) as opposed to output or activity oriented (such as to increase the number of education grants issued). What progress is the agency making in developing its strategic plan, including defining its mission and establishing appropriate goals? Response. Strategic planning has been an important part of FCA operations for several years. Three years ago, the Agency produced its first five-year Strategic Plan (plan) that identified goals and strategies for carrying out its mission. During the most recent strategic planning cycle, the FCA Board and senior management updated the goals and other elements in the plan. The revised plan contains a mission statement for the Agency, a set of guiding principles, an environmental assessment that produced numerous planning assumptions, three strategic goals, nine strategies for accomplishing the goals, and 30 specific initiatives or actions that the Agency intends to pursue over the next five years to fulfill its mission. Our plan is nearing completion and will be submitted to the Office of Management and Budget (OMB) before the September deadline. Mr. Skeen. Has the agency identified conflicting goals for any of its program efforts? If so, what are the performance consequences of these conflicting goals and what actions--including seeking legislative changes--is the agency taking to address these conflicts? Response. Our mission is to regulate and supervise the Farm Credit System which makes loans and provides other financial services to a single industry--agriculture. As such, the Agency focuses on only one program activity and that is regulating the System to foster safety and soundness and ensure compliance with all laws and regulations. Therefore, there are no conflicting goals in our program activities. Mr. Skeen. Strategic plans must be based on realistic assessments of the resources that will be available to the agency to accomplish its goals. As you are developing your strategic plan, how are you taking into account projected resources that likely will be available-- especially as we move to a balanced budget? What assumptions are you making? How are you ensuring that your goals are realistic in light of expected resources? Response. The goals in the Strategic Plan are based on the FCA Board's vision for the Agency that the FCA will be a recognized leader in effective and efficient financial regulation. We believe these goals are realistic. The goals are: 1. Minimize risk to the System's customer/shareholders, investors, and Insurance Fund 2. Implement effective regulations and policies that impose minimal burden 3. Enhance FCA's effectiveness, efficiency and external relations The Five-Year Staffing and Structure Plan that was implemented in FY 1996 has positioned the Agency to move smoothly into the next century with the right mix of positions and talent to accomplish the Agency's mission and the goals set forth in the Strategic Plan. We feel confident that the Agency will be able to accomplish the goals contained in the Strategic Plan with the existing resources, and that the Agency has adequate resources to fulfill its mission and oversee the safety and soundness of the Farm Credit System institutions. Mr. Skeen. For Congress, the heart of the Results Act is the statutory link between agency plans, budget requests, and the reporting of results. Starting with fiscal year 1999, agencies are to develop annual performance plans that define performance goals and the measures that will be used to assess progress over the coming year. These annual goals are to measure agency progress toward meeting strategic goals and are to be based on the program activities as set forth in the President's budget. What progress have you made in establishing clear and direct linkages between the general goals in your strategic plan and the goals to be contained in your annual performance plan? OMB expressed concern last year that most agencies had not made sufficient progress in this critical area. Response. In order to comply with GPRA and sound business practices, the FCA has ongoing a comprehensive and Agency-wide project to develop performance measures to assess whether the Agency's performance is consistent with the goals and objectives of the Agency's Strategic Plan. As part of the project, the Agency developed and evaluated four desired outcomes for Agency operations which closely track the three goals included in the Agency's Strategic Plan. Preliminary Agency-level performance measures were developed for these outcomes and forwarded to OMB as part of the Agency's FY 1998 budget submission. Preliminary communication from OMB was favorable regarding this initial submission. Currently, additional performance measures are being developed which require interaction with, and input from, all Agency operational units and Strategic Plan Goal Advocates. Part of that process will be a reevaluation of the preliminary Agency-level measures in order to determine whether those or other additional Agency-level measures are appropriate, and whether there is sufficient linkage between the Agency's Strategic Plan, desired outcomes, and performance measures. The final measures and annual performance goals will be identified in the thirdquarter of FY 1997, and in late FY 1997 the Agency will be developing any supporting data collection systems needed for the Agency's performance measurement system. In October 1997, we anticipate the measures and goals will be included in the Agency's FY 1999 Annual Performance Plan and submitted to OMB along with the FY 1999 budget. Mr. Skeen. More specifically, how are you progressing in linking your strategic and annual performance goals to the program activity structure contained in the President's budget? Do you anticipate the need to change or modify the activity structure to be consistent with the agency's goals? Response. The Agency is responsible solely for the regulation and examination of the Farm Credit System and, as such, is represented as a single program in the President's budget. Further, all Agency goals, and the measures currently under consideration or being tested to support these goals, relate specifically to this program. At this point, FCA does not anticipate that it will need to change its activity structure to be consistent with the Agency's goals. Mr. Skeen. Overall, what progress has your agency made--and what challenges is it experiencing--defining results-oriented performance measures that will allow the agency and others to determine the extent to which goals are being met? Response. Each Agency operating unit has assessed the expected or desired outcomes from their activities and is developing performance measures to assess achievement of those outcomes. One challenge has been defining the linkage of how one unit's outcomes may affect the outcomes or results of another unit's activities (for example, one group's outcome may be another group's input). The measures developed as a result of this process should also serve to measure the results of our strategic planning efforts. Mr. Skeen. If applicable, what lessons did the agency learn from its participation in the Results Act pilot phase and how are those lessons being applied to agency-wide Results Act efforts? What steps is the agency taking to build the capacity (information systems, personnel skills, etc.) necessary to implement the Results Act? Response. The FCA did not participate in the Results Act pilot phase. The FCA has, however, taken steps to build the capacity necessary to implement the Results Act. In mid-1996, the FCA formed a workgroup to assist the Agency in the development of performance measures. The workgroup created the ``Farm Credit Administration Performance Measurement Development Guidelines'' (Guidelines), which were provided to all managers and several Agency staff persons. The Guidelines outline the requirements of the Results Act, provide a program for the development of FCA's performance measures, and address the documents required by GPRA, key dates for their submission, and performance measurement theory. They also provide a worksheet for use in developing performance measures. In addition, various other internal documents outlining the strategic planning and budgeting processes are available to provide guidance to managers. The Agency has also, through the use of small group sessions, informed each manager of the Results Act requirements. In fact, each has been involved in developing performance measures for the FCA and has had an opportunity for input into the Agency's Strategic Plan. During the development of performance measures, the Agency assesses whether the data and information systems are available to capture the information necessary to compute the measure being considered. Mr. Skeen. The Results Act requires agencies to solicit and consider the views of stakeholders as they develop the strategic plans. Stakeholders can include state and local governments, interest groups, the private sector, and the general public, among others. Who do you consider to be your Agency's primary stakeholders and how will you incorporate their views into the strategic plans? Response. As discussed above, our mission is to regulate and supervise the Farm Credit System which makes loans and provides other financial services to a single industry--agriculture. As such, the Agency focuses on only one program activity and that is regulating the System to foster safety and soundness and ensure compliance with all laws and regulations. The Agency's stakeholders are System institutions, the farmers and ranchers who are its member-borrowers, investors, and the public. Over the past five years, the Agency has surveyed the System for input to its planning process. The FCA has incorporated this information into its Strategic Plan. The Agency also conducts annual meetings at several sites across the country with the boards of directors and senior management of System institutions as another means of receiving input from one of its primary stakeholders. Surveys were also conducted on Capitol Hill to obtain information from committee staff members to help develop the Agency's Strategic Plan. Through the regulation development process, our other stakeholders are afforded the opportunity to give us input on the regulations and other issues. This process includes Advanced Notices of Proposed Rulemaking and Negotiated Rulemaking exercises. Mr. Skeen. For the Results Act to be successful, agencies with similar missions, goals, or strategies will need to ensure that their efforts are coordinated. What other federal agencies are you working with to ensure that your strategic plans are coordinated? What steps have you taken to ensure that your efforts complement and do not unnecessarily duplicate other federal efforts? Response. By statute, the Farm Credit Administration is the sole regulator responsible for examination of the federally charted Farm Credit System, a network of borrower-owner cooperative financial institutions. While we primarily develop our Strategic Plan internally to FCA, we do communicate with other agencies to share or acquire knowledge in regulation development, examination, performance measurement, economic and financial assessment, and on administrative functions. Also, the FCA coordinates closely with the Farm Credit System Insurance Corporation (Insurance Corporation). The FCA and the Insurance Corporation have a common board of directors which facilitates coordination. Mr. Skeen. The Results Act requires agencies to consult with Congress as they develop their strategic plans. Since the plans are due in September, now is the time for agencies to begin the required consultations. What are your plans for congressional consultation as you develop your strategic plan? Which Committees will you consult with? How will you resolve differing views? Response. In November 1996, the FCA undertook interviews with key constituencies as part of the development of the FCA Strategic Plan, 1998-2002. These interviews included discussions with majority and minority staff of the following committees. House Appropriations Subcommittee on Agriculture, Rural Development, FDA, and Related Agencies; House Agriculture Subcommittee on Resource Conservation, Research and Forestry; House Committee on Agriculture; House Banking Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises; and Senate Committee on Agriculture, Nutrition, and Forestry. These particular interviews did not surface differing views. In the future, however, if similar interviews do result in differing views, FCA will evaluate and consider the ramification of all views during the assessment of its future operating environment as part of its strategic planning process. As you know, the GPRA requires all agencies to submit their strategic plans to OMB by September 1997. Our Strategic Plan will be submitted soon and once it has been accepted, we will provide it to members of the oversight committees and other interested parties. Mr. Skeen. In passing the Results Act, Congress sought to fundamentally change the focus of federal government and decisionmaking to be more results-oriented. Organizations that have successfully become results-oriented typically have found that making the transformation envisioned by the Results Act requires significant changes in what they do and how they do it. What changes in programs policy, organization structure, program content, and work process has the agency made to become more results- oriented? Response. The Agency has continually reviewed its operations and made adjustments as needed based upon the changes in the program for which it is responsible. For instance, the FCA has undertaken considerable restructuring and downsizing in recent years as a result of the changes in the FCS. We have streamlined operations by eliminating management levels and consolidating various divisions, regions, and field offices. From a work process perspective, FCA has placed a high priority on creating increasingly efficient and innovative examination and supervisory programs that meet our needs, as well as those of our customers. For example, FCA uses a risk-based approach towards conducting examinations of FCS institutions. This approach ensures that institutions possessing, or exposed to, the greatest levels of risk receive a higher level of oversight from FCA. These actions have been taken to make FCA more efficient and responsive to the regulatory needs of the FCS. Mr. Skeen. How are managers held accountable for implementing the Results Act and improving performance? Response. Each manager in FCA has participated in the implementation of the Results Act. Managers had the opportunity to participate in the development of the Agency's Strategic Plan and have developed operating plans in support of the Strategic Plan. Also, each manager has been involved in developing performance measures for their units and FCA as a whole. In the future, managers will be held accountable not only through the results achieved by their units, but for their unit's contributions to the results achieved by the Agency. This accountability will be enhanced by linking the performance standards of individuals to the performance measures of the Agency. Mr. Skeen. How is the Agency using Results Act performance goals and information to drive daily operation? Response. The Agency is in the process of testing the performance measures which have been developed. These measures will capture the Agency's progress in accomplishing the goals included in its strategic plan. After testing of the performance measures is complete, FCA's regular reporting process will be revised as needed. The reporting process will provide management with timely data from which to assess the Agency's progress. The Agency will then use this data to make necessary revisions to its operations or actions to ensure we achieve our planned results. This linkage of results to the management decision-making process is imperative as Agency management has made a commitment to ensure FCA is a results-oriented organization. FCA Background Mr. Dickey. Is the Farm Credit System a government lender? Response. No. The Farm Credit System (FCS) is privately owned by its borrowers and does not lend government funds. It raises funds for lending by selling securities in national and international financial markets. It has no government capital investment. Furthermore, the Government does not guarantee securities of the FCS institutions. However, institutions of the System are Federally chartered and designated as Federal instrumentalities. This charter provides access to funding at attractive interest rates, but also limits the types of customers the institutions can serve and the types of financial services the institutions can provide. Mr. Dickey. Does the Farm Credit System have a specific mandate to assist small, beginning, or minority farmers? Response. The Farm Credit Act of 1971, as amended (Act), generally requires the FCS to make its lending and other programs available to all classes of eligible borrowers in all areas of the country through all phases of the economic cycle. Section 4.19 of the Act mandates that this service shall include in each association a ``. . . program for furnishing sound and constructive credit and related services to young, beginning, and small farmers and ranchers'' (emphasis added). The Act also requires that the bank in each district compile data on such programs and furnish it to FCA, which includes a compilation of such information in the FCA Annual Report on the Financial Condition and Performance of the Farm Credit System. There are no specific quotas associated with the mandate. No separate mention is made of minority farmers, but Farm Credit institutions are subject to the anti- discrimination provisions of the Equal Credit Opportunities Act. Mr. Dickey. How well has the Farm Credit System met the needs of such borrowers? Response. Data published in the FCA 1995 Annual Report on the Financial Condition and Performance of the Farm Credit System summarize the number and dollar volume of loans to young, beginning, and small (YBS) farmers, and to farmers meeting two or more of these characteristics. (The 1996 report will be issued in June 1997). In the 1992 Census, operators who were 35 or younger made up 11 percent of farm operators. Of these, 57 percent reported that they paid interest on farm debt, so about 6.3 percent were customers for farm lenders. At the end of 1992, the FCS had 31,735 loans outstanding to young farmers in a total portfolio of 609,030 loans, or about 5.2 percent of its loans. Thus, the FCS associations were serving a proportionate share near the 6.3 percent. Some of the difference could be due to the fact that the FCS portfolio is more concentrated in farm mortgages, while young farmers were more likely to have non-real estate debt than mortgage debt. A major limitation of both FCS and Census data is that neither measure the extent to which beginning farmers are getting started as junior members of multi-operator businesses. Mr. Dickey. How does the Farm Credit Administration monitor the Farm Credit System's lending to such borrowers? Response. The FCA monitors lending to YBS borrowers based on annual call report data provided by each Farm Credit Bank and Agricultural Credit Bank, data from U.S. Department of Agriculture estimates based on the Agricultural Census, and reviews of district programs for YBS borrowers. Data from the census and call reports is analyzed by economists in the Risk Control Division of FCA's Office of Policy Development and Risk Control. The analysis notes the borrower number and loan volume that each of the three YBS categories represents of the total Farm Credit System borrower number and the loan volume. The analysis also covers trends in each category dating back to 1988 and provides explanation of causes for changes between periods. The FCA reviews district programs in order to evaluate the adequacy of policy and programs of Farm Credit System institutions in complying with Section 4.19 of the Act, which addresses the needs of YBS borrowers. Finally, the FCA provides details of the monitoring of YBS borrowers in the Annual Report on the Financial Condition and Performance of the Farm Credit System which is presented to Congress annually. Please see pages 28 through 33 of the 1995 report for those details. Customer Eligibility Regulation Mr. Dickey. Could you please explain the purpose of the new customer eligibility regulations that your agency has recently published? Response. The previous customer regulations had not been updated in 25 years. The final rule eliminates restrictions in the customer regulations that are not required by the Act. In addition, the rule incorporates recent amendments to the Act which govern the eligibility rules for lending under title III of the Act and provide Farm Credit banks and associations with new authorities to participate with non- System lenders in loans to similar entities. Mr. Dickey. Do these regulations encourage System lenders to expand into credit markets in which they lack expertise? Response. No. The FCS has extensive experience over the past several decades in extending credit to farmers, ranchers, and aquatic producers and harvesters for their agricultural and other credit needs, as well as farm-related businesses, rural home owners, cooperatives, utilities, and agricultural exporters. While additional legal entities and foreign nationals are now eligible to borrow from FCS banks and associations, the new regulations do not enable the FCS to expand into credit markets in which they have no prior experience. In addition, the new similar entity authority, granted by amendments to the Act in 1992 and 1994, allows FCS institutions to participate with non-System lenders in loans to parties who are ineligible to borrow from FCS banks and associations, but only if the loan is of the type that the System institution is otherwise authorized to make. Mr. Dickey. What is the difference between ``custom-type'' services and ``farm-related'' services? Why did FCA change its terminology? Response. FCA regulations at 12 C.F.R. 619.9120 previously defined ``custom-type'' services as ``the performance of on-farm functions on a `for-hire' basis which farmers and ranchers typically have done for themselves.'' The Act authorizes lending to farm related businesses but does not require that such businesses furnish only ``custom-type'' services to their customers. Therefore, the FCA repealed a regulatory requirement that impedes the System's ability to finance otherwise eligible farm-related businesses. Mr. Dickey. In the recently published scope and eligibility rule, FCA stated it would be impossible to list the ``farm-related'' services that would be eligible for System financing. Why is it impossible? Response. The FCA stated in the preamble to the final rule (62 FR 4438, January 30, 1997) that ``[e]ven if it were possible to compile a comprehensive list today, dynamic advances in the farm services industry would quickly render it obsolete.'' Furthermore, if a specific service that is ``directly related'' to the agricultural production of farmers and ranchers were excluded from the list in the regulation, then FCS institutions could not extend credit to farm-related businesses that otherwise would be eligible for System financing under the Act. The FCA would continually need to amend the regulation whenever new farm-related services are developed. In contrast, the new regulation provides System lenders with the flexibility to finance all farm-related businesses that are eligible under the Act. Mr. Dickey. Under the new regulations, Farm Credit System (FCS) institutions will be allowed to lend to businesses that provide ``farm related services.'' If less than 50% of its gross income is derived from farm related services, then it can receive FCS financing for that portion of its business. And if it derives more than 50% of its gross income from farm related services, then it can receive whole firm financing from the FCS. How do you plan to monitor individual loans and certify compliance with these requirements? Response. If a firm's annual income measured on either a gross sales or net sales basis from farm-related services is less than 50 percent, it may obtain FCS financing only for its farm-related service activities. ``Whole firm financing,'' in this context, is limited to the financing of activities that are directly related to agricultural production. Therefore, a firm that provides services to both farmers and non-farmers could not receive financing for those activities that are not directly related to agricultural production. For example, a firm that sprays crops for farmers and also lawns for consumers, could only receive financing for those activities related to spraying crops for farmers. The FCA's proposed eligibility regulation (60 FR 47103, Sept. 11, 1995) initially provided that if more than 50 percent of the firm's income was derived from farm-related services, it could obtain FCS financing for ``all of its business needs.'' In response to comments, the FCA revised the regulation to limit financing for such firms to farm-related business activities. Compliance with the provisions of the farm-related service businesses regulation will be monitored during examinations of institutions. Compliance will be determined by examination of documentation when individual loans are reviewed. The necessary information to determine compliance will be found in the borrowers' loan files. [Pages 40 - 90--The official Committee record contains additional material here.] Thursday, March 6, 1997. COMMODITY FUTURES TRADING COMMISSION WITNESS BROOKSLEY BORN, CHAIRPERSON Opening Remarks and Proposed Legislation Mr. Skeen. The committee will come to order. This morning I would like to welcome Brooksley Born, the Chairperson of the Commodity Futures Trading Commission. I like that ``Chairperson'' for reason of proper axiom. This is her first appearance before this subcommittee and we want to make you feel at home, Ms. Born. We appreciate you being here. CFTC is in the news quite a bit these days. Although not of its own choosing, as our friends in the Senate are proposing to make some changes in the Agency's authority. Would you please tell us what the Senate is doing? Ms. Born. Certainly. There are bills in both the House and the Senate at this point that would change regulation of the futures markets in a very broad-based way. Both bills would eliminate all federal oversight and regulation of futures exchange trading, if that trading was restricted to so-called professional markets, which would include small businesses, mutual funds and other entities with $1 million of net worth. The exchanges say that more than 90 percent of their current trading volume is on behalf of eligible entities. And the Commission believes that for that reason, very simple changes in exchange rules would allow them to become completely unregulated. There would be prohibitions against fraud and manipulation, but only after the fact. Mr. Skeen. After the fact. Ms. Born. So, we would only have enforcement authority. Mr. Skeen. So, it takes your discovery option away from you almost entirely. Ms. Born. We would have no regulatory tools to detect or to prevent manipulation or fraud on these markets. Introduction of Staff Mr. Skeen. I see. I appreciate that. I think that was the first question I wanted to ask you. Would you also introduce whoever you have with you today? Ms. Born. I certainly will. This is Madge Bolinger. Mr. Skeen. We take great stock in the staff over here because that's the memory bank of this whole institution. Ms. Born. I certainly couldn't do the numbers without Madge Bolinger. Mr. Skeen. Well, we couldn't do the numbers over here without some of the folks we have around too. We appreciate them. Ms. Born. She's the Director of our Office of Financial Management and is here with me today. Mr. Skeen. Those folks behind you there? Ms. Born. They are other staff people at the Commission; Don Tendick who is our Acting Executive Director; Susan Lee who is my Chief of Staff; and Emory Bevill who works with Madge Bolinger. Mr. Skeen. Well, welcome to all of you and thank you. Ms. Kaptur. Ms. Kaptur. Thank you, Mr. Chairman. I do believe we've just had a vote called. Mr. Skeen. Yes. We'll just go to the next bell, if you'd like. I think we've about covered most of what we wanted to do this morning. You go ahead. Ms. Kaptur. All right. I just wanted to welcome Chairwoman Born to the committee. And we look forward to your testimony. I also appreciate the personal visit to my office. And I'm very interested in asking several questions. Mr. Skeen. I think what we will do is go ahead and go on over and vote and come back. Is there a series of votes or just one? Does anybody know? Just one vote. Okay. We'll do that and then we'll take your statement right after that. Ms. Born. Very good, Mr. Chairman. Mr. Skeen. I don't want to cut you off too short. Ms. Born. No. That's fine. Mr. Skeen. You've been very patient. So, with your indulgence, we'll go vote and be right back. Ms. Born. Certainly. [Recess.] Opening Statement Mr. Skeen. We're back on the record. Thank you for your indulgence. Ms. Born, you may go ahead and begin with your statement. Ms. Born. Thank you very much, Mr. Chairman. Mr. Chairman and Members of this subcommittee. Thank you for this opportunity to discuss with you the President's fiscal year 1998 budget for the Commodity Futures Trading Commission. I request that my written testimony be included in the record of the hearing. Mr. Skeen. It shall be done. Ms. Born. Thank you. The Commission is a small agency with an important mission. It oversees the nation's 11 futures and option exchanges and supervises 64,000 commodity professionals who trade on the floor of those exchanges or represent customers. These markets are growing rapidly, having more than doubled in trading volume in the last decade. The President's fiscal year 1998 budget request for the Commission is $60,101,000, with a staffing level of 600. This request represents an increase of $5 million and 20 staff persons over the fiscal year 1997 appropriation. About $4 million of the request is required for the Commission to sustain its current level of services. And $1 million is to fund the requested 20 additional staff years. The Commission's tasks are to ensure the integrity of the U.S. futures and option markets, protect customers from fraud and other trading abuses, monitor the markets to detect and prevent price distortions and manipulation, and maintain the competitive strength of the nation's exchanges. The requested increase will be used to continue enhancement of the Commission's enforcement and surveillance programs and slightly to expand the Commission's industry oversight function. Approximately 75 percent of the requested dollar increase will be dedicated to enforcement efforts to increase our investigative activities, litigation support, and cooperative law enforcement efforts. The Commission's goal is to send a strong message that fraudulent activities and other violations of the Commodity Exchange Act will be promptly and thoroughly investigated and proceeded against vigorously. The increase will also enhance the ability of the Commission to use its new integrated market surveillance system which will assist Commission staff in monitoring systemic risk in the marketplace. This increase will also provide the resources to sustain the necessary level of oversight over the compliance programs of the nation's futures and option exchanges and the National Futures Association. The increase in funding and staffing is well-justified and will benefit agricultural producers and processors, financial services firms, energy concerns, and many other sectors of the economy that depend upon the important price-discovery and risk-shifting functions of the futures and option exchanges. The Commission remains committed to the elimination of unnecessary regulatory burdens and is currently reviewing and amending its regulations to streamline them as appropriate in light of the Commission's mandate to protect the public interest. The Commission is also committed to working with Congress to improve and update the Commodity Exchange Act through legislative amendments. As I mentioned earlier, bills to amend the Act have been introduced in Congress which would result in the pervasive deregulation of our futures and option markets and thus would pose grave dangers to the public interest. Our current regulatory system has allowed our futures markets to become the strongest, most competitive, and most respected in the world by convincing market participants around the world that they are safe, fair, and transparent. The Commission is strongly opposed to the provision of the bills which would eliminate government regulation of much of our exchange trading in futures and option and would leave those who use and rely on these markets exposed and unprotected. Even if these provisions were enacted, the Commission's funding needs for fiscal year 1998 would not decrease. The Commission recognizes that this subcommittee faces difficult appropriations decisions this year. Nonetheless, we believe that the increase that the President has requested for fiscal year 1998 is essential for the Commission to fulfill its Congressional mandate and to keep pace with a growing, complex, and dynamic marketplace. Thank you very much, Mr. Chairman. I would be happy to respond to any questions you or the other Members of the subcommittee may have. [Clerk's note.--Ms. Born's written testimony appears on pages 163 through 188. Ms. Born's biographical sketch appears on page 189. The Commodity Futures Trading Commission's budget justification appears on pages 190 through 307.] proposed legislation Mr. Skeen. Thank you very much, Ms. Born, for your presentation. I think we were a little premature talking about the Senate bill. I understand there is a version in the House as well. We were talking about the opposition that you may have to the bills. Would you go ahead and repeat that just as it applies to the proposed legislation and whether you support it or oppose it so we can get a clear message? Ms. Born. Actually, we oppose some of the provisions of the Senate bill and all the provisions of the House bill. The one that concerns us the most is the so-called professional markets exemption which would allow exchange trading on the futures markets without any federal oversight or regulation as long as the participants in those markets met certain criteria which essentially would allow participation by entities with $1 million net worth. Right now our exchanges have said that more than 90 percent of the volume of trading on those markets constitutes trading by those kinds of entities. We think that the provisions in the bill would lead to widespread elimination of federal oversight. It would mean we would not have any reporting or large trader reports. There would be no kinds of standards that would apply to trading on these markets; no audit trail requirements; no prohibitions against various kinds of activities that are now proscribed in the Act. Also, the 64,000 commodity professionals whom we supervise, if they participated in these markets, which we think they would, would no longer have to be registered or meet any kind of fitness requirements. The standards for how they treat their customers would be eliminated. As I said before, the only federal law that would apply would be the bare-bones prohibitions against fraud and manipulation. We would be able to bring an enforcement action after the occurrence. professional markets exemption Mr. Skeen. The basic criteria for the exemption is what, $1 billion or $1 million? Ms. Born. One million dollars of net worth for an entity or a partnership. A proprietorship with $1 million of net worth would be able to participate--or a partnership. Mutual funds, pension funds, commodity pools with individuals' money in them would all be able to participate. Mr. Skeen. That sounds about like a financial statement from a Senator. Ms. Born. That's right. integrated surveillance system Mr. Skeen. Let me take you back to the integrated surveillance system. We've finally got it in operation? Ms. Born. It is anticipated that we will be collecting data by this fall. We have much of the hardware and software in place and will be able to get daily reports on large positions in options, as well as futures at that point. Mr. Skeen. But you've had a chance to at least see how effective it is or whether it's helpful to you or not helpful. At least you've had some test runs on it. Ms. Born. It will be extremely helpful. I don't think anybody has any question about that. current services request Mr. Skeen. I don't think so either. But it took us long enough to get it initiated. We appreciate the fact that you've got it in operation. In your opening statement you say that $4 million is needed to sustain current services and that's a little over 7 percent just to stay even. Could you explain the factors that go into that request? Ms. Born. Certainly. I think almost half of it is mandatory increases in compensation for our employees that are required by law. Another large portion is an increase in our rent for our building here in Washington. This will be the third year of our lease, and during the first two years we had substantial rent reductions from the landlord in place of allowances for leasehold improvements. So, fiscal year 1998 will be the first year we'll have to pay full rent. rent and systems analysis Mr. Skeen. Who is your landlord? Ms. Bolinger. The property is managed by Faison and Associates and 1155 21st Street Associates is the landlord. Mr. Skeen. It's a private corporation? Ms. Born. Yes. Mr. Skeen. I understand. It is not a government entity. Ms. Born. No. We're in a private building on 21st Street. There is also an element there for computer processing which appears as though it's an additional amount. It's actually the amount we generally incur on a year-to-year basis. Mr. Skeen. On an annual basis. Ms. Born. Around $600,000. This current year we have not had that because we prepaid it last year. Mr. Skeen. Does that take care of your upgrades and things of that kind? Ms. Born. I think that's just our ongoing maintenance, Mr. Chairman. Mr. Skeen. Just your ongoing maintenance of the contract. Ms. Born. Yes. Mr. Skeen. I see. Ms. Born. We got $2.5 million from the Congress for upgrades. And that was all committed in fiscal year 1996, although part of it is being expended still this year and next year. transaction fees Mr. Skeen. Very well. Let's talk about user fees, or in the case of CFTC, the transaction fees. We've had discussions in the past on it. The administration is now proposing user fees in a number of areas for fiscal year 1998, but not for CFTC. Can you tell us if there was any discussion at all about transaction fees for your budget or do you think that these fees, or some other type of user fees, will be a good idea? Ms. Born. There was a discussion that I had with some of the staff at OMB at the time that our budget mark was being arrived at about whether transaction fees would be useful. I think OMB decided that they should not propose them for this coming fiscal year, although I think that they may be planning to study whether they will propose it in the future. farmers and ranchers Mr. Skeen. Well, rather than adjusting all of the other items that have an affect on the budget and so forth, we keep falling back on this user fee idea. I suppose that's the bail out system. I appreciate the fact that at least they're talking to everybody about user fees. Farmers and ranchers are always looking for more ways to protect themselves from loss or to minimize their risk in what is always a very risky business, but very few of them take advantage of the transactions on agricultural markets. Is there anything we can do about that to improve the relationship between the actual farming community and educating them to the fact that there is a way to reduce their risk by using the CFTC? Ms. Born. The CFTC right now is cooperating and working on that with the U.S. Department of Agriculture. Under the 1996 Farm Bill, the Department of Agriculture was mandated to create an educational program for farmers. And we have volunteered to cooperate in every way we can to help USDA create a good educational program for farmers. We feel that as government price supports for farm prices are eliminated there will be more price risks that agricultural producers face. And there will be a greater need for them to fully understand the various risk management tools available, including futures on the exchanges. Mr. Skeen. How well received are these sessions? Have they been sessions? Ms. Born. No. USDA is still in the planning phase of this. Mr. Skeen. Planning. So, there hasn't been any large scale effort? Ms. Born. No. We do have brochures for users of the market to try to educate them about the markets. We answer questions of farmers and others who call in. And we have made some effort to reach out to people. We have an Internet web site now. Mr. Skeen. Is that where some of the computer money went? Ms. Born. We put a lot of information on the computer, so that if a farmer has a computer, he or she can log on and get information. And also our staff has gone out a couple of times in the past year or so to meet with producers. producer organizations Mr. Skeen. Producer organizations. I would suggest strongly that, that be the contact point. To include also a session when they have their annual meetings or something at that time because some people in the farming and ranching community have an innate fear of anything that has to do with the trading market because of some sad experiences they may or may not have had or heard about. Ms. Born. Commissioner Joseph Dial, who is one of our Commissioners, has been a great ambassador, from the Commission to those groups. He speaks frequently. He also Chairs our Agricultural Advisory Committee which has a large number of producer groups represented on the Advisory Committee. I think there are at least 30 members of that committee from organizations like the American Farm Bureau and the National Cattlemen's Association. Mr. Skeen. Well, I suggested to some of the organizations in the past that they send some of their young people just out of college or just out of high school and let them at least experience what goes on on those floors and how the trading is done. I think there is just a vast area of absolutely no knowledge whatsoever or experience base. It would enhance them. At least they would become aware that there is an alternative other than just doing the same old operations year-after-year and taking all of the risks. And if you get hit hard, you've got no fall back. Ms. Born. That's really the message that Commissioner Dial is trying to bring in his speeches. Mr. Skeen. Our farming community is aging rapidly. We'd like to at least get a little flexibility out of some of the younger ones coming up. Ms. Kaptur. crop yield contracts Ms. Kaptur. Thank you, Mr. Chairman. I wasn't able to be here for all the remarks you made because of the vote. Chairwoman, I wanted to ask you on page 16 of your testimony, and I don't know if you covered this in your oral testimony or not, but you make a reference to some new exchange contracts designed to provide a vehicle for crop insurance companies to hedge risks. This is something I've been interested in for a very long time. During our conversation earlier in the office, you mentioned that the agricultural trades had gone up from about 9 percent, 10 percent to almost double in this last year on the exchange markets to a level of about 18 percent I think you said. Ms. Born. That's correct. Ms. Kaptur. And as less federal support is available, the need for the markets grow even more to hedge that risk. In the insurance area I'm very interested in what kind of progress you might have made. This has been a rather vexing problem for us with companies either charging too much or not offering insurance or offering insurance that farmers didn't want to buy. What kind of a future do you see for crop insurance overall using the markets as a vehicle to create this product to hedge risks? Ms. Born. Well, this is a start. The Chicago Board of Trade has created five crop yield contracts that can be used to ensure against variations in yield. It's only in corn right now. But I think if those contracts are successful, it's likely that our futures exchanges will experiment with additional crop yield contracts that will give hedging opportunities not merely for price fluctuations, but also fluctuations in yield. Ms. Kaptur. If I wanted to explain what you're doing to an average farmer in my district, what would I say? Ms. Born. This is the Chicago Board of Trade that's doing it. And we supervise them and approve these contracts. I don't fully understand the contracts because they were approved before I got on board, but we'd be happy to supply information to you. But as I understand them, they base a futures contract on the possible variations in yield in the corn crop in various states. It's for Illinois, Indiana, Nebraska, and there is a contract that's just for Ohio. And I think this gives corn producers and crop insurers and others who are relying on the yield in Ohio an opportunity to hedge their risks against a very poor year, for example. crop insurance companies Ms. Kaptur. Are crop insurance companies participants in this? Ms. Born. I believe they participated with CBOT in designing the kind of contract to help create a contract that they can use to offset the risks of their insurance contracts. And they participate in these markets by buying and selling these futures. Ms. Kaptur. I would be interested in any additional information you could get me on that. For example, farmers in our area don't purchase crop insurance because they figure with the prices being what they are, if they take a loss once every five years, they would pay that much for crop insurance. So, I'm interested in the effective cost to the farmer. If there is a way you could get me information, I would---- Mr. Skeen. Would the Gentlelady yield? Ms. Kaptur. I would be pleased. Mr. Skeen. This is done just on a yield basis. Ms. Born. Yes. This is a contract based on variations in yield. Mr. Skeen. So, you don't have to have a specific catastrophe or something. Ms. Born. No. Mr. Skeen. Who sets those yield levels? Ms. Born. I think the marketplace does, Mr. Chairman. That's what the bids and offers on the floor of the exchange are. Mr. Skeen. You need to educate us as well. That's a very interesting concept. Ms. Born. I would be happy to provide you with all of the information. [The information follows:] [Pages 99 - 102--The official Committee record contains additional material here.] Mr. Skeen. Thank you. Thank you for yielding. crop insurance concerns of farmers Ms. Kaptur. Yes. I would be interested in as much detail on that so I could understand how it is operating and what relationship it might have to some of the crop insurance concerns that we've discussed here from a federal budgetary standpoint, but also to be able to talk to farms and explain what is happening on that. Ms. Born. We have a lot of information on that and I'll be happy to provide that. budget increase requested Ms. Kaptur. Thank you. I wanted to ask, your budget includes a $4 million increase in 1998, most of it for enforcement. Is that correct? Ms. Born. It's a $5 million increase overall. And 75 percent is for enforcement purposes. increase for enforcement Ms. Kaptur. And could you explain again why is that necessary? Ms. Born. Well, our enforcement effort had dwindled in the early 1990s when our budget was held at a more or less flat level and we had to reduce staff. For the fiscal year 1996 budget, for the first time, we got a significant increase because Congress and the Administration recognized that we really needed to put a higher priority on enforcement and restaff that enforcement effort. We have done so in 1996. We are in the process of adding some more people in 1997, and now request ten more people for 1998. This is one of the major priorities of the Commission. There is a great deal of fraud, not only relating to exchange trading, but much more so of off exchange bucket shops that are defrauding consumers and the retail customer. Some of these schemes are very complex financial fraud schemes that our Enforcement Division is now getting up to full ability to deal with. annual volume of trades Ms. Kaptur. One thing I don't know and maybe you know. What is the dollar volume of trades on an annual basis in the 11 futures markets? Ms. Born. There are 11 futures markets. There are about 500 million trades. Ms. Kaptur. 500 million. Ms. Born. I think it can be as high as several trillion dollars. annual volume of futures versus equities Ms. Kaptur. Does it surpass the number of trades in volume on Wall Street in the stock markets? Ms. Born. I don't know that. And we can get that for you. Ms. Kaptur. It would be interesting to look at that. Ms. Born. I would be happy to get it. [The information follows:] A direct comparison of the size of the equities and futures markets is difficult because of the difference in the nature of trading on the two markets. Trading on equity markets results in the transfer of ownership in an asset, that is, an equity share in a company. In contrast, trading on futures markets results in the transfer of risk. There is no measurable asset price of such a trade. The Commission's economic staff estimates that the notional, or underlying, value of futures and options traded on U.S. futures exchanges in 1996 was approximately $35 trillion. This estimate is generated by multiplying the price of the commodity traded by the physical size of the contract by the number of contracts traded during the year. The totals for each contract are then aggregated across markets. Neither the Commission nor the industry customarily makes this calculation because it significantly overstates the amount of capital exchanged. In comparison, Commission staff estimates that the aggregate value of trading on the U.S. stock exchanges, including NASDAQ, in 1996 was $8 trillion. This figure was derived by multiplying the total number of shares traded on U.S. stock exchanges in 1996 by the average price per share for the year. Trading volume for all futures and option contracts during calendar year 1996 was 499 million contracts. This compares to a volume of approximately 270 billion shares traded on U.S. stock exchanges. bucket shops Ms. Kaptur. But the area where you see the necessity for additional enforcement staff then is in what you call bucket shops and organizations that feed into the markets then. Ms. Born. Often they're not even dealing on the markets. They may be representing to the public that they're selling futures on the market, but they're really just taking people's money and not doing trades at all; just in effect stealing it. delivery points Ms. Kaptur. My final question relates to how the Chicago Board of Trade responded to your Commission's recommendations that delivery point specifications had to be amended for futures contracts in corn and soy beans. Toledo, the community that I represent, is affected by that decision. What has happened? They were to have reported back to you on March 4. Is that correct? Ms. Born. Yes. And what we heard from CBOT was that on March 4th their Board approved a proposal that would change the delivery points. That proposal will go for a vote to the membership of CBOT before it's formally submitted to us. So, we don't have a formal submission from CBOT yet. As I understand it, what they will do is change from a delivery point system using grain elevators to a shipping certificate system instead. The new delivery plan will allow shipping certificates for the northern part of the Illinois River. It would not include the current delivery point at Toledo and would not include the current delivery point in St. Louis. impact on toledo and st. louis Ms. Kaptur. And so how would that impact those communities? Ms. Born. Toledo has been a major cash market for corn and soybeans. And it should not adversely affect the cash market. What it would do, however, is eliminate the ability to use the Toledo cash market as a vehicle for delivery on the futures exchange. Ms. Kaptur. Is there anything that the Commission could provide me in regard to this decision? Ms. Born. We'd be delighted to provide you with the only submission we have as of now from CBOT, which is a couple of pages of an outline of their proposal. They haven't done a detailed proposal for us yet or made a formal submission, we don't have in writing all the details. On the other hand, we do plan shortly to put out this outline of the proposal for public comment. And I've asked our Division of Economic Analysis to write-up what they know from their discussions with CBOT in terms of the details. We will certainly provide you with the outline. As soon as economic analysis has their write-up of their understanding based on conversations, we'll try and supply that too. [The information follows:] [Pages 106 - 108--The official Committee record contains additional material here.] Ms. Kaptur. If their recommendation is approved, would that result in less shipping through St. Louis and Toledo of actual cargos? Ms. Born. I am not certain. I think it could result in less shipping through Toledo. St. Louis has not been a significant point of delivery on the existing contracts, even though it's been available. Toledo has had some significant deliveries. Our Division of Economic Analysis is trying to do an analysis of what the implications will be because if CBOT's membership approves this on April 15, we believe it will be formally submitted to us for approval. Ms. Kaptur. Any background you can give me on that particular issue would be greatly appreciated. Ms. Born. Certainly. Ms. Kaptur. Thank you, Mr. Chairman. [The information follows:] The Commission continues to receive comments on the task force's proposal, and we will supply the Subcommittee with an additional analysis on this issue as soon as the staff of the Division of Economic Analysis completes its preparation. Mr. Skeen. Thank you, Ms. Kaptur. Mr. Serrano. Mr. Serrano. Thank you, Mr. Chairman. I was commenting to my staff about this thing developing between Toledo and St. Louis; developing into a range war of some sort. Mr. Skeen. No. It's more like a port war. potential for fraud and abuse Mr. Serrano. Thank you. And thank you for joining us today. I'm very much interested mostly in your comments on the pending legislation and also on the fact that in your summary you remind us that in recent years the trading has expanded to include new markets. And many of them, if not all of them, include foreign involvement. It's become an international situation more than ever before. It would seem to me then from what little I know about this issue that you now need more protection for folks who live within our borders and, if not more, then certainly a new kind of regulation. We may be putting people at risk. So, my question to you is: does this legislation put folks at risk that the protection won't be there that was there in the past, as you deal with other places and other markets? And also, in your view, in what markets are the potential for fraud and abuse greatest at this time? Ms. Born. I'd be happy to respond to that. In the Commission's view, if the bills pass, in their current form our futures exchanges would be the least regulated major exchanges in the world. These have become global markets to some significant extent. And for that reason the Commission for the past ten years has been trying to work with the foreign regulators of foreign exchanges to make sure that those exchanges are well-regulated. We are potentially vulnerable to misbehavior on foreign exchanges, for example, the Sumitomo Corporation problem and the Barings Bank problem in the last couple of years, each took place on foreign exchanges. As a result of those problems, there has been a coming together of the futures regulators of the world. And indeed we had a conference of the 17 countries that have the major commodity futures markets last fall that we sponsored in London along with the UK's equivalent of the SEC-- it's called the Securities and Investments Board--and Japan's MITI. Coming out of that conference was an agreement among the countries to work together to adopt best practice standards for regulation of these futures markets around the world that everybody would try to aspire to. Essentially, right now the U.S. regulatory scheme is seen as the model for the world. And we do a lot of educating and working with other countries. globalization and deregulation Mr. Serrano. That's an interesting point you make because if we move to deregulate, we will leave the world without our system, but yet we will not be doing our part on this side. Ms. Born. That's exactly right. prospects of proposed legislation Mr. Serrano. Is this message you presented to me, this explanation, which is excellent, to let us know what the problem is and what the pitfalls are--do you feel that you're gaining any ground getting this message to the folks that are proposing the legislation at all? Ms. Born. On the Senate side the bill was only introduced in the last month with this provision in it we see as the most dangerous. Mr. Serrano. Things move fast over there. Ms. Born. I did testify on this before them. We'd be happy to share our testimony with you. I am not sure that the end users of these markets are currently fully aware of what's being proposed and considered. And I think some of them are gradually becoming aware of it. Mr. Serrano. Well, I certainly would hope, Mr. Chairman, that this is something we take a very close look at. We must fully understand what we might be getting into in this House as time goes on with this proposed legislation. I thank you for your comments and your answers. Ms. Born. I might mention one other thing that we've been doing recently about the potential dangers of this market. Last Friday we had the first cross-border stress test of these markets. cross-border stress test Mr. Serrano. Cross-border stress test? Ms. Born. Cross-border stress test. Mr. Serrano. I thought that happened every day. Ms. Born. It was a test of the ability of regulators and futures markets in the United States and the United Kingdom to react to--and of course it was hypothetical--to react to the financial default of a major player in markets both in the U.S. and the U.K. which many, many market participants now participate in multiple markets. So, we supposed that a major player on NYMEX in New York, on CME in Chicago, and on LIFFE, the London International Financial Futures Exchange, collapsed suddenly and didn't have the funds to meet its obligations. And we learned a great deal. There are emergency plans we have already. But this was a way to fine tune those plans and see how well they worked in terms of the regulators talking with one another, speaking with their exchanges and getting information quickly. It was a very useful exercise. Mr. Serrano. You could have asked Congress. We do that. We just put off the vote for another--thank you. Ms. Born. Thank you. Mr. Skeen. That's a very interesting exercise. The possibility of having some kind of a situation in which that occurred is entirely possible. So, you're taking these possibilities and running the models on them. Ms. Born. Exactly. Indeed they do occur, unfortunately. The Sumitomo matter was a recent situation that was somewhat similar. Mr. Skeen. At least you're preparing yourselves for the possibility of a major catastrophe of that kind in the financial market. Ms. Born. We're doing the best we can. financial instruments share of market Mr. Skeen. We don't want any drop, or decline, or be completely wiped out in that case. What percentage of the business now is still financial instruments? Ms. Born. Over half is now financial instruments. Mr. Skeen. It's been by far your major concern. Ms. Born. Yes. effect of financial instruments on agriculture Mr. Skeen. Regulation of financial instruments, I don't know how they affect the agricultural markets. I guess they pay on things like corn and wheat internationally. That would have some affect on that, but most of these are just financial transactions on the currency. Ms. Born. Currencies, interest rates. Mr. Skeen. And then valuations. Ms. Born. Which may affect the agricultural firms. Also, there are futures now on the S&P 500 and other equity indices. Mr. Skeen. Standard and Poor. Ms. Born. So, on the stock markets as well. But we still have major markets in agriculture--that's 18 percent--and in metals. In energy we've got the oil and electricity and natural gas contracts, and there are some other products like lumber. Mr. Skeen. Are the stock exchanges doing anything on financial instruments as well? Ms. Born. They don't trade futures. Mr. Skeen. You don't trade futures. Ms. Born. Only futures exchanges may trade futures. distinction between futures and securities Mr. Skeen. I think that's the distinction that we ought to understand better than we do. Ms. Born. Well, they're really very different kinds of instruments from securities. Mr. Skeen. That's right. Ms. Born. Futures are designed for a completely different purpose. They're not investments like a security is. They are really designed to hedge against price changes or to speculate on changes in prices. Mr. Skeen. There is a lot of fluidity in that market anyway. Ms. Born. And it requires a much different kind of regulatory scheme than a securities market does. Mr. Skeen. We appreciate the work that you're doing and the upgrade that you've made in the system. Like they say around here, we work for the government. We're here to help you. Ms. Born. We certainly are ready to help you in any way. Mr. Skeen. We appreciate your testimony. We're going to try to come up with a decent budget. Mr. Skeen. I yield to Ms. Kaptur. comparison of futures and equity markets Ms. Kaptur. I'm following up on your thought though on the way in which the futures markets are regulated compared to the equity markets, the bond markets. It would be interesting to me if you looked just at the volume, the dollar volume and the number of trades. We were talking about 500 million trades on the futures markets. And then take a look at your regulatory structure and how many enforcement people you have, and then to look at the equity markets and to see the volume, the dollar amounts and their regulatory structure. I would be very interested in that; if there is some type of parallel you could provide. Ms. Born. We'd be happy to do that. [The information follows:] In responding to your questions concerning the relative growth of futures trading, the nature of the regulatory scheme, and the relative growth in the size of the Commission, I would note generally that the U.S. futures markets have sustained impressive growth in volume of contracts traded while the staffing level at the CFTC has not grown commensurately between 1980 and 1996. Specifically, since 1980 the volume of contracts traded on the U.S. commodity markets grew from 83 million to over 495 million in fiscal 1996, an increase of over 412 million contracts or more than a five-fold increase in total volume. During that same period, the number of designated contracts rose from 80 to over 500. Currently, we have over 157 futures and option contracts trading on U.S. futures exchanges. The regulation of futures trading has several aspects. The futures industry is self-regulatory, and the Commission oversees and monitors the industry's self-regulating organizations. Commission oversight includes, among other things, review of new contracts and proposed exchange rule amendments, discipline of members and the fitness of commodity professionals. The Commission also has direct responsibility to enforce the Commodity Exchange Act and Commission rules, including addressing instances of manipulation and customer fraud and abuse. In FY 1996, 27 percent of Commission employees were engaged in enforcement related activities. Although the breadth and scope of the markets which the Commission regulates has grown roughly 500 percent since 1980, the Commission's staffing level grew from 459 full time equivalent staff-years in 1980 to 541 in 1996, an increase of only 82 staff years or 18 percent. To fund this operation, the Commission's budget grew from 17 million to 54 million dollars, an increase of 37 million dollars over the 1980-96 period. Thus, the Commission has managed to carry out its regulatory responsibilities over a much expanded industry with a relatively small increase in overall expense and staff. The securities markets regulated by the SEC have also experienced tremendous growth over the last 16 years. Between 1980 and 1996, the SEC's budget grew from $72 million to over $300 million dollars. Their full time equivalent count grew from 2,041 to 2,767, an increase of 726 FTEs or 36 percent. The CFTC's budget represented about 23 percent of the SEC's budget in 1980 and represents 18 percent of the SEC's budget for FY 1997. Ms. Kaptur. Thank you Mr. Chairman. Mr. Skeen. Mr. Serrano. Mr. Serrano. No questions. Mr. Skeen. That about does it. We thank you and we're adjourned. We would also like to maintain the ability to extend further questions to you. Ms. Born. Yes. We'd be happy to respond. Mr. Skeen. We're adjourned. [The following questions were submitted to be answered for the record:] Changes From OMB Request Mr. Skeen. Your request to OMB for fiscal year 1998 was for $63,731,000, $3,660,000 less than the amount approved by OMB which you requested for the next year. What are the principal changes in FTEs and programs that you made as a result of requesting the lower amount? Response. We are requesting 40 fewer FTEs. Approximately 78% of the resulting savings was in personnel compensation and benefits, and 22% was for related operating expenses. The programmatic breakout of the $3,660,000 change is: Market Surveillance Analysis and Research, $1,212,000; Trading and Markets, $913,000; Enforcement, $1,222,000; and Proceedings, $313,000. Carryover Funds Mr. Skeen. Are there any carryover funds from the fiscal year 1997 and previous budgets? Response. No. Our appropriations are classified as ``annual'' as opposed to ``no-year'' or ``multi-year.'' Last year we lapsed, that is did not obligate, $16,000 out of a total appropriation of $53,532,000. Inspector General Report Mr. Skeen. The Inspector General reports that for the period ending September 30, 1996, 39 CFTC employees used their American Express Government Account Cards for expenses ``other that those related to official travel''. What action has been taken in response to the IG's findings? Response. In February 1996, Chairman William F. Clinger, Jr. of the House Committee on Government Reform and Oversight asked government agencies to review employees' personal use of their government-sponsored American Express cards. In response, the CFTC Inspector General's Office reviewed employee card usage for the six month period of July 1, 1995 through December 31, 1995. The review revealed that 39 CFTC employees holding government sponsored American Express cards used their cards for expenses not related to official travel. Card issuance is for the convenience of the Federal employee who signs an agreement with American Express to use the card for expenses of official government business only. The government has no liability for charges made by individuals. Billing and delinquency matters are between the individual and American Express. Therefore, no government funds were expended in the 39 cases found by the Inspector General. In order to remind employees of their responsibilities to American Express, then Acting Chairman Tull issued a memorandum restating the contractual conditions to which the cardholders agreed when they accepted a card. His May 15, 1996 memo also indicated that future use of the cards outside these terms may result in revocation of the cards and/or disciplinary action. The Office of Financial Management reviewed the American Express cardholders to ensure that they consisted only of employees authorized to hold cards for use in their official capacities. The Commission plans this type of review annually, requiring supervisors to recertify the authority for employees to continue to hold cards. Finally, the Office of Financial Management strengthened internal controls regarding the issuance and cancellation of government sponsored cards. March 1996 Wheat Futures Mr. Skeen. Please provide a status report on any investigations, disciplinary actions or legal procedures involving the CBT-March wheat futures issue from 1996. Response. On March 20, 1996, the Chicago Board of Trade, CBT, March 1996 wheat futures experienced a new high for an expiring wheat contract when it closed at $7.50 per bushel at expiration. Trading during the closing minutes of this contract ranged from a low of $5.30 per bushel to a high of $7.50 per bushel: the equivalent of 880 ticks or $11,000.00 per contract. The Commission's staff launched an inquiry into this unusual market event on the afternoon it occurred. The CBT also initiated an examination of trading in March wheat futures on the afternoon of March 20. On these transactions two floor brokers made $587,400 in the aggregate, and several customers lost money. At the time, several market participants complained and shortly thereafter a hearing took place before the Senate Committee on Agriculture, Nutrition and Forestry. On April 30, 1996, the CBT issued preliminary charges against six floor members and three member firms for executing orders after the close of trading, trading after the hours for trading, accepting a new order from off the floor and after the close for execution during the Modified Closing Call, MCC, in violation of applicable post-close trading session rules, and/ or exceeding speculative limits. On June 10, 1996, the CBT entered into a settlement agreement with two firms and one trader, accepting a $10,000 fine paid jointly by the two member firms and dropping the charges against the trader. By August 21, 1996, the CBT had accepted settlements from the remaining five traders and one firm. These five traders and one firm, without admitting or denying any violation, agreed to the issuance of a reprimand. No fines were imposed. The CBT also implemented rule changes in response to this incident as follows: altering the current rules for the close of an expiring contract to preclude optional extension of the closing period; requiring the price range for trading in the post-close MCC session to be set at the midpoint of the closing range; requiring two or more Pit Committee members to approve the MCC range when it departs from the midpoint of the closing range and setting parameters for such departures; precluding market reporters from accepting quotations 30 seconds after the close for futures and two minutes after the close for options, unless an insertion is explicitly authorized by the Pit Committee; and implementing use of fog bullhorns rather than alarms to signal the beginning and end of the close in an expiring contract. The findings and recommendations of the Commission staff investigation were summarized in a report, dated November 26, 1996, which was transmitted to the Commission's Oversight Committees. The Commission adopted a number of recommendations in the report, including instructions to CBT to improve certain of its rules and compliance efforts. In addition, the Commission undertook review of six of the settled disciplinary actions. This matter is now pending before the Commission. The Commission separately addressed certain trading by the Chairman of the CBT. Derivative Policy Group Mr. Skeen. Please explain the Derivative Policy Group's Framework for Voluntary Oversight. Response. In view of growing concern about regulatory gaps in the OTC derivatives area, in August, 1994, the Derivatives Policy Group, DPG, a group representing the six largest broker- dealer and derivatives dealers in the U.S., was formed at the insistence of Arthur Levitt, Chairman of the Securities and Exchange Commission. The group was asked by Chairman Levitt about developing a framework for the voluntary oversight of the participating firms' derivatives activities. After its inception, the SEC invited the CFTC to participate in the oversight activities to assure consideration of regulatory policy with respect to futures commission merchants engaged in the OTC derivatives business and cooperation between U.S. regulators. The DPG developed such a framework and published a report in March 1995 addressing the work plan for implementing four interrelated elements of derivatives oversight, as follows: Management controls, including provision for an external audit and verification process that such controls are in place; Enhanced supervisory reporting, providing the SEC and CFTC with new quantitative reports on credit risk and other exposures arising from OTC derivatives activities; Mechanisms for assessing the evaluation of the impact of various market and credit scenarios; and Guidance relative to the interface between dealers and their non-professional counterparts, including a provision for generic risk disclosure and specific guidance on how to assure there is a meeting of the minds between a professional intermediary and its non-professional counterpart. At the initial presentation of the DPG's report to the public, the regulators made clear that the actions taken by the DPG voluntarily were a step in addressing the public's concern with the risks to the system and to customers of OTC derivatives dealing, which would require further evaluation going forward. The CFTC reviews all reports provided pursuant to the DPG's commitments in connection with its ongoing risk assessment program. Inspector General Workload Mr. Skeen. Please summarize the audits and investigations conducted by the Inspector General and in fiscal year 1996. Response. During fiscal year 1996, ten audits and one investigation were completed. One major audit, begun in fiscal year 1996, is continuing today. The ten audits consisted of a review of CFTC's Rule Enforcement Review Programs, a Review of the Use of American Express Cards for Official Travel, a Peer Review of the Office of the Inspector General of a Designated Federal Entity, Audits of the Imprest Funds in Los Angeles, Kansas City, Chicago, and New York, and three Cash Verifications of the Imprest Fund in Washington, D.C. The investigation related to an allegation that CFTC employee had written a book that did not contain the standard disclaimer of attribution to the CFTC, had worked on the book on CFTC time, and had used CFTC resources. The OIG found that the standard disclaimer was not needed because of the brief nature of the references to the employee's association with CFTC as part of a biographical sketch in the dust jacket of the book. The OIG found no evidence that the employee did any substantial work on the book while on the CFTC payroll or converted CFTC resources to personal use. Accordingly, the investigation was closed on October 6, 1996. The continuing audit, a Review of Enforcement Information Requirements, is the next step in an agency-wide review of information needs begun with the Office of Proceedings, continued through the Market Analysis Section of the Division of Economic Analysis, and now addressing the needs of the Division of Enforcement. National Cheese Exchange Mr. Skeen. There have been reports in the press that CFTC may become involved in regulation or oversight of the National Cheese Exchange. Please tell the Committee what discussions have taken place within CFTC on this subject and what decisions, if any, have been made. Response. The CFTC is not requesting additional authority to regulate the National Cheese Exchange. However, legislation introduced by Wisconsin Senators Herb Kohl and Russ Feingold, S. 256, would require the CFTC to regulate the NCE. The Commission has not taken a position on the legislation other than to advise Senators Kohl and Feingold that the CFTC stands ready to work with Congress on this issue and will accept any additional responsibilities that the Congress in its judgment believes are appropriate. On February 5, 1997, Commissioner John Tull met with Wisconsin Governor Tommy Thompson and a delegation of dairy farmers to discuss cheese prices and the National Cheese Exchange. Commission staff recently examined the operations of the NCE in connection with its review of a cash-settled fluid milk futures contract that had been submitted for review to the CFTC by the Coffee, Sugar and Cocoa Exchange. That futures contract, which was approved by the Commission on February 27, 1997, is settled by reference to the basic formula price, BFP, which is determined in part by cheese prices on the NCE. As with all futures contract proposals that are designed to settle in cash as opposed to actual delivery, Commission staff carefully reviewed the procedures used to arrive at and to compute the proposed cash settlement price, in this case the BFP, as part of its overall contract review. Moreover, given the importance of NCE cheese price movements in the calculation of the BFP and the recent controversy surrounding the NCE, staff gave careful consideration to the operation of the NCE. Among other things, the report notes that prices on the NCE are arrived at by open outcry and records of bids, offers, and transactions are maintained by both the NCE and the U.S. Department of Agriculture. A copy of the CFTC staff's ``Report on the National Cheese Exchange in Connection with the Application of the New York Coffee, Sugar and Cocoa Exchange as a Contract Market for Basic Formula Price'' was made available to the public along with the report on the CSCE BFP contract. Agricultural Trade Options Mr. Skeen. The press has reported that Commissioner Dial has said that the CFTC's ban on agricultural trade options may hamper the use of some risk management tools by merchants and farmers. The CFTC's Division of Economic Analysis has been studying this issue for some time. When will the study be completed and what are the prospects for lifting the ban? Response. The staff anticipates completing an analysis of alternative courses of actions with respect to the ban for Commission consideration this spring. The Commission will weigh the various alternatives developed by the staff at that time. Percentage of Resources Used for Agricultural Commodities Mr. Skeen. What percentage of CFTC resources is used for agricultural commodities? Response. The Commission does not routinely track work- hours spent on agricultural versus non-agricultural commodities so it is difficult to answer that question with any degree of precision. However, a rough estimate may be around 30% of resources in the recent past. The Commission's regulation of agricultural commodities is relatively resource intensive. For example, in 1996 and 1997 the ``hedge-to arrive'' and ``grain delivery point'' issues have required staff-hours disproportionate to the volume of trading in the affected commodities. Our experience has been that resource allocations tend to change to reflect current trends and issues. Volume for Agricultural Commodities Mr. Skeen. How much of the total annual trader volume is composed of agricultural commodities? How does this volume compare with past years? Response. Total annual trading volume in all agricultural commodities was 74.9 million contracts in futures and 19.1 million contracts in options during calendar year 1996, or about 18.8 percent of total futures and option volume of trading. This represents an increase during recent years, both absolutely and as a percentage of total industry volume. Trading of agricultural options increased about 125 percent from 1992 to 1996, while agricultural futures volume grew about 46 percent over the same period. National Futures Association Mr. Skeen. Please describe the relationship between CFTC and the National Futures Association. Response. The National Futures Association, NFA, is the only registered futures association approved pursuant to Section 17 of the Commodity Exchange Act, which states the statutory terms and conditions for registering such an association. As a registered futures association, the NFA is required to adopt and to enforce rules in a number of areas, including training and proficiency testing for persons involved in soliciting regulated transactions, minimum capital, segregation and other financial requirements applicable to members, and sales practice standards. NFA also has periodic auditing responsibility for futures professionals who are not exchange members and for certain exchange member firms it has contracted to audit. Further, pursuant to Section 17, the Commission may delegate to any registered futures association certain registration functions. The Commission has delegated to NFA all registration processing and certain other registration functions. The NFA has cooperated with the CFTC in designing rules related to telemarketing, voluntary fund disclosures and other issues relating to its members, and has voluntarily undertaken certain functions related to foreign firms doing business in the U.S. The Commission has oversight responsibility for all NFA functions to ensure compliance with the Commodity Exchange Act and the Commission's regulations. The Commission also monitors NFA for enforcement of its own rules and by-laws. Service Fees Mr. Skeen. How much was collected in service fees in 1996? Do all of these fees go to the National Futures Association? For what are these fees primarily used? Response. In 1982, the Commission received authority to collect service fees in eight areas. Six of the categories remain active today: rule enforcement reviews, contract market designations, reparations, FOIA requests, publications and photocopying. Two categories are no longer applicable: leverage transaction merchants no longer exist, and the National Futures Association registers commodity professionals for the industry. In fiscal 1996, the Commission collected and deposited $1,467,968 in service fees into the general fund of the U.S. Treasury. The National Futures Association maintains its own fee structure and collection effort. NFA Disciplinary Actions Mr. Skeen. Please provide a table showing information on sales practices and financial-related disciplinary actions taken by the National Futures Association during calendar year 1995. Please include on that table the number of complaints issued, divided between sales practice and financial cases. To what extent are futures merchants required to be bonded or carry insurance on customers' funds? Response. Neither the Commodity Exchange Act, as amended, or the Commission's regulations require either bonding or insurance on customers funds. Section 4d(2) of the Act does require that a futures commission merchant keep an account for customer funds and property separately from the futures commission merchant's own funds. Also, as provided in Commission regulation 1.17, all future commission merchants must maintain adjusted net capital at a prescribed level. The requested table for 1995 as well as one for 1996 is provided below. [The information follows:] NFA DISCIPLINARY ACTIONS INITIATED 1995 ------------------------------------------------------------------------ Firm Status Nature of action ------------------------------------------------------------------------ 95 BCC 001 Futurecom Investments, Pending........... Financial. Inc. 95 BCC 002 New Castle Intl. Pending........... Sales Practice. Commodities Inc. 95 BCC 003 Catranaco Incorporated Pending........... Sales Practice. 95 BCC 004 First American $10,000 Fine...... Sales Practice. Discount Corp. 95 BCC 005 Concorde Trading Group Pending........... Sales Practice. 95 BCC 006 Preferred Commodity Firm permanently Sales Practice. Corp. barred; 3 indivs suspended; 1 indiv fined $2,500. 95 BCC 007 Global Futures Pending........... Sales Practice. Holding, Inc. 95 BCC 008 First Commercial Pending........... Sales Practice. Financial Group. 95 BCC 009 Cromwell Financial Pending........... Sales Practice. Services, Inc. 95 BCC 010 Alaron Trading $40,000 Fine...... Sales Practice. Corporation. 95 BCC 011 First Investors Group Pending........... Sales Practice. of Palm Beach. 95 BCC 012 New Forest Capital Pending........... Sales Practice. Management, Inc. 95 BCC 013 Gary G. Hanson........ Pending........... Sales Practice. 95 BCC 014 Niederhoffer Pending........... Financial. Investments, Inc. 95 BCC 015 American Futures Pending........... Sales Practice. Group, Inc. 95 BCC 016 Star Commodities Ltd.. Pending........... Sales Practice. 95 BCC 017 Kelly Angle, Inc...... Pending........... Sales Practice. 95 BCC 018 Scott D. Wolfe, Inc... Pending........... Sales Practice. 95 BCC 019 Northstar Trading Pending........... Sales Practice. Group. 95 BCC 020 Universal Commodity Pending........... Sales Practice. Corporation. 95 BCC 021 Fitzgerald Capital $1,000 Fine....... Financial. Advisors, Ltd. ------------------------------------------------------------------------ Summary Total: 18 Sales Practice Related Actions; 3 Financial or Record Keeping Actions. DISCIPLINARY NFA ACTIONS INITIATED 1996 ------------------------------------------------------------------------ Firm Status Nature of Action ------------------------------------------------------------------------ 96 BCC001 Crowne Futures......... $7,500 Fine....... Sales Practice. 96 BCC002 Shaner Trading Permanent Financial. Partners, Inc. expulsion. 96 BCC003 Infinity Trading Pending........... Financial. Company, Inc. 96 BCC004 Michael Tropiano....... Permanent Sales Practice. withdrawal. 96 BCC005 Trading Places Pending........... Sales Practice. Commodities, Inc. 96 BCC006 Atwood Commodities, Inc $12,500 Fine...... Financial. 96 BCC007 Robert A. Simmons...... Pending........... Sales Practice. 96 BCC008 FSG International, Inc. $75,000 Fine...... Sales Practice. 96 BCC009 Sage Clearing Ltd...... $7,500 Fine....... Financial. 96 BCC010 Universal Futures, Inc. Pending........... Sales Practice. 96 BCC011 Goldman Payne, Inc..... Pending........... Financial. 96 BCC012 Minogue Investment Pending........... Sales Practice. Company, Inc. 96 BCC013 Saratoga Futures, Inc.. Indiv suspended 2 Sales Practice. yrs.; Firm permanently barred. 96 BCC014 Peregrine Financial Pending........... Sales Practice. Group, Inc. 96 BCC015 MBH Commodity Advisors, Pending........... Sales Practice. Inc. 96 BCC016 Niederhoffer Pending........... Sales Practice. Investments, Inc. 96 BCC017 Wolf Commodities, Inc.. Pending........... Sales Practice. 96 BCC018 Vision Ltd. Partnership Pending........... Financial. 96 BCC019 Glory Fund I, Inc...... Pending........... Sales Practice. 96 BCC020 Eric Ding, dba First Permanently barred Sales Practice. World Group. ------------------------------------------------------------------------ Summary Total: 14 Sales Practice Related Actions; 6 Financial or Record Keeping Actions. Regional Offices Mr. Skeen. Is there any particular specialization in the regional offices or do they all reflect the full range of CFTC responsibilities? Response. Our two largest regional offices are in Chicago and New York, the cities in which most of the futures and option trading takes place. Both of these offices have accountants, economists, futures trading specialists, investigators and attorneys who carry out activities in all of the Commission's programs. Our Los Angeles office consists almost entirely of enforcement personnel to deal with enforcement problems that have been prevalent in the Western states. Our Kansas City and Minneapolis offices focus on surveillance and auditing activities of the exchanges in those two cities. Foreign Transaction Fees Mr. Skeen. What is the trading volume for each foreign exchange that charges transaction fees? Response. The Commission is aware of three foreign exchanges that charge transaction fees. During 1996, the trading volume at the London International Financial Futures and Options Exchange, LIFFE, ranked third in world futures volume. LIFFE's total trading volume of both futures and options on futures was 162,631,867. Marche a Terme International de France, MATIF, ranked seventh in world futures volume, trading 68,293,238 contracts. The total trading volume on Japan's Osaka Securities Exchange was 12,885,757 contracts. Currently, the Commission does not have information on additional foreign exchanges that charge transaction fees. Foreign Transaction Fees Mr. Skeen. Which foreign exchanges do not charge transaction fees? Response. Although we have not undertaken an exhaustive survey of the matter, we are not aware of any exchange in a major jurisdiction which does not charge transaction fees. For example, at the London International Financial Futures and Options Exchange, LIFFE, both the buyer and seller pay 0.45, or approximately $0.73, in fees on all futures trades. Similarly, at the Marche a Terme Internationale de France, MATIF, both the buyer and the seller pay $2.50 per contract in fees. On the Osaka Securities Exchange, the exchange fees vary by contract. As an example, the fee on the Nikkei 225 futures contract, to be paid by the member for each buy and sell order, is 0.00086% of the trading value. Foreign Transaction Fees Mr. Skeen. Which foreign exchanges are directly funded through transaction fees? What percentage of each of these exchanges' total budget comes from such fees? Response. We do not have information concerning foreign exchange budgets and the relationship of such fees to the exchanges' budgets. Working Relationship--SEC and CFTC Mr. Skeen. Please describe the working relationship between the Securities and Exchange Commission and the CFTC; how the two agencies cooperate; where their jurisdictions are different; and how the two enforcement offices operate. Response. The working relationship between the Securities and Exchange Commission and the CFTC is cooperative and extensive. Coordination between the CFTC and the SEC occurs on an informal basis through regular contacts between our Chair and Commissioners and through communications among staff in related subject matters areas. There is formal cooperation through regular meetings of the President's Working Group on Financial Markets, and its staff, in which the CFTC, SEC and other financial regulators participate. In addition, statutory provisions mandate cooperation in certain areas. Recent examples of interagency coordination include the following: adoption by the CFTC of amendments to its financial reporting rules to foster harmonization with SEC financial reporting deadlines; an initiative by the CFTC to foster coordination of its audits of futures commission merchants with audits by the SEC; modifications of SEC rules governing custody of investment company assets to permit such assets to be held by CFTC-regulated futures commission merchants in reliance on the safeguards afforded by CFTC regulation; coordinated approval of circuit breakers on the securities exchanges and the futures exchanges trading equity index futures; and consultations between CFTC and SEC concerning proposed exchange linkage agreements and new derivative products. These extensive formal and informal contacts between the agencies foster effective and efficient regulation by the CFTC and the SEC, which regulate separate, but interconnected, portions of the financial marketplace. The CFTC regulates the nation's futures and option exchanges, over 240 futures commission merchants and over 60,000 commodity professionals. The SEC regulates the nation's securities and securities option markets, including over 8,500 broker-dealers and over 500,000 securities professionals. In the enforcement area, cooperation between the staff of the Commission's Division of Enforcement and their counterparts at the SEC continues to be an effective tool in policing wrongdoing in the nation's financial markets. From time to time conduct comes to the attention of the two enforcement offices that implicates both the commodities and securities laws. In such circumstances the offices routinely join forces, often devising coordinated investigation strategies for gathering and sharing information. In this way we are able to avoid duplication of effort and share expertise and resources. Where appropriate, we also coordinate the filing and settlement of enforcement actions to ensure a consistent governmental response to the misconduct. During the last year the Commission and SEC filed three such actions: Fenchurch, Tropiano and Ahrens. The Commission filed and simultaneously settled an administrative action against Fenchurch Capital Management, Ltd., a registered CPO and CTA active in the U.S. government securities cash and futures markets. The Commission's order found that Fenchurch attempted to, and did, manipulate the value of its position in the 10-Year U.S. Treasury Note futures contract traded on the Chicago Board of Trade by cornering the available supply of the cheapest-to-deliver notes. The Commission's action and the underlying investigation were coordinated with the SEC, which filed an injunctive action against Fenchurch for securities law violations in connection with related transactions in the repurchase market for government securities. The Chicago Board of Trade and the New York Federal Reserve Bank also participated in the joint investigation. Earlier in the year, the Commission and the SEC were coplaintiffs in a civil injunctive action brought against Michael Tropiano, an unregistered CPO in New Jersey. Tropiano was charged with soliciting $2.9 million dollars from 118 customers to invest in commodity pools and subsequently converting more than $1.5 million to his personal use. Criminal charges were also brought against Tropiano by the U.S. Attorney in Camden, New Jersey. In the fall of 1996, the Commission filed and settled a civil injunctive action against Kent Ahrens of York, Pennsylvania alleging recordkeeping and reporting violations and fraud. Ahrens' alleged fraudulent scheme involved both futures and securities in connection with his trading for clients, including The Common Fund, a non profit organization which manages investments of university endowment funds. The SEC filed a related injunctive action, and the U.S. Attorney for the Middle District of Pennsylvania filed criminal charges. Status of Audit Mr. Skeen. What is the current status of the AUDIT project? Please describe how the program will operate. Response. The CBT and CME originally proposed AUDIT to meet enhanced audit trail requirements which became effective in 1995. The Commission and Congress have indicated that these standards are performance standards and do not necessarily require a specified technology. CBT has an AUDIT prototype. Currently, it is not devoting resources to the development of this or other electronic, hand- held trading cards. Instead, CBT is focusing on the development of automated order-routing systems. The Exchange has stated that it has long range plans to develop a hand-held electronic trading card that can be used by brokers and traders in the pit. It is unclear whether the CBT's AUDIT prototype or some other technology would be used if and when the CBT determines to implement such a system. CME is no longer pursuing AUDIT. Instead, the Exchange is using software developed for AUDIT to develop a new hand-held, electronic trading card, based on off-the-shelf technology. AUDIT was intended to be used by floor members to record trade execution data and to transmit the data to clearing firms and clearinghouses. AUDIT would generate an electronic audit trail for every personal trade and correction entered into the hand-held terminal. Accordingly, the Exchanges would have additional timing data for trades. The system, in providing on- line trade submission to clearing for matching, would permit outtrades to be corrected immediately and would thereby enhance financial integrity. Audit Mr. Skeen. How will AUDIT affect personnel requirements for oversight activities? Response. Although AUDIT would improve Exchange audit trails, and as such, aid in the detection and deterrence of many trade abuses, AUDIT would not eliminate such abuses. It is unclear if or when, in what form, and for what purpose the CME and the CBT will implement AUDIT. The implementation and operation of AUDIT would trigger new oversight responsibilities, including ensured effective operation and security of the handheld units and related systems. Moreover, AUDIT contemplates the continuing use not only of traders but also clerks. If AUDIT were to be implemented, it may result in modifications of the Commission's oversight activities as well as changes in the expertise necessary to perform these activities, but the Commission does not at this time anticipate a related change in the number of personnel performing oversight activities. Exchange Compliance with Regulations Mr. Skeen. What are some of the non-electronic means that the CFTC will enforce to ensure that the commodities exchanges are in compliance with regulations? Response. The Commission conducts reviews of exchange compliance with regulations on a routine basis and requires each exchange to have a program in place to monitor exchange and member compliance with its rules. Exchanges must maintain compliance with Commission audit trail, recordkeeping, and trade surveillance requirements. For exchange audit trail programs, the Commission permits exchanges to comply with one-minute timing requirements through non-electronic means. Thus, exchanges are not required to adopt electronic, hand-held trading cards such as AUDIT that was proposed by CME and CBT. Through rule enforcement reviews, audit trail testing, and other actions, the Commission has ensured that the exchanges have made non-electronic enhancements to their audit trail systems. These improvements to exchange systems have included use of additional timing and sequencing data, enhanced timing logic, reformatted trading cards, reduced number of trades recorded on each trading card, additional timestamps, upgraded time and sales data input by pit reporters, and more aggressive enforcement of the current requirements. Commission regulations also set forth several important requirements for trade related recordkeeping, including regulations that govern timestamping, content, and format of records. Recently, the Commission amended its regulations to prohibit obliteration of trading records by members. The exchanges all must have programs to enforce these provisions and do so through non-electronic means. For example, they conduct regulatory audits of trading documents. In addition to audit trail and recordkeeping requirements, the Commission requires each exchange to maintain market surveillance, trade practice surveillance, and disciplinary action programs. These programs include such non-electronic elements as floor observation, manual review of computerized surveillance reports, and disciplinary action procedures. The Commission ensures compliance with these requirements through rule enforcement reviews and other programs. Dual Trading Fraud Mr. Skeen. What are some of the ways in which the CFTC curbs dual-trading fraud on the futures exchanges? Response. In 1990, the Commission amended the audit trail recordkeeping requirements of Regulation 1.35 to increase significantly the frequency of collection of trading cards and order tickets to reduce the opportunity for the fabrication or alteration of trading records, assure trader accountability for trading cards, and improve sequencing of trades. The Commission generally has found that the exchanges are actively enforcing these requirements and members' compliance rates are generally high. In addition, the Commission has long required exchanges to maintain affirmative surveillance programs to monitor trading activity. These programs generally use computerized surveillance, record surveillance, and on-floor surveillance to detect and deter potential dual-trading abuses. The Commission reviews the adequacy of compliance programs at each exchange at least once every two years. The Commission also conducts similar direct surveillance of exchange trading activity and may refer any suspicious activity, to the relevant exchange and to the Commission's Division of Enforcement for further investigation. Dual Trading Mr. Skeen. What is the most frequent basis for initiating an investigation in this area? Response. The Division of Enforcement most frequently initiates investigations into abuses involving dual trading on the nation's futures exchanges following a review of its exchange database information. The exchange database is a computer file of all exchange trading activity dating back to the 1980s. These records allow the Commission to identify suspicious trading patterns and to isolate individual transactions and brokers for follow-up investigation. To focus its review of exchange database information, the Division relies on information from a variety of sources, including tips from informers, customer complaints and exchange disciplinary files. In virtually all cases, however, the ultimate decision to initiate a full investigation of particular brokers and transactions depends on the Division's identification of suspicious trading patterns and other information contained within the exchange database system. President's Working Group Mr. Skeen. Who makes up the President's Working Group on Financial Markets and what are its responsibilities? Response. The President's Working Group on Financial Markets consists of the Chairperson of the CFTC, the Chairman of the SEC, the Secretary of the Treasury, and the Chairman of the Board of Governors of the Federal Reserve System. Representatives of other regulatory entities with responsibilities related to financial markets, including the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Reserve Bank of New York, have joined in discussions relating to their areas of responsibility. Representatives of the National Economic Council, the Council of Economic Advisors, and the Office of Management and Budget also have participated. The Working Group was originally established in March 1988 to review issues relating to the October 1987 market break. In 1994 as the result of a recommendation of the CFTC in its Over- the-Counter Derivatives Report, the Secretary of the Treasury at that time revitalized the Working Group and committed it to coordinating inter-regulatory efforts with respect to the burgeoning OTC derivatives markets and other financial markets. During the past three years, the Working Group and related staff have been meeting to discuss and examine current financial market developments. The Working Group regularly discusses individual agency initiatives relevant to financial markets and seeks to coordinate approaches to regulatory policy. Recently, the Working Group has addressed sales practices for government securities, bankruptcy law changes to assure appropriate treatment of OTC products and the efficacy of netting arrangements, the consequences of Barings and Sumitomo, the Windsor and London Communique initiatives, and other areas of common concern. Firm Failures Mr. Skeen. How many firms trading in options have failed during the past year? Response. No futures commission merchants or other registered firms to our knowledge ceased operations during the past year due to net capital problems. Generally, during each of the past five years there were either few or no failures of U.S. futures commission merchants or other registered firms. There were no such firm failures in 1993, 1995 or 1996, and there was one such failure in 1994 and 1992. In both of those cases, the accounts of the firms experiencing capital difficulties were transferred to other futures commission merchants without any customer sustaining loss as a result. The Commission does not have information regarding failures by non- registered firms trading in options. Self-Policing Activities Mr. Skeen. Does the industry carry out any type of self- policing activities? Response. Yes. Under the statutory framework we administer, the futures exchanges are required to carry out a number of self-policing activities under Commission oversight. The Commodity Exchange Act requires that each futures exchange maintain an affirmative compliance program that contains specified elements to ensure that its members adhere to exchange and Commission rules. Exchange rule enforcement programs are required to address market surveillance, trade practice surveillance, investigations, disciplinary procedures, audit trail compliance, financial compliance and sales practice compliance, including handling of customer complaints. For example, each futures exchange, as a self-regulatory organization, is required under our regulatory framework to adopt and enforce minimum financial requirements and reporting rules for its member FCMs that are at least as stringent as those established by Commission regulations and to conduct periodic routine audits for compliance. NFA, which is responsible for non-exchange-member futures commission merchants and introducing brokers and all commodity pool operators and commodity trading advisors, has statutorily imposed responsibilities with respect to segregation and futures sales practice compliance, including telemarketing. As self-regulatory organizations, SRO's, the futures exchanges and the National Futures Association have the primary direct responsibility to ensure the financial integrity of their member firms. The Commission is responsible for oversight of the SROs' financial surveillance and rule enforcement programs and for direct auditing on a sample basis to test the quality of SRO compliance programs. In addition to routine compliance audits, the SROs are also required to undertake for cause audits and to report specified conduct, financial conditions and events, and violations of the Act to the Commission. Our statutory framework places heavy reliance upon the exchanges' self-policing efforts and upon the Commission's oversight of those exchange efforts. Commission staff periodically review each exchange's rule enforcement program and recommend needed improvements in reports which are made available to the public. Recently this program has been augmented to review certain exchange programs and procedures on a cross-exchange basis and to recommend best practices. During FY 1996, the Commission issued one such report on price trade register insertions and correction procedures and currently is developing a report on broker associations. The Act also empowers the Commission to enforce exchange self-regulatory responsibilities through a variety of methods, including bringing administrative enforcement proceedings against exchanges failing to enforce their own rules, and the Commission has made use of that authority on a number of occasions. Civil Monetary Penalties Mr. Skeen. What was the dollar amount collected for civil penalties assessed in 1996? What was the average per penalty assessment? What happens to the money collected from civil penalties? Response. The dollar amount of civil penalties assessed and becoming due in FY 1996 was $1,436,000. Of that amount, $1,336,000 was collected, for a 93 percent collection rate for that fiscal year. The average per penalty assessment for the amounts becoming due was $143,600. Also collected was $226,000 assessed in prior fiscal years, for an overall total of $1,562,000. The money collected from civil monetary penalties is deposited with the Department of Treasury as general fund receipts. FCM Investigations Mr. Skeen. How many investigations has the Division conducted on Futures Commission Merchants each year since 1987? How many convictions were handed down for those same years? Response. Because the Commission does not track its investigations strictly by registration category, but rather by type of misconduct, our records do not contain a precise number of all of the investigations involving FCMs. Our records do show that from fiscal 1987 through fiscal 1996, the Commission opened approximately 82 investigations which it tracks under the category ``FCM fraud.'' This number does not reflect all of our investigations involving FCMs, however, since the Commission conducted investigations of FCMs under other categories of misconduct, like recordkeeping and supervision. The number of such other investigations involving FCMs is not readily available. The Commission, as a civil law enforcement agency, does not bring criminal prosecutions and obtain convictions. However, since the beginning of fiscal 1987 through the end of fiscal 1996, the Commission has brought civil proceedings resulting in the following sanctions: 66 cease and desist orders have been entered against FCMs, 18 FCMs have had their registrations revoked or suspended, 9 FCMs were the subject of trading prohibitions and 53 FCMs were assessed a total of $16,250,000 in civil monetary penalties. The Commission refers criminal violations to the Department of Justice for prosecution and provides expert assistance to state and federal prosecutors to the extent its resources allow. Because the Commission is not responsible for prosecuting criminal violations, it does not maintain complete statistics on the results of criminal prosecutions. Generally, however, the Department of Justice pursues commodity-related cases against individuals rather than firms. Foreign Travel Mr. Skeen. Please provide a list of all foreign travel in fiscal year 1996 by CFTC members and staff. Include on that list the name of the CFTC employee traveling and the cost and reason for each trip. Response. [The information follows:] [Pages 124 - 148--The official Committee record contains additional material here.] Domestic Travel Mr. Skeen. What is the total domestic travel budget for CFTC for fiscal year 1996 and fiscal year 1997? Response. The Commission does not have separate domestic and international travel budgets. The total travel budget for FY 1997 is $879,000. In FY 1996, the Commission obligated $720,000 for travel, including $647,000 for domestic travel and $73,000 for international travel. Foreign Assistance Mr. Skeen. Please describe the assistance that CFTC provided to foreign countries in fiscal year 1996. Response. During fiscal year 1996, the CFTC responded to over 50 requests for assistance from 23 foreign authorities. The requests related generally to investigations of possible violations of foreign laws, regulations or rules, and to fitness and properness checks of individuals and firms seeking to conduct business in foreign jurisdictions. In response to these requests, the CFTC provided various types of assistance, including: providing foreign futures authorities with access to our investigative, litigation and registration files; analyzing trading records to aid foreign futures authorities in their evaluation of potential violations of their laws; and conducting joint investigations, including taking investigative testimony together with a foreign futures authority. Among the types of records provided to foreign authorities were account opening documents, exchange trading data, customer monthly statements and daily confirmations, and large trader reports. In order to accommodate the increasing number of requests for technical assistance from numerous foreign market authorities, the CFTC annually organizes a one week training seminar at our Chicago, Illinois regional office for foreign regulators and exchange representatives. The seminar provides intensive training offered by the CFTC and exposes attendees to the full scope of the CFTC's regulatory program as well as to broader policy issues. The October 1996 seminar brought together 79 participants from more than 48 organizations representing 29 jurisdictions and emphasized issues related to oversight of electronic markets, CFTC's large trader reporting system, special monitoring issues related to contract expiration and launching of new contracts. The annual seminar continues to evolve as we adapt the seminar to the diverse needs of the participants and current regulatory interest. In addition to the annual training seminar, the CFTC also hosts individual delegations at both CFTC headquarters and regional offices, where foreign officials can learn about various aspects of the CFTC's regulatory program. For fiscal year 1996, for example, the CFTC hosted approximately 45 delegations at its Washington, D.C. headquarters and in various regional offices. Typically, our briefings for foreign delegations last one day and provide an overview of the CFTC's fundamental operations. The CFTC has also provided on-site technical assistance. During fiscal year 1996, for example, CFTC staff traveled to Singapore at the request of its government to assist the Singapore International Monetary Exchange in reviewing their compliance and surveillance programs and to train new staff. Also in fiscal year 1996, staff from the Division of Economic Analysis, along with a staff member from the Chicago regional office, provided technical assistance to the Philippine Securities Exchange Commission in their review of an existing contract traded on the Manila International Futures Exchange. In each of these cases, the expenses have been paid by the foreign authority. We generally have limited the duration of any such on-site visits as our staff resources do not permit us to send senior staff for extended periods abroad. Finally, we have also attempted on a case-by-case basis to accommodate the desire of foreign regulators to send their staff to the CFTC for extended visits. For example, in fiscal year 1996 we hosted a two-person delegation from a market authority which spent a month in Washington, with time divided between the Commission and the U.S. SEC, and a month at the CFTC's Chicago regional office reviewing the entire range of our regulatory program. Similarly, our Division of Economic Analysis hosted a representative from a foreign exchange. In such instances, we have attempted to schedule introductory meetings with relevant CFTC staff which typically last one hour each. During these sessions, the foreign staff member would receive relevant material and, if available, would be provided with a room or library space for independent study. Trade Practice Matters Mr. Skeen. Please update the table that appears on page 54 of last year's hearing record that shows the percentage of professional resources spent on trade practice and other fraud matters. Response. I would be pleased to provide that information for the record. [The information follows:] PERCENTAGE OF PROFESSIONAL RESOURCES SPENT ON TRADE PRACTICE AND OTHER FRAUD MATTERS ------------------------------------------------------------------------ Percentage Percentage on trade on other Fiscal year practice fraud matters matters ------------------------------------------------------------------------ 1996.......................................... 13 71 1995.......................................... 20 70 1994.......................................... 20 62 1993.......................................... 26 60 1992.......................................... 27 53 1991.......................................... 30 51 1990.......................................... 21 62 1989.......................................... 14 67 1988.......................................... 16 66 ------------------------------------------------------------------------ Enforcement Investigations Mr. Skeen. Please provide a table showing the number of investigations in the Division of Enforcement for the past five years. Response. I would be pleased to provide that information for the record. [The information follows:] ENFORCEMENT INVESTIGATIONS ------------------------------------------------------------------------ Investigations Fiscal year Investigations pending at opened year end ------------------------------------------------------------------------ 1996.................................... 113 136 1995.................................... 83 89 1994.................................... 54 94 1993.................................... 89 97 1992.................................... 70 104 ------------------------------------------------------------------------ Cooperative Enforcement Mr. Skeen. Please provide a list of foreign countries or self-regulator organizations in which you have a Memorandum of Understanding or some other agreement. Which of these have been signed in the past year? Response. The Commission has a variety of cooperative arrangements for the exchange of confidential information in enforcement matters. These arrangements have been made with 42 foreign governmental and non-governmental authorities located in 21 different jurisdictions. The CFTC has formal arrangements, including Memoranda of Understanding or ``MOUs'', with governmental entities in 14 different jurisdictions. Since amendments were made to the Act in 1992, the Commission has entered into 32 new arrangements to provide and receive assistance from foreign futures authorities. These new arrangements include seven MOUs, one Agreement, one exchange of Diplomatic Notes pursuant to a Treaty, signed by the Department of State on behalf of the Commission, and 22 less formal arrangements. In 1996, the Commission signed one new cooperative enforcement MOU. On September 16, 1996, the Commission and the New Zealand Securities Commission entered into a MOU on Consultation and Mutual Assistance for the Exchange of Information. At present, the Commission is actively working on formal arrangements with several countries. [The information follows:] Memoranda of Understanding for Cooperation on Supervisory, Investigative and Enforcement Matters September 1996, New Zealand: MOU between the New Zealand Securities Commission (NZSC) and the CFTC on consultation and cooperation and mutual assistance for the exchange of information. October 1995, Hong Kong: MOU between the Hong Kong Securities and Futures Commission (SFC) and the CFTC concerning consultation and cooperation. June 1995, Italy: MOU between the Commissione Nazionale per la Societa e la Borsa (CONSOB) of Italy and the CFTC. May 1995, Argentina: MOU between the Comision Nacional de Valores of Argentina and the CFTC on consultation, technical assistance and mutual assistance. May 1995, Mexico: MOU between the Comision Nacional Bancaria y de Valores of Mexico and the CFTC on consultation, technical assistance and mutual assistance. October 1994, Australia: MOU between the United States Commodity Futures Trading Commission and the Australian Securities Commission Concerning Consultation and Cooperation in the Administration and Enforcement of Futures Laws. November 1993, Switzerland: Treaty Between the United States and Swiss Confederation on Mutual Assistance in Criminal Matters (MLAT), to obtain assistance from Swiss authorities in civil enforcement matters through a designated authority in each country, which in the United States is the Department of Justice. April 1993, The Netherlands: Agreement Between the Government of the United States of America and the Government of the Kingdom of the Netherlands on Mutual Administrative Assistance in the Exchange of Information in Futures Matters. January 1993, Taiwan: Memorandum on the Exchange of Information Between the United States Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission of Taiwan. October 1992, Spain: MOU on Mutual Assistance and Exchange of Information Between the CFTC and the Comision Nacional del Mercado de Valores of Spain. July 1992, Ontario: MOU between the CFTC and the Ontario Securities Commission (OSC). July 1992, Quebec: MOU between the CFTC and the Commission des valeurs mobilieres du Quebec (CVMQ). September 1991, United Kingdom: MOU on Mutual Assistance and Exchange of Information Between the CFTC, the U.S. Securities and Exchange Commission, the U.K. Department of Trade and Industry, and the Securities and Investments Board. (This agreement supersedes the previous U.K. MOU which was signed in 1986 and amended in 1988.) April 1991, Brazil: MOU on Mutual Assistance and Exchange of Information. June 1990, France: Administrative Agreement Between the CFTC and the Commission des Operations de Bourse (COB). Multilateral Arrangements March 1996: Declaration on Cooperation and Supervision of International Futures Markets and Clearing Organizations: Australia, Austria, Brazil, Denmark, France, Germany, Hong Kong, Hungary, Ireland, Italy, Malaysia, Netherlands, Portugal, Quebec Canada, Singapore, South Africa, Spain, Sweden, United Kingdom and U.S. CFTC. Supports information sharing agreement and MOU signed by 62 international futures exchanges and clearing organizations. Establishes a multilateral mechanism for the sharing of information on a bilateral basis upon the occurrence of certain agreed triggering events affecting an exchange member's financial resources or positions. Supervision of Cross-Border Managed Futures Activity October 1995, Hong Kong: Declaration on Cooperation and Supervision of Cross-Border Managed Futures Activity, with Hong Kong SFC. Establishes a framework for cooperation and assistance between regulatory authorities in supervising cross-border managed futures activity, including the sharing of routine audit information and cooperation in conducting on-site examinations. Financial Information Sharing Memoranda of Understanding September 1991, Ontario and Quebec: Financial Information Sharing Memorandum of Understanding between the CFTC and CVMQ/ OSC. May 1989, United Kingdom: Addendum to the Financial Information Sharing Memorandum of Understanding. September 1988, United Kingdom: Financial Information Sharing Memorandum of Understanding Between the CFTC and U.S. and U.K. regulatory authorities. Provides for the recognition of foreign financial requirements and, in the case of the Canadian FISMOU, also provides for the sharing of risk assessment information on related firms. Mutual Recognition Memorandum of Understanding Provides for information sharing to facilitate monitoring and compliance matters related to the mutual recognition of intermediaries and products. June 1990, France: Mutual Recognition Memorandum of Understanding Between the CFTC and the COB. Cooperative Arrangements for Information Sharing on Matters Related to Program Specific Arrangements Cooperative arrangements for the sharing of information on matters related to the implementation of CFTC Part 30 regulations for granting an exemption from certain rules (rule 30.10), and/or authorizing the offer and sale of foreign options (rule 30.3 (no longer required effective March 18, 1996)), the offer and sale of foreign stock index futures contracts, or a foreign exchange's screen-based trading system to operate from a U.S. location. November 1995: Bundesaufsichtsamt fur den Wertpapierhandel (BAWe) (Germany) (rule 30.10 and placement of DTB screens in the U.S.) June 1995: Comision Nacional del Mercado de Valores of Spaint (rule 30.10). December 1992: Ministry of Agriculture, Forestry and Fisheries of Japan (rule 30.3 and rule 30.10). May 1989: Side Letter Relating to US/UK Memorandum of Understanding (rule 30.3 and rule 30.10). August 1988: Ontario OSC (rule 30.10). June 1988: Quebec CVMQ (rule 30.3 and rule 30.10). May 1988: Australian National Companies and Securities Commission (rule 30.3 and rule 30.10). February 1988: Monetary Authority of Singapore (rule 30.10). December 1987: Monetary Authority of Singapore (rule 30.3). Arrangements Related to the Issuance of No-Action Letters Concerning the Offer and Sale of Foreign Stock Index Futures Contracts in the U.S. Arrangements to support the issuance of staff no-action letters concerning the offer and sale of foreign stock index futures contracts have been executed with regulatory authorities in Hong Kong, Sangapore, Ontario, United Kingdom, France, Australia, Spain, Italy and Germany. Civil and Administrative Proceedings Mr. Skeen. Please update the table that appeared in last year's hearing record that shows the number of civil injunctive actions and administrative proceedings. Response. I would be pleased to provide that information for the record. [The information follows:] CIVIL AND ADMINISTRATIVE PROCEEDINGS ------------------------------------------------------------------------ Administrative Civil cases Cases cases filed filed completed ------------------------------------------------------------------------ Fiscal year: 1996.................... 21 17 30 1995.................... 41 11 49 1994.................... 33 10 67 1993.................... 45 11 54 1992.................... 36 18 59 1991.................... 31 11 52 1990.................... 37 11 29 1989.................... 35 15 56 1988.................... 40 14 41 ------------------------------------------------------------------------ Civil Monetary Penalties Mr. Skeen. Please update the table that appeared in last year's hearing record that shows the amount of civil penalties from administrative proceedings issued for each fiscal year since 1988. Response. I would be pleased to provide that information for the record. [The information follows:] CIVIL MONETARY PENALTIES IMPOSED FISCAL YEAR 1988-96 ------------------------------------------------------------------------ Amount ------------------------------------------------------------------------ Fiscal year: 1996.................................................. 5,530,000 1995.................................................. 18,915,100 1994.................................................. 5,403,000 1993.................................................. 3,313,100 1992.................................................. 5,815,800 1991.................................................. 2,848,071 1990.................................................. 23,608,000 1989.................................................. 7,100,400 1988.................................................. 2,337,500 ------------------------------------------------------------------------ Pending Designation Applications Mr. Skeen. Please provide a list of all new contracts that are pending before CFTC at this time. Response. [The information follows:] DESIGNATION APPLICATIONS BEFORE CFTC [As of 03/19/79] ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ACTIVELY PENDING--FUTURES--Total = 11: NYMEX...................................... Hong Kong Stock Index............................. 11/12/96 NYCE....................................... U.S. Dollar/South African Rand.................... 12/19/96 FCOM....................................... Cattle, Live...................................... 01/17/97 CME........................................ South African Rand................................ 01/17/97 NYCE....................................... U.S. Dollar Malaysian Ringgit..................... 01/23/97 NYCE....................................... U.S. Dollar Singapore Dollar...................... 01/23/97 NYCE....................................... U.S. Dollar/Indonesia Rupiah...................... 01/23/97 NYCE....................................... U.S. Dollar/Thai Baht............................. 01/23/97 CBT........................................ U.S. T-Notes, Long-Term, Inflation-Indexed........ 01/30/97 CME........................................ New Zealand Dollar................................ 02/10/97 CBT........................................ Italian Government Bonds.......................... 02/27/97 ACTIVELY PENDING--OPTIONS--Total = 12: CBT........................................ U.K. Gilts,Long-Term.............................. 04/03/96 NYMEX...................................... Hong Kong Stock Index............................. 11/12/96 NYCE....................................... U.S. Dollar/South African Strand.................. 12/19/96 FCOM....................................... Cattle, Live...................................... 01/17/97 CME........................................ South African Rand................................ 01/17/97 NYCE....................................... U.S. Dollar.Malaysian Ringgit..................... 01/23/97 NYCE....................................... U.S. Dollar/Singapore Dollar...................... 01/23/97 NYCE....................................... U.S. Dollar/Indonesia Rupiah...................... 01/23/97 NYCE....................................... NYCE U.S. Dollar/Thai Baht........................ 01/23/97 CBT........................................ U.S. T-Notes, Long-Term, Inflation-Indexed........ 01/30/97 CME........................................ New Zealand Dollar................................ 02/10/97 CBT........................................ Italian Government Bonds.......................... 02/27/97 ---------------------------------------------------------------------------------------------------------------- Volume of Domestic Agricultural Trading Mr. Skeen. Please update the table that appears on page 69 of last year's hearing record showing the percent of domestic agricultural contract and options versus total volume. Response. [The information follows:] VOLUME IN DOMESTIC AGRICULTURAL \1\ (AG) CONTRACTS [In millions of contracts] ---------------------------------------------------------------------------------------------------------------- Futures Options ----------------------------------------------------------------- Fiscal year Domestic AG as Domestic AG as AG Total percent AG Total percent contracts volume of total contracts volume of total ---------------------------------------------------------------------------------------------------------------- 1997.......................................... 65.1 397.4 16.4 16.4 102.0 16.1 ---------------------------------------------------------------------------------------------------------------- \1\ Includes wheat, corn, oats, barley, soybeans, soybean oil, soybean meal, rice, hogs, live cattle, feeder cattle, pork bellies, milk, cheddar cheese, butter, potatoes, and cotton. New Contracts Approved Mr. Skeen. Please provide a list of all new products that were approved by CFTC during the past year. Response. [The information follows:] new contracts approved by cftc through 03/19/97 futures Fiscal year 1996 CBT--Argentina Brady Bond Index CBT--Yield Insurance, Ohio Corn CBT--Brazilian Brady Bond Index CBT--Mexico Brady Bond Index CBT--Yield Insurance, U.S. Corn CBT--Yield Insurance, Nebraska Corn CBT--Yield-Curve Spread, 3/30 Year CBT--Yield Curve Spread, 3/5 Year CBT--Yield Insurance, Indiana Corn CBT--Yield Insurance, Illinois Corn CBT--Yield Curve Spread, 3/10 Year CBT--Yield Curve Spread, 2/3 Year CME--Nasdaq 100 Index CME--S&P 500/BARRA Growth Index CME--Argentine Par Brady Bond CME--Brazilian Real CME--Milk, Fluid CME--Brazilian ``C'' Brady Bond CME--DMark/FFranc Currency Cross Rate CME--Venezuelan ``DCB'' Brady Bonds CME--Mexican Par Brady Bond CME--DMark/Ilira Currency Cross Rate CME--DMark/SPeseta Currency Cross Rate CME--DMark/SKrona Currency Cross Rate CME--Oriented Strand Board CME--Brazilian Par Brady Bond CME--IPC (Mexican Stock Index) CME--Mexico 30 Stock Index CME--Brazilian ``EI'' Brady Bonds CME--Argentine ``FRB'' Brady Bonds CME--S&P 500/BARRA Value Index CSCE--Butter CSCE--Milk MCE--Mesican Peso NYCE--Potatoes NYCE--Emerging Market Debt NYFE--PSE Technology Index NYMEX--Natural Gas, Permian Basin NYMEX--Electricity, Palo Verde NYMEX--Gasoline, Conventional, NY Harbor NYMEX--Natural Gas, Alberta NYMEX--Electricity, COB Total FY 1996=42 CME--Boneless Beef, 90 Percent Lean CME--Mexican Interbank Interest Rates, 28-Day CME--Mexican Treasury Bills, 91-Day CME--Dow Jones Taiwan Stock Index CSCE--Milk, BEP NYCE--New Zealand Dollar/U.S. Dollar NYCE--Pound Sterling/Japanese Yen Cross Rate NYCE--Pound Sterling/Swiss Franc Cross Rate NYCE--Australian Dollar/U.S. Dollar NYCE--DMark/SPeseta Cross Rate Total FY 1997 through 3/19/97=10 options Fiscal year 1996 CBT--Yield Insurance, Illinois Corn CBT--Yield Insurance, U.S. Corn CBT--Yield Curve Spread, 3/30 Year CBT--Anhydrous Ammonia CBT--Brazilian Brady Bond Index CBT--Federal Funds, 30-Day CBT--Argentina Brady Bond Index CBT--Yield Curve Spread, 3/10 Year CBT--Yield Insurance, Nebraska Corn CBT--Diammonium Phosphate CBT--Yield Insurance, Indiana Corn CBT--Mexico Brady Bond Index CBT--Yield Curve Spread, 2/3 Year CBT--Yield Curve Spread, 3/5 Year CBT--Yield Insurance, Ohio Corn CME--Brazilian Par Brady Bond CME--Argentine Par Brady Bond CME--S&P 500/BARRA Value Index CME--DMark/SKrona Currency Cross Rate CME--Milk, Fluid CME--Oriented Strand Board CME--Argentine ``FRB'' Brady Bonds CME--DMark/ILira Currency Cross Rate CME--S&P 500/BARRA Growth Index CME--Mexico 30 Stock Index CME--DMark/FFranc Currency Cross Rate CME--Venezuelan ``DCB'' Brady Bonds CME--Brazilian Real CME--DMark/SPeseta Currency Cross Rate CME--Nasdaq 100 Index CME--IPC (Mexican Stock Index) CME--Butter CME--Mexican Par Brady Bond CME--Federal Funds Rate CME--Brazilian ``EI'' Brady Bond CME--Brazilian ``C'' Brady Bond CSCE--Butter CSCE--Milk MGE--Barley NYCE--Emerging Market Debt NYCE--Potatoes NYFE--Swiss Franc NYFE--Japanese Yen NYFE--Deutsche Mark NYFE--British Pound NYFE--PSE Technology Index NYMEX--Electricity, COB NYMEX--Natural Gas, Alberta NYMEX--Electricity, Palo Verde NYMEX--Natural Gas, Permian Basin Total FY 1996=50 Fiscal year 1997 (through 03/19/97) CBT--Eurodollars CME--Boneless Beef, 90% Lean CME--Dow Jones Taiwan Stock Index CME--Boneless Beef Trimmings, 50% Lean CME--Mexican Interbank Interest Rates, 28-Day CME--Mexican Treasury Bills, 91-Day (CETES) CSCE--Milk, BFP NYCE--Pound Sterling/Japanese Yen Cross Rate NYCE--DMark/SPeseta Cross Rate NYCE--Pound Sterling/SFranc Cross Rate NYCE--Australian Dollar/U.S. Dollar NYCE--New Zealand Dollar/U.S. Dollar Total FY 1997 through 3/19/97=12 Appropriation and Authorized FTES Mr. Skeen. Please provide a table showing the number of FTEs and the annual appropriation amounts for CFTC since 1987. Response. [The information follows:] COMMODITY FUTURES TRADING COMMISSION DOLLARS APPROPRIATED AND AUTHORIZED FTES 1987-1997 ------------------------------------------------------------------------ Dollars Authorized Fiscal year appropriated FTE's ------------------------------------------------------------------------ 1987......................................... 29,761,000 508 1988......................................... 32,813,000 518 1989......................................... 34,723,000 545 1990......................................... 39,186,000 555 1991......................................... 43,959,000 595 1992......................................... 47,300,000 616 1993......................................... 47,300,000 562 1994......................................... 47,485,000 554 1995......................................... 49,029,000 545 1996......................................... 53,532,000 565 1997......................................... 55,101,000 580 ------------------------------------------------------------------------ Historical Funding and Staffing Mr. Skeen. Please provide a ten-year table showing the funding and manpower resources for the Office of the Commissioner, Office of the General Counsel, Division of Enforcement, Division of Economic Analysis, Division of Trading and Markets, and the Office of the Executive Director. Response. [The information follows:] COMMODITY FUTURES TRADING COMMISSION FUNDING BY DIVISION FY 1987-1997 [In millions of dollars] ---------------------------------------------------------------------------------------------------------------- CHAIR./ Fiscal year DEA ENF T&M PRO COMM. OED OGC Total \1\ ---------------------------------------------------------------------------------------------------------------- 1987........................................ 4.6 7.4 5.3 1.5 2.3 6.6 2.1 29.8 1988........................................ 5.0 8.2 5.7 1.6 2.7 7.6 2.0 32.8 1989........................................ 5.1 8.9 6.4 1.7 3.1 7.3 2.2 34.7 1990........................................ 5.6 9.6 7.3 1.8 3.0 9.4 2.5 39.2 1991........................................ 7.1 11.1 8.6 1.9 3.5 9.0 2.7 43.9 1992........................................ 7.5 12.2 9.8 1.9 4.0 8.8 3.0 47.2 1993........................................ 7.4 12.2 9.9 1.9 3.5 9.3 3.0 47.2 1994........................................ 7.5 12.3 10.4 1.8 3.5 9.0 3.1 47.6 1995........................................ 7.2 12.8 10.6 1.7 4.6 8.8 3.4 49.1 1996........................................ 9.6 13.9 11.9 1.7 5.1 7.9 3.4 53.5 1997........................................ 7.7 16.1 12.2 2.0 4.8 8.5 3.8 55.1 ---------------------------------------------------------------------------------------------------------------- \1\ DEA=Division of Economic Analysis, ENF=Division of Enforcement, T&M=Division of Trading and Markets, PRO=Proceedings, CHAIR/COMM=Offices of the Chairperson and the Commissioners, OED=Office of the Executive Director, OGC=Office of the General Counsel. COMMODITY FUTURES TRADING COMMISSION FTES BY DIVISION FY 1987-1997 [In millions of dollars] ---------------------------------------------------------------------------------------------------------------- CHAIR./ Fiscal year DEA ENF T&M PRO COMM. OED OGC Total ---------------------------------------------------------------------------------------------------------------- 1987........................................... 94 125 96 27 38 78 33 491 1988........................................... 97 136 98 28 40 81 30 510 1989........................................... 94 142 104 27 44 85 33 529 1990........................................... 94 137 110 28 41 84 33 527 1991........................................... 101 145 119 27 41 85 33 551 1992........................................... 105 157 133 25 47 89 36 592 1993........................................... 97 152 128 24 42 86 33 562 1994........................................... 91 145 127 23 41 85 31 543 1995........................................... 86 144 123 23 45 89 32 542 1996........................................... 81 147 129 23 39 90 32 541 1997........................................... 84 169 132 23 45 94 33 580 ---------------------------------------------------------------------------------------------------------------- Rental Payments to Others Mr. Skeen. Please explain the approximately $1.6 million increase requested in Object Class 23.2, Rental Payments to Others. Response. Almost all of the increase is to cover rate increases for our lease of office space in Washington, D.C. FY 1998 is the third year of our ten year lease, but it will be the first year that our annual rent payment will not be partially offset by substantial rent reductions from the landlord in lieu of allowances for leasehold improvements. The Commission usually experiences an annual increase of 5- 7% in the rent accounts and we expect to return to this historical level of increase after FY 1998. Other Services Mr. Skeen. Please explain the approximately $660,000 increase requested in Object Class 25.2, Other Services. Response. The $659,000 increase between FY 1997 and FY 1998 is for systems analysis and programming. The Commission contracts for these services to augment staff resources in the design, analysis and maintenance of the major systems needed to perform the Commission work. Advisory Committees Mr. Skeen. Please provide a list of all of the advisory committees that were used during fiscal year 1996 and any that you plan to use during fiscal year 1997. What expenses did you incur from advisory committees for those years? Response. The CFTC has three advisory committees which we believe provide a useful and cost-effective way for Commissioners and senior staff to receive industry input on current regulatory developments and to assess the impact of agency actions or contemplated actions on the regulated community. Expenses by the advisory committees are extremely small. Meetings are held at the Commission's headquarters offices, and in general, travel and other expenses are paid solely by the participants. Total annual agency expenditures on all advisory committees in fiscal 1996 was $2,060. The Agricultural Advisory Committee had two meetings in 1996. Membership is comprised of 24 associations (e.g., American Farm Bureau Federation, Farm Credit Council, National Cotton Council of America, North American Export Grain Association, etc.). Less than one staff-year was used to support this committee, and expenditures totaled $1,200 for transcription costs of the proceedings. The Advisory Committee on CFTC-State Cooperation met once in 1996. This committee is comprised of representatives from 18 states, associations and government entities (e.g. California Department of Corporations, Managed Futures Association, U.S. Department of Justice, etc.). Less than one staff-year was used to support this committee, and $860 were expended, $360 on travel for participants from various state government entities and $500 for a transcript of the proceedings. The Financial Products Advisory Committee held no meetings in 1996. Membership of this committee is comprised of 22 representatives from the financial industry and the federal sector, including representatives of Goldman Sachs & Company, Deloitte & Touche, and the Federal Reserve Board. It is anticipated that all three advisory committees will meet in 1997. Contracts Mr. Skeen. Please provide a list of all outside contracts the CFTC had in Fiscal Year 1996. Please list amount, who received the contract, and the purpose. Response. ------------------------------------------------------------------------ Amount Contractor Purpose ------------------------------------------------------------------------ 243,000........... American Reporters, Inc.. Court Reporting Services. 69,000............ Bell Atlantic............ Telephone Line Service. 26,000............ Bloomberg L.P............ News Service. 625,000........... Cexec, Inc............... Systems Development. 3,061,000......... Faison Associates........ Office Space Rental. 41,000............ Gelco Information Network Software Training. 712,000........... Integrated Technologies.. Computer Related Services. 2,500,000......... Integrated Technologies.. Computer Related Services. 73,000............ J.C. Nichols............. Office Space Rental. 117,000........... Knight-Ridder Financial.. News Service. 84,000............ Lawyers Co-Operative Pub. Electronic Subscription. 102,000........... Miglin-Beitler Mgmt...... Office Space Rental. 891,000........... Port Authority of NY & NJ Office Space Rental. 41,000............ Port Authority of NY & NJ Electric Utility. 1,173,000......... Premisys Real Estate..... Office Space Rental. 56,000............ SAS Institute............ Software License. 300,000........... Sumitomo Life Reality Office Space Rental. (NY). ------------------------------------------------------------------------ Registered Introducing Brokers Mr. Skeen. Please provide a table showing the number of registered introducing brokers since 1987 and the breakout between the number of independent introducing brokers and the number of guaranteed introducing brokers for each year. Response. The CFTC is pleased to provide that information for the record. [The information follows:] REGISTERED INTRODUCING BROKERS ------------------------------------------------------------------------ Guaranteed Independent Total introducing introducing Fiscal year ending September 30 introducing brokers brokers brokers (IBGs) \1\ (IBIs) ------------------------------------------------------------------------ 1996............................. 1,507 1,108 399 1995............................. 1,468 1,080 388 1994............................. 1,388 1,017 371 1993............................. 1,410 1,034 376 1992............................. 1,486 1,107 379 1991............................. 1,627 1,150 477 1990............................. 1,795 1,231 564 1989............................. 1,774 1,417 357 1988............................. 1,673 1,347 326 1987............................. 1,517 1,213 304 ------------------------------------------------------------------------ \1\ Applicants for registration as IBGs with no self-declared derogatory information on their registration application are eligible for a temporary license while full registration fitness checks are conducted, and such firms are included in the IBG column. GPRA Mr. Skeen. How is the agency using Results Act performance goals and information to drive daily operations? Response. We have not reached this stage of the implementation. Mr. Skeen. GPRA, known as the Results Act, requires each executive agency to issue no later than September 30, 1997, a strategic plan covering at least five years. In addition to a mission statement grounded in legislative requirements, the plans are to contain general goals and objectives that are expected to be outcome or results oriented (such as improve literacy) as opposed to output or activity oriented (such as to increase the number of education grants issued). What progress is the agency making in developing its strategic plan, including defining its mission and establishing appropriate goals? Response. The Commission established a Strategic Planning Task Force to ensure implementation of GPRA in accordance with the legislation. In January 1997, the Commission adopted a mission statement and work continues today on Commission goals and objectives. We plan to meet the legislated requirement to submit a five year strategic plan for the agency in September 1997. Mr. Skeen. Has the agency identified conflicting goals for any of its program efforts? If so, what are the performance consequences of these conflicting goals and what actions-- including seeking legislative changes--is the agency taking to address these conflicts? Response. At this time, drafting of goals is in progress. We have not, as yet, identified any conflicting goals. Mr. Skeen. Strategic plans must be based on realistic assessments of resources that will be available to the agency to accomplish its goals. As you are developing your strategic plan, how are you taking into account projected resources that likely will be available--especially as we move to a balanced budget? What assumptions are you making? How are you ensuring that your goals are realistic in light of expected resources? Response. As we deal with the requirements of strategic planning, we are assuming the President's FY 1998 budget. Future adjustments above that level, due to program increases, or below that level, due to cost absorption or funding reductions, will require modifications to the plan. The requirement for an annual performance plan for each of the five years of the strategic plan provides the mechanism to adjust the plan as necessary due to variances in funding or other assumptions affecting program inputs, outputs and therefore outcomes. The Commission has recent experience with fluctuating funding levels due to a period of downsizing and operational streamlining in the early 1990's. We understand the importance of maximizing the level of resources devoted to staffing and therefore to our major goals. Every effort will be made to continue this management philosophy. The goals of the Commodity Futures Trading Commission encompass the heart of our mission, and every dollar we manage goes to support their accomplishment--to protect the economic functions of the futures and option markets; to protect market users and the public; and to foster open, competitive and financially sound markets. Mr. Skeen. For Congress the heart of the Results Act is the statutory link between agency plans, budget requests, and the reporting of results. Starting with fiscal year 1999, agencies are to develop annual performance plans that define performance goals and the measures that will be used to assess progress over the coming year. These annual goals are to measure agency progress toward meeting strategic goals and are to be based on the program activities as set forth in the President's budget. What progress have you made in establishing clear and direct linkages between the general goals in your strategic plan and the goals to be contained in your annual performance plans? OMB expressed concern last year that most agencies had not made sufficient progress in this critical area. Response. Work on the first annual performance plan for the Commission has not started. The Strategic Planning Task Force is in the process of drafting the final set of objectives for the Commission to review and adopt before starting on the five year and the annual performance plans. We are in contact with OMB, informing our oversight staff of our progress at each stage of the planning activity. We will continue to work with them to ensure that we meet this requirement and others satisfactorily. Mr. Skeen. More specifically, how are you progressing in linking your strategic and annual performance goals to the program activity structure contained in the President's budget? Do you anticipate the need to change or modify the activity structure to be consistent with the agency's goals. Response. The program activity structure presented by the Commission in the President's budget document is structured along organizational lines and will not, as far as we anticipate presently, require modification. Because the Commission's goals cut across organizational lines, every organizational unit is likely to be working in support of all three general goals from different perspectives and functional areas. Mr. Skeen. Overall, what progress has your agency made--and what challenges is it experiencing--defining results-oriented performance measures that will allow the agency and others to determine the extent to which goals are being met? Response. This is perhaps the greatest challenge of the legislation, particularly for a regulatory agency with an enforcement mission. We will be looking to the experiences of other Federal regulators as we define our performance measures and working with our current set of output indicators to refocus their emphasis on outcome. It is our intention to use the performance indicators in the budget formulation and execution cycles, measuring resource utilization and goal achievement. Mr. Skeen. If applicable, what lessons did the agency learn from its participation in the Results Act pilot phase and how are those lessons being applied to agency-wide Results Act efforts? What steps is the agency taking to build the capacity (information systems, personnel skills, etc.) necessary to implement the Results Act? Response. The Commission was not a participant in a formal pilot program under GPRA. We have however looked to the pilots as they report on their experiences, by reading case studies and by consulting with the appropriate staff of other agencies and departments. The Commission manages two information systems which will provide data for measuring program performance: the financial management system, which captures cost data; and the labor distribution system, which captures staff-years data by program and project. As we move toward implementation of the Act, we will review our information systems to ensure that they are capturing the necessary data at the appropriate level of detail. Mr. Skeen. The Results Act requires agencies solicit and consider the views of stakeholders as they develop the strategic plans. Stakeholders can include state and local governments, interest groups, the private sector, and the general public, among others. Who do you consider to be your agency's primary stakeholders and how will you incorporate their views into the strategic plans? Response. There are many stakeholders whose views help shape the focus and direction of the Commission's work, including the futures and option exchanges; market professionals; market users; producers such as farmers, ranchers, energy companies; consumers such as food processors, public utilities, agricultural businesses; investors such as pension and mutual funds; Congress; and interest groups such as the Futures Industry Association. There are many avenues through which views and information are gathered. The Commission has three advisory groups concerning agricultural issues, state and federal law enforcement issues and issues surrounding financial products and the marketplace. Advisory group meetings are widely participated in by interested parties. For instance, the Agriculture Advisory Committee consists of representatives of over twenty agricultural associations which participate on behalf of their memberships. Commission staff are in frequent contact with exchange officials and have periodic meetings with the National Futures Association in fulfilling our oversight role. We also meet frequently with the leadership of the Futures Industry Association, the Managed Futures Association and other representatives of commodity professionals. These stakeholders are at the center of the commodities industry and provide valuable feedback. The Commission manages a reparations program to provide the public with a place to seek resolution of complaints concerning their dealings with the futures and option markets and commodity professionals. Trends identified through this program provide valuable information to the Commission, highlighting potential areas of broader concern. The Chairperson of the CFTC is a member of the President's Working Group on Financial Markets along with the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System and the Chairman of the Securities and Exchange Commission. This group is valuable in coordinating the efforts of the financial regulators, particularly in addressing the common goals of financial integrity and customer protection. We also work closely with other federal agencies and with state regulatory and enforcement officials. Finally, the Commission is a member of the International Organization of Securities Commissions, a group of regulators from around the world which works together on regulatory issues affecting the global financial marketplace. These mechanisms produce information and insight into the industry, the marketplace, its professional community, and its users--both domestic and international. Mr. Skeen. For the Results Act to be successful, agencies with similar missions, goals, or strategies will need to ensure that their efforts are coordinated. What other federal agencies are you working with to ensure that your strategic plans are coordinated? What steps have you taken to ensure that your efforts complement and do not unnecessarily duplicate other federal efforts? Response. The Commodity Futures Trading Commission is the only federal entity charged with oversight authority over the U.S. futures and option markets. We work closely with fellow regulators and law enforcement entities, federal, state and foreign, as required to administer and to enforce the Commodity Exchange Act, as amended. The Chairperson of the CFTC is a member of the President's Working Group on Financial Markets along with the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve and the Chairman of the Securities and Exchange Commission. The CFTC believes that this group is a critical coordinating body for federal financial oversight. The Working Group meets regularly to communicate individual agency initiatives and to coordinate approaches to regulatory policy. Mr. Skeen. The Results Act requires agencies to consult with Congress as they develop their strategic plans. Since these plans are due in September, now is the time for agencies to begin the required consultations. What were your plans for congressional consultation as you develop your strategic plan? Which Committees will you consult with? How will you resolve differing views? Response. The Commission plans to consult with its oversight and appropriations committees as it develops its strategic plan. Mr. Skeen. In passing the Results Act, Congress sought to fundamentally change the focus of federal management and decisionmaking to be more results-oriented. Organizations that have successfully become results-oriented typically have found that making the transformation envisioned by the Results Act requires significant changes in what they do and how they do it. What changes in program policy, organization structure, program content and work process has the agency made to become more results-oriented? Response. We have not, as yet, defined changes which may be required in organizational structure or policy content or application. Mr. Skeen. How are managers held accountable for implementing the Results Act and improving performance? Response. After Commission management gains experience through the first few Annual Performance Plans, we will look to how the planning process should be linked to the performance appraisal process. We do not have a basis for making such recommendations at this time. Potential for Fraud and Abuse Mr. Serrano. You discussed in your statement pending legislation that would sharply limit federal regulation of futures and options exchange trading. You also mentioned the challenge the Commission sees in the face of rapidly evolving markets. In your view, in what markets is the potential for fraud and abuse greatest and, of these markets, which are better suited for federal regulation as opposed to self- regulation by exchanges? Response. In our view, based upon the historical record, the potential for fraud and abuse does not vary with the type of commodity traded in a particular futures exchange. The Commission's Division of Enforcement has brought law enforcement proceedings involving conduct on all or virtually all futures exchange markets. We also do not find the necessity for federal regulation to vary with the type of futures exchange market. Indeed, since the enactment of the Commodity Futures Trading Commission Act of 1974, Congress has recognized the importance of a single, uniform regulatory structure for all futures exchange markets. Like the federal securities laws, this regulatory structure contemplates an extensive self- regulatory role for the exchanges, but also recognizes the necessity of federal oversight to assure that self-regulation adequately serves the public interest. While the Commission does not believe that the need for federal regulation of futures exchange markets differs among those markets, the Commission has recognized that exchange markets can require a higher level of regulation than over-the- counter markets as they currently exist. Exchange markets concentrate credit risks that are diffused on the decentralized over-the-counter marketplace and thus create systemic risks of greater magnitude than those posed by over-the-counter transactions. The strong public interest in preserving and protecting the price-discovery and price-basing functions performed by the exchanges also distinguishes them from most over-the-counter markets. Vigilant market surveillance, careful review of contract design and exchange rules, and supervision of market professionals are necessary to protect against market disruptions that would interfere with these important pricing functions. Brooksley Born Brooksley Born was sworn in as Chairperson by Acting Chairman John E. Tull on August 26, 1996. Ms. Born was nominated by President Clinton on May 3, 1996, and confirmed by the Senate on August 2, 1996, for a term expiring in April, 1999. Ms. Born practiced law at the Washington, D.C., firm of Arnold & Porter from 1965 until her appointment to the CFTC. As a partner in the firm, Ms. Born specialized in representing institutional and corporate clients in complex litigation, primarily in the federal courts, and in futures regulation matters. Ms. Born is an active member of the District of Columbia Bar and the American Bar Association (ABA), having served on the Boards of Governors of both organizations. She currently serves on the Boards of the American Bar Foundation and the National Women's Law Center. Ms. Born was in 1972-1973 an Adjunct Professor of Law at Georgetown University Law Center and a Lecturer at Law at Columbus School of Law, Catholic University of America, in 1972-1974. A native of San Francisco, California, Ms. Born received her A.B. degree from Stanford University in 1961 and her Juris Doctor degree from Stanford Law School in 1964, where she graduated first in her class and was President of the Stanford Law Review. She is a member of Order of the Coif. She has also been honored by the National Association of Public Interest Law, the National Legal Aid and Defender Association, and the National Women's Law Center. She received the Woman Lawyer of the Year Award from the Women's Bar Association of the District of Columbia in 1981. [Pages 163 - 307--The official Committee record contains additional material here.] Thursday, February 27, 1997. FOOD AND DRUG ADMINISTRATION DEPARTMENT OF HEALTH AND HUMAN SERVICES WITNESSES MICHAEL A. FRIEDMAN, M.D., DEPUTY COMMISSIONER FOR OPERATIONS ROBERT J. BYRD, DEPUTY COMMISSIONER FOR MANAGEMENT AND SYSTEMS WILLIAM B. SCHULTZ, DEPUTY COMMISSIONER FOR POLICY DENNIS WILLIAMS, DEPUTY ASSISTANT SECRETARY, BUDGET, DEPARTMENT OF HEALTH AND HUMAN SERVICES MARY K. PENDERGAST, DEPUTY COMMISSIONER/SENIOR ADVISOR TO THE COMMISSIONER MARGARET JANE PORTER, CHIEF COUNSEL, FOOD AND DRUG DIVISION, OFFICE OF GENERAL COUNSEL Mr. Skeen. The committee will come to order. Dr. Friedman, let me start with a welcome. We're certainly going to miss your predecessor. He was sort of a lightning rod around here. If things got boring, you could always invite Dr. David Kessler to your hearings. Seriously, I do want to say for all the controversy he caused at times, Dr. Kessler will leave the Food and Drug Administration a better place operating more efficiently and the American public is far better off. So, now that I've said that, the FDA still has a lot of improvements to make, at least for the time being, and Dr. Friedman, you get to carry the load on your back. We can spend hours here talking about approval times for individual drugs, but in general, most of the pharmaceutical companies say things are much better. And I do think that as a direct result of PDUFA--now there is an acronym for you--Prescription Drug Users Fee Act, having an extra $80 million should do something to hurry the process. We could talk about medical device approvals all day long, and things need improvement. And we could talk about tobacco, and I'm sure we will. We could talk about food inspections and additives, and we could talk about closing regional laboratories. With FDA we have a lot of open doors to areas of interest and problems. In the end, we will all want the same thing; faster, safer products for the citizens of the United States. So, with that, Dr. Friedman, that's the most gracious introduction that I've given you. It's up to you now. Glad to have you here and welcome. Dr. Friedman's Opening Remarks Dr. Friedman. Thank you very much, Mr. Chairman. Members of the committee, I appreciate this opportunity to appear before you and present the 1998 Food and Drug Administration Budget Proposal. First of all, I would like to introduce some of my colleagues who are seated with me here. Mr. Robert Byrd, Deputy Commissioner for Management and Systems; Mr. William Schultz, Deputy Commissioner for Policy; and Mr. Dennis Williams from the Department. There are other key Agency women and men who are also here to provide answers for you as the day progresses. As you well recognize, the mission of our Agency is to promote and protect the public health of Americans. Today, I'm serving as the spokesman for an Agency which is deeply committed to the premise that our citizens should have confidence in the quality of their food, the medicines and devices crucial to their health care, and the tens of thousands of other regulated products which they use daily. This is a truly enormous responsibility. My written testimony describes in somewhat greater detail our performance; a performance that demonstrates a continuing quest for improvement, and reflects a commitment to our mission, our responsiveness to you and other parts of Congress, and our respect for every tax dollar that's entrusted to us. However, in the interest of conciseness in my oral statement I will briefly overview some of the past year's successes and then move on to some top priority requests for which we are seeking your support. Those priority requests include a food safety initiative to counter the threat of foodborne illness, a sensible regulatory program to protect our youth from the diseases caused by the use of tobacco products, and the reauthorization of the two existing major user fee programs; the one you just mentioned, PDUFA, a terribly important program to us, and the Mammography Quality Standards Act; both of which will expire this year. While time does not permit me to properly convey fully the achievements of the Agency in the past year there have been achievements, important achievements, in each of our centers. And if I may, let me begin with PDUFA. The Prescription Drug User Fee Act of 1992 was designed by this committee and by the Commerce Committee in conjunction with representatives of the drug industry and the Food and Drug Administration as a kind of experiment. In this experiment, industry provided extra additional resources to the FDA in the form of user fees which would then be used to improve our application review for new drugs and biologic products. Four years later, this experiment has been judged near a universal success. Patients get new products sooner and a better quality and length of life in many instances. Companies are able to market their products sooner and the FDA has gained the resources to perform their job in the manner in which they would like. [The Prescription Drug User Fee Chart follows:] [Page 311--The official Committee record contains additional material here.] Dr. Friedman. The first chart demonstrates that since the initiation of this activity, we have consistently met and frequently exceeded PDUFA's demanding and progressive annual performance goals. This committee has seen this kind of data before. I only remind you that last year was in fact the best year we've had. For example, let me mention drugs that we have called New Molecular Entities or NMEs. These are widely regarded as breakthrough products. And therefore the most meaningful in bringing new hope to patients. The number of these approved serves as a fairly good indicator of a certain kind of progress in medicine. Measured by this standard, medical progress in the last year was noteworthy. Our Center for Drug Evaluation and Research approved 53 NMEs and that's nearly twice the number previously. [The New Molecular Entities Chart follows:] [Page 313--The official Committee record contains additional material here.] Dr. Friedman. You can see by the chart here both the median time to approval has dropped fairly substantially and the number of approvals has increased. If one looks together at both the volume of activity and the speed of activity, you can see a very satisfactory performance. Last year's median time to approval was 14.3 months; 10 percent faster than in the year before; and as you can see nearly twice as fast as in the late 1980s. Our approvals under PDUFA are getting faster for all new medications, not just for NMEs. And in the first year of PDUFA, we approved 70 new products in a median time of 24.1 months. Last year, we approved 131 new products, including the NMEs, in a median time of 15.4 months. Some of the most important of these activities are listed in more detail in my written statement. Another outstanding achievement last year was the approval of the 118 efficacy supplements; a truly unprecedented number. I do not want these to appear to be sterile statistics. These are issues of enormous personal importance to family members, to children, to friends, to anyone needing these new treatments. This record of achievement can only be maintained with adequate resources. Consequently, as I will mention later, reauthorization of this spectacularly successful program is an Agency priority. However, lest you think this sort of performance is an isolated aberration or exception to Agency activities, let me share briefly with you some representative data from some of our other centers. [The PMA Approvals Chart follows:] [Page 315--The official Committee record contains additional material here.] Dr. Friedman. For our device center, as you mentioned Mr. Chairman, if one looks at the PMA approvals, those most complex, difficult, and new products you can see that in the last fiscal year the number of approvals increased very substantially from, as you see, 27 to 43. [The 501(k) First Action Performance Chart follows:] [Page 317--The official Committee record contains additional material here.] Dr. Friedman. If you look at simpler devices, the so-called 510(k) devices, you can see again that our on-time performance is substantially better this last year. The center has worked extremely diligently to come much closer to on-time activities than ever before. [The Re-Engineered Animal Drug Development Process Chart follows:] [Page 319--The official Committee record contains additional material here.] Dr. Friedman. Let me mention our Center for Veterinary Medicine. I have here a poster that you have seen before which describes the re-engineering of the approval process by our Center for Veterinary Medicine. This is a very ingenious and a very enlightened way to proceed, working in conjunction with industry in order to approve in a real-time fashion, different parts of an application. What's noteworthy here are some of the very speedy approvals of certain products which result from this sort of interaction and collaboration. [The Food and Color Additives and GRAS Petitions Chart follows:] [Page 321--The official Committee record contains additional material here.] Dr. Friedman. The next shows evidence of performance for our Center for Food Safety and Applied Nutrition. Over the past several years, our Food and Color Additive GRAS Petition Program has taken some very substantial criticism. You can see in the mid-1980s and through the early 1990s, in fact, we were receiving more petitions than we were finalizing action on. Through some very diligent efforts on the part of the center, you can see that the performance in 1996 was dramatically better. This is the largest decision effort by the center that we've had in recent memory and a very substantial turn around. Mr. Chairman, I've described the highlights of last year's FDA's performance, not as an exercise in self-congratulations and not with any self-satisfaction, and certainly not, sir, with any arrogance. I do this rather to make the case based on the convincing evidence that I've shown here and a lot of other evidence that with your continued support, we're prepared to meet the public health challenges that confront us. [The Food Safety Initiative follows:] [Page 323--The official Committee record contains additional material here.] Dr. Friedman. One of the most significant public health tasks ahead is to better protect Americans against foodborne illness by implementing the President's Food Safety Initiative. Americans rightfully expect their food to be wholesome and safe, and with rare exception it is. We know however that problems do exist. Millions of foodborne illnesses occur each year. Perhaps as many as 9,000 Americans die as a result. The total estimated cost of this may exceed $5 billion. These costs in lives and economic consequences are simply unacceptable. When an outbreak of foodborne illness is recognized, we act quickly and vigorously in cooperation with other federal, such as USDA, CDC, NIH, and so forth, state, local, and public health authorities, and members of the industry. [The Second Food Safety Initiative Chart follows:] [Page 325--The official Committee record contains additional material here.] Dr. Friedman. But the key is timely recognition. Last year, for example, thanks to such team work, we were able to limit the public's exposure to apple juice contaminated with E.coli 0157:H7. The manufacturer promptly recalled the unsold product. And a nationwide warning was issued for consumers not to drink it. Even so, 66 Americans and Canadians were affected and made ill. And sadly one of them, a little girl in Colorado, tragically died of the complications of this foodborne disease. This outbreak and others underline the need for more effective interagency cooperation in surveillance, in inspections, in consumer and retail food worker education, in risk assessment, and the supporting research which is required. And this is requested in our budget. I've indicated here simply an outline of the Food Safety Initiative which is a very comprehensive government-wide approach to this very important problem. We certainly anticipate that you have questions for us and we'd be very happy to talk about this more later. [The Youth Tobacco Prevention Initiative Chart follows:] [Page 327--The official Committee record contains additional material here.] Dr. Friedman. Another major task that we face in the coming year is to better protect our most precious resource, our youth, against the devastating effects of tobacco. The linkage between smoking and premature death of more than 400,000 Americans a year is unfortunately well-documented. Two and a half years ago the Agency launched an inquiry into the reasons why, despite this knowledge, so many Americans begin smoking. We found evidence that nicotine is addictive, and that manufacturers use this knowledge in designing their products. We also found, and in a way this was the most disturbing discovery, that these consequences result from childhood use. Youth being a stage in life that's most carefree and susceptible to risk taking. At present, three million American youngsters use tobacco products. Three thousand additional minors begin smoking each day. As a result, up to a third of them will die prematurely. [The second Youth Tobacco Prevention Initiative Chart follows:] [Page 329--The official Committee record contains additional material here.] Dr. Friedman. Against this background, the President last year announced a program that's designed to keep tobacco products away from under-aged Americans. We've just begun implementing this program in cooperation with state and local authorities as the first step in an overall program that we hope will reduce tobacco use by minors by 50 percent in the next seven years. Our budget request will focus on outreach to educate retailers and others about these new rules and on contracts with state officials to begin enforcing the new program. [The FDA Challenges Chart follows:] [Page 331--The official Committee record contains additional material here.] Dr. Friedman. Mr. Chairman, in addition to these three priority tasks, implementation of the Food Safety Initiative, restriction of access to tobacco products by minors, and the reauthorization of our user fee programs, we face many other long-term challenges to which we will have to find solutions in order to continue to protect American consumers and to add to their piece of mind and quality of life. These challenges include the need to appreciate and utilize rapidly growing scientific information to make meaningful health facts more accessible to the public, and to advance global efforts for harmonization, and the sharing of public health standards in order to safeguard the quality of our imports of regulated products. The challenge is to achieve these goals despite the fact that our workload continues to increase, and that pragmatically we recognize it's not simply good enough for us to work harder. We must work smarter and we must work in closer cooperation with others, especially our sister agencies, USDA, CDC, NIH, state, and local officials. We can meet these challenges in the very best tradition of our nine decade old Agency. More than anything else, we want to do so. I thank you for this opportunity to provide you with these remarks. We're ready to respond to any questions, sir. Thank you. [Clerk's note.--Dr. Friedman's written testimony appears on pages 487 through 518. Dr. Friedman's, Mr. Byrd's, Mr. Schultz's, Mr. Williams', Ms. Pendergast's, Ms. Porter's, and Mr. Zeller's biographical sketches appear on pages 480 through 486. The Food and Drug Administration's budget justification appears on pages 519 through 685.] Mr. Skeen. Thank you very much. user fees Thank you Dr. Friedman. Let me focus on one of the big issues in your budget request and that's the user fees. Yesterday, we had Secretary Glickman here. His request is full of user fees, but at least his request to us did not already take credit for the enactment of user fees. You, on the other hand, ask us, the Appropriations Committee, for $750,922,000 and then say that you will get the rest somewhere else. You know how sadly phoney that approach is. Phoniness in this request does not justify the time that we will surely spend on talking about it. This should be called the ``Lobbyist Full Employment Act.'' You name it, food, drug, or medical industry, lobbyists are all over the place. And how many years has FDA asked for user fees as a part of their budget request and not gotten them? What happens if we give you just what you ask for, the $750 million and then tell you to go suck eggs for the rest of your problem? What would the impact of that be? And what do we have to do to make us--and I use that term calculatingly, because what we're doing is a phoney budget process. The American people deserve better honesty than this and they need to know the products they use are safe. I know that you've heard of tobacco and it seems like a real popular subject lately. And you've asked for $34 million to enforce your proposed tobacco regulations. Everybody would agree that we don't want kids to smoke. But not everyone will agree with you that FDA should have anything to do with the enforcement, and we know you are due in court on the issue. Don't you really think that since the funds are so short that we ought to wait and see what the courts decide before we offer up $34 million that might better be spent on approving drugs, or medical devices, or inspecting food, or one of the many other important things that you do? And let's face the facts. This is going to drag on in the courts for some long, long period of time. In addition to that, let's talk about food additives petitions. Your user fee proposal includes charging for food additive petitions. I know that it has taken FDA years to approve some of those. Can you tell me what you actually spend in approving a food additive petition? How do you construct the charge for that activity? I don't mean to just take the height off of you right at the very start, but I've done a pretty good job at this point, Doctor, and that goes with the job I guess. But in all kindness I think that we've got to take a straight on approach to these particular subjects, and I would appreciate your response on that. Dr. Friedman. Absolutely sir. you've asked a number of questions. Let me go through them step-by-step if I may. Mr. Skeen. Yes, sir. Dr. Friedman. If I've forgotten one---- Mr. Skeen. We'll remind you. Dr. Friedman [continuing]. Help me. Yes. Thank you. I appreciate that help. Your first question had to do with the budget. Let me make some comments if I may, sir. I think we have demonstrated over the past several years that our ability to take each dollar that we have and stretch it to the very maximum for the public good. I think that's been abundantly demonstrated. Mr. Skeen. I would agree with you. Dr. Friedman. As we approach this year's budget, we're very, very sensitive to the general desire, not just by the Administration but by generally everybody, to reduce the budget deficit. And we recognize that that's an important, difficult but necessary activity. And we realize that everyone participates in that. As a bottom line, we have identified an amount of money that we modestly present to this committee with an expressed promise that with that amount of money, as a bottom line number, we can do a tremendous amount for the public good in the areas that you've named and in the new areas. We know that it will be difficult to match our expectations, given that amount of money, in terms of trying to protect the public. But we're perfectly prepared to do so. We very much want to work, sir, with you and other Congressional committees to arrive at the very best way in which that bottom line can be put together. And we recognize that this is a difficult and complex area, but are trying to factor in our desires to do the public good with that amount of money, which is an important amount of money, with the need by the Administration and others to balance the budget. past user fees proposals Mr. Skeen. Well, in that connection I'll repeat the question. For how many years has FDA asked for user fees and how many times have we gotten them? Dr. Friedman. I asked the very same question, sir. And I found that the first user fees, the first I could identify were asked for in 1985. There may have been some before that. In general, with rare exception, they have not found favor. Mr. Skeen. That's true. Dr. Friedman. Yes, sir. Mr. Skeen. That's a little foreboding. We have this serious budget problem. And you and I both agree on this. Dr. Friedman. Yes, sir. Mr. Skeen. It's going to be very difficult. I think you've been asking for user fees to get it passed. It's just one of those things. But I appreciate your response and your honesty. We're starting off on the right foot. We'll see what we can do because we've got these terrible problems to take care of. We want to help you get your job done and done right. Dr. Friedman. Thank you, sir. Mr. Skeen. But I think that what we ought to do is tell these folks that come up with some of these budget ideas, which are wonderful, but it is once again the theorist. And those who have visions and so forth forget about the people who have to make it work somewhere down the line. Visionaries are alright, but functionaries are also essential in the functioning end of the thing. With that, I'll pass this on now to my Ranking Member, Mr. Fazio who is acting, and he is a great actor. Mr. Fazio. I'm trying not to act out, Mr. Chairman. Mr. Skeen. We're going to hold onto the five-minute rule today. Mr. Fazio. Okay. Mr. Skeen. I'll tap it when you get there. orphan drug application user fee Mr. Fazio. I haven't had the privilege of being on this committee before and, therefore, looking at your budget. I thought I might begin by asking some questions that have just come to my attention from constituents; from people who reach out to their Congressman for help. In one case, it is a constituent with a very rare disease. Apparently, only 80 people have been diagnosed with it in the United States. It's in the muscular dystrophy family. She participates in a drug research program with a university doctor at Duke University in North Carolina. A small pharmaceutical company makes the drug available to her at no cost. Without the experimental drug, she indicates she will be unable to get out of bed. But with this drug she says she can engage in some normal, everyday activity including, on occasion at least, trying to go to her job. It's on the market, this drug, in Europe, for about $250 per gram. The pharmaceutical company has not submitted an application to the FDA at this point. There is no desire on their part, at the moment, to market the drug in the U.S. I'm aware that a small company can apply for a fee waiver for the FDA's application to get through the review process. But if I understand correctly, a company does not qualify for the waiver if they already have other drugs on the market. In considering reauthorization of the Prescription Drug User Fee Act, apparently some pharmaceutical companies are discussing with FDA the possibility of exempting all orphan drugs from application user fees. I don't know whether you're ready to stake out a position on this at the moment, but I'd be interested in your reaction as to how we deal with this kind of anomaly; this very, very limited market that many of these orphan drugs have, and the problems that we have bringing them to people who legitimately benefit from them. Dr. Friedman. I think the question that raises is a perfectly appropriate one and one that I will only try and deal with in a general way. Our discussions with industry so far, and I characterize them as discussions, have been extremely valuable and I think very fruitful. We've identified a number of areas of common agreement and a number of areas in which general frameworks have been worked out. But I certainly want to stress that in a sense these discussions don't take on a reality until there is Congressional involvement because the last time this very successful activity was initiated, it was a Congressionally orchestrated one. And we envision that this year will be exactly the same thing. I think it would be inappropriate for me to express any particular interest or point of view about that issue, except to say that our Agency's position has consistently been, whether it's to children, people with rare diseases, or other populations for whom we know or think there are effective therapies, to get those therapies to those individuals. I think Dr. Kessler and all of the staff at the agency have demonstrated that time and time again. And as a general approach, we're going to continue with that, sir. Mr. Fazio. Mr. Schultz recognized the issue too. I wonder if you might want to comment. Mr. Schultz. Yes. The only thing I would add is I think, without looking at the language, that the principle of the law right now is to say that user fees should not be a barrier to any sort of development. And I assume that we will try and retain that. It's a little more complicated than just exempting orphan drugs because there are some drugs that qualify as orphan drugs that are highly profitable. There are a handful of drugs that sell $100 million a year or more that technically are orphan drugs. I think the current law tries to address exactly the issue you're raising and I think there will be a chance to refine it. Mr. Fazio. Is it true that if you have any other drug on the market you are not eligible for any kind of waiver on application user fees? Dr. Friedman. I don't think that's correct. Mr. Schultz. I don't either. No. Mr. Fazio. Similar drugs, but not any drug. I mean if you had something in the same family. Dr. Friedman. No. Mr. Fazio. We will follow-up on that. Dr. Friedman. I really don't think that's correct. relief band Mr. Fazio. I wanted to bring up another situation that affects a company that does business in my district. It's a laboratory called Maven Laboratories. Apparently, you approved a product that they call Relief Band, and then determined that it was mislabeling the product and banned it from the domestic market. They continued to market the product overseas. But apparently they have been interfered with in several ways. They've been, in effect, stopped from doing the development of the product by FDA because FDA has interdicted incoming shipments of the imported manufacturing components. My first question is what authority does FDA have in such an instance where, although the product is legally sold overseas, you're preventing them from obtaining elements of the product that would apparently, from your perspective, prevent them from doing something you've asked them to stop doing and that's selling in the domestic market. Is that a typical situation that we find? And what authority do you have to do that, sir? Dr. Friedman. If I may, let me divide the question into two parts. One, you asked about the authority. And I certainly would be happy to have Margaret Porter, our General Counsel, or others speak to the specific legal abilities. With respect though to this particular company, I understand that we are in receipt of a letter from you very recently about this. This is a matter which is in the midst of compliance activity right now. I think that this is not appropriate for public discussion, although we certainly want to provide you with the information that you've requested in your letter. With respect to the first part of your question regarding authority, if I could have Ms. Porter respond. Ms. Porter. Yes, Mr. Fazio. Your question is with respect to the Agency's authority to regulate devices or other products that are designated for export. Under the recent export amendments if a product is properly designated for export, then it could be exported. Often questions are raised as to whether in fact a particular product is being manufactured for domestic use or for exportation. And that's a question that would need to be resolved in the particular case. Mr. Fazio. But without having resolved that issue, you're in a position to step in and prevent them from obtaining an element of their product which they claim is only going to be sold in export? It's a factual situation that needs to be resolved. Ms. Porter. That's correct. I think as Dr. Friedman indicated, given the fact that this is an ongoing compliance matter, we would not want to discuss the facts of the particular case further publicly. But yes, that's right. We have the authority to satisfy ourselves that the requirements of the statute are in fact being met. Dr. Friedman. I must say that I understand that recently there has been some activity with regard to this company. And that's what I'd like to share with you. Mr. Fazio. Okay. We will talk to you about this later. Dr. Friedman. Thank you. internet surveillance Mr. Fazio. There is another issue that relates to this. Apparently, they've had their trademark impinged upon based on the FDA's surveillance of the foreign web sites on the Internet. And I wondered what authority FDA had to conduct that kind of surveillance, you know, what it's goal is, how frequently it finds violations in this manner? Dr. Friedman. In terms of authority. Ms. Porter. Well, again, the Internet as well as any other communication source can be used as a vehicle for inappropriately promoting or labeling products. Again, it would turn on the specific facts of the situation. Mr. Fazio. Well, obviously my time has been used and I will follow-up with you on this. On the surface apart from the facts, it seems that you're in a very powerful position to affect the viability of this entity. And it is something I want to follow-up with you on. Thank you, Mr. Chairman. Mr. Skeen. Mr. Walsh. Mr. Walsh. I yield to Mr. Dickey. I understand he has to leave. Mr. Skeen. Mr. Dickey. Mr. Dickey. Thank you, Mr. Chairman. I thank you, Mr. Walsh. Hi, Dr. Friedman. Dr. Friedman. Hello, sir. Mr. Dickey. How are you doing? Dr. Friedman. Fine. Thank you. national center for toxicological research (nctr) Mr. Dickey. I want to ask you about NCTR. Have you ever heard of that? Dr. Friedman. Yes, sir, I have. Mr. Dickey. Jefferson County, Arkansas. All right. It has taken a cut that is, I think, disproportionate to what other agencies have taken. We're over the 15 percent threshold in this particular year. I'd like to know why there has been a disproportionate cut for NCTR as compared to other agencies? And in that answer could you tell me how the other agencies have done in your decision? Dr. Friedman. I think you mean for other centers or other parts of the agency? Mr. Dickey. Yes, sir. That's what I mean. Dr. Friedman. I'd be happy to do so. This is obviously a very important topic for you because you have been consistently in and a supporter of NCTR. Because I understand you have to leave, if we don't have sufficient time now, I would very much look forward to the opportunity to meet with you and your Staff to go over this in considerably more detail. The reason I say that is that some of the budget lines actually take people looking over the same piece of paper. It's not such a simple thing. And I don't want to give you a superficial answer today and then pass that off as not satisfactory. But let me give you an answer because---- Mr. Dickey. Before you do that. Dr. Friedman. Yes, sir. Mr. Dickey. Could we meet next week? Dr. Friedman. As far as I know. Mr. Dickey. Then I'll go. Okay. Dr. Friedman. No, no. I'm serious. That offer is made very seriously, sir. Mr. Dickey. Thank you, sir. We'll just set that up. Dr. Friedman. We will set that up, sir. Mr. Dickey. Thank you. Mr. Skeen. Doctor, I don't know what you did but you certainly just shortened up that discussion. Dr. Friedman. I'm told I have this ability to drive people from the room. Mr. Skeen. You're very good. Ms. DeLauro. We're going to take you next and then we're going to hear from Mr. Walsh. Ms. DeLauro. Thank you very, very much, Mr. Chairman. Thank you, Dr. Friedman. Dr. Friedman. Yes, ma'am. Ms. DeLauro. I appreciate your testimony. I appreciate all of the good work that's been done by the FDA over the years. I also say to you that I'm sorry for the FDA that Dr. Kessler is leaving, but I am delighted that he's going to be coming to New Haven, Connecticut as the Dean of the Yale Medical School. So, I'm really looking forward to having his expertise in our community. I also told him to come live in the District. We're going to try to find him a place in the District. tobacco I wanted to say something and then ask a couple of questions with regard to the tobacco issue. It's clear that the Administration's proposal regarding tobacco places a special emphasis on how we prevent young people from using tobacco. It's an issue of some concern to me. One of the things that we've done in my community is to put together something called the Kick Butts Connecticut Campaign. We have middle school children who have actually been trained. If you will--it's a little army of middle school kids who are going to the elementary school kids and talking to their peers about not smoking and so forth. It's really quite exciting to see kids talking with each other. We know what the effects are and what your statistics are. We've seen what happens when young people start, that they don't stop, and what that means in terms of their life expectancy and a whole variety of other issues. I was really concerned when reading the paper this morning. I get to the question that, in Virginia, the Virginia Attorney's refusal to enforce new tobacco regulations which are aimed at preventing young people from using tobacco products. I'm troubled that they are going to--they've just decided that they don't view it as valid and that they're not going to abide by it. I really want to ask you how FDA is going to ensure that states and retailers understand and are going to implement the tobacco regulations? I happen to view this as a test. If we start on the wrong foot on this issue we are going to undo what, in my view, has been the direction for us to go on. You've done statistics. I have. We all have in our communities. Kids do know Joe Camel. They recognize Joe Camel more than they recognize Mickey Mouse. The level of advertising is directed right at kids because that's what the new market is about. If we are going to have states make a decision that they can willy-nilly decide whether or not that they're going to abide by the regulations, it's my view that we've got to deal with that now and here. And I want to know what FDA is going to do about this? Dr. Friedman. If I may, Mr. Schultz. Mr. Schultz. Thank you. In terms of the Kick Butts Campaign, our rules are obviously designed to stop tobacco companies from advertising and appealing to kids. But the other piece of that is educational. We know it's hard to get to kids. And one of the very effective ways of doing this is having their peers talk to them. So, that kind of program is truly very exciting. The Post's article was a little odd in the sense that since this is a federal program, the principal responsibility for enforcing the new federal regulation which basically says that retailers can't sell to kids and tobacco companies can't advertise, is with the Federal Government. It would be our job principally to do the enforcement. Now, as a part of that, in addition to spending a lot of money educating retailers about what the new rules are, we will also be contracting with some states so that we can get state officials to basically enforce the federal law. So, it will be very important to have state cooperation. But it's by no means essential. It will be a federal law to be enforced by federal officials. I'm hearing today that the Governor of Virginia and maybe the Attorney General are backing away from the statements in that article. Ms. DeLauro. Isn't tomorrow the day in which the identification piece goes in. Dr. Friedman. That's right. Mr. Schultz. That's right. Beginning tomorrow, retailers will be responsible as a matter of federal law for checking ID's of anyone under the age of 27 and for not selling to kids. But you're right. It's very critical to get the cooperation of the states. We've generally gotten a very good response from the states. And we think that the citizens in the states, we know this, they're very supportive of this effort to keep tobacco away from children. Ms. DeLauro. If it's going to be federally monitored and enforced, then we've got to do that. And we've got to do it right from the outset. As I say, I don't think you can let this go and linger. I think it sets a very, very bad precedent. We need to be looking very, very carefully at that. Mr. Schultz. And that's why the $34 million request in our request is so important so we will have the resources to do that. Dr. Friedman. That's right. Ms. DeLauro. Do I still have time, Mr. Chairman, or is it up? Mr. Skeen. You have one minute. mammography quality standards Ms. DeLauro. Okay. Let me ask a question. Mammography quality standards is going to sunset in September 1997. I want to get some sense as to how the standards have improved breast cancer treatment since their inception. Can you comment on the progress that has been made as Congress starts to consider reauthorization of the quality standards? Dr. Friedman. Certainly. The volume of work that was proposed for this was very large. As you know, we're talking about something like 10,000 different inspection sites that are necessary all across the country, and a formidable task in educating inspectors and others about sorts of standards should be put in place. There have been two GAO inquiries into how these standards are being applied. What we know from the most recent GAO report is that the number of out of compliance or violations has decreased very dramatically. It is not down to zero, obviously, and we're continuing to make progress on that. But there is much greater compliance, much greater uniformity. Standards are being applied in ways that never occurred before. We're in the midst of completing the final, if you will, parts of the regulation to describe the kinds of training that should be carried out, the kinds of inspections that should be carried out and so forth. It has been a very difficult task to identify those because we wanted to get it right as much as we could. I think everyone who looks at this program says this is a success. There are those who say, how can we make it a greater success? And what kinds of standards should we impose at this time? We've committed to having those final regulations completed by the end of the fiscal year. We think that from the patient's point of view, the average citizen, from the health care provider's point of view, from the insurance companies' points of view, from virtually every perspective, every interested party in this sees this as a highly worthwhile effort. The amount of money that we're talking about here is barely $14 million. Modest is too large a word. Given the number of women who are affected by this disease, given the number of mammograms that occur in the United States every year, given the life saving that we know goes on, this is an incredibly good buy. Ms. DeLauro. Thank you. Thank you, Mr. Chairman. Mr. Skeen. Mr. Walsh. Mr. Walsh. Thank you, Mr. Chairman. Welcome, Mr. Friedman. Dr. Friedman. Thank you. Mr. Walsh. I look forward to working with you. Dr. Friedman. Thank you. user fee proposal Mr. Walsh. In your capacity as Director I wish you lots of luck. You have a lot of challenges, not the least of which is the budget that's been presented to us by the President which represents an 8 percent reduction in the appropriation for the Food and Drug Administration. That is at least anticipated to be offset by a series of new user fees or regulatory taxes on industry. And as you know, taxes are not very popular these days. They never have been, but they seem to be less so now. It presents you and this subcommittee a real challenge. We have less money. We have a reduction that's been requested in your appropriation by the President. If the user fees are not authorized, and I think the Chairman stated it pretty well; that there doesn't seem to be a great deal of support for authorizing those fees. Then we're either going to have a reduced appropriation or we're going to have to find that money somewhere else. So, it's a real challenge. I'm just curious about other user fees that are in place such as the prescription drug user fee. My memory isn't good on this. Maybe somebody on your staff could tell us, when those user fees were proposed and were they proposed as a supplement to the existing appropriation for FDA or were they an offset? In other words, was a reduction in the appropriation requested? Dr. Friedman. Let me provide you some information and then Mr. Byrd can certainly supplement my answer. The prescription drug user fee and the mammography quality standards both were resources that were provided as additional resources to the Agency. Clear expectations, performance goals were established for each one. And as you know for the prescription drugs these were progressive over the years. But there were some very clear expectations about those funds. First of all, as I say, the objective goals were established and publicly agreed to. The second was there was a commitment that funds that were collected for that activity would not be used for anything else. There would be no migration of funds at all. That these would be funds accountable to those activities. And I think that program has been a great success partly because of the very transparency of the program. We provide a report to Congress and talk about this publicly. The accounts are looked at by accounting firms. So, it's perfectly clear that the monies are being used in a very careful fashion. Mr. Walsh. Those were supplemental funds. Those were a supplement to the existing---- Mr. Schultz. That's correct. Dr. Friedman. That's correct, sir. Mr. Walsh. All right. And there was an agreement basically arrived at by the industry and the FDA that this was something that the industry supported, felt they could benefit from, and improved the time frames for approvals? Dr. Friedman. That's correct, sir. Mr. Walsh. Then it would seem to me that if we were going to do these user fees or regulatory taxes for other industries, you'd want to follow the same procedure; would you not? Dr. Friedman. Well, I think the question that you're asking is do we see ways in which we can improve performance in our product areas. We certainly are vigorously striving to do so. And to the extent that the resources provided move us in that direction, that's our intention. Mr. Walsh. My concern here is that in this period of fiscal restraint and a drive toward a balanced budget, that this would be, in the eyes of a skeptic, a budget gimmick. This is not really user fees or regulatory taxes. Well, they are indeed regulatory taxes. But it's just a supplement to your budget. It's a way to get more money into the budget without the general purpose tax base to derive it from. Dr. Friedman. We know that there are many parts of the government for which user fees have been proposed this year, in addition to ourselves. We know that this is not something that is being considered only for the Food and Drug Administration. Mr. Walsh. No. There are questions all across the federal budget. Dr. Friedman. One example is the Department of Transportation. You know about the USDA and others. To simply restate what I said earlier, I think that we looked very carefully at what a reasonable bottom line figure would be to allow us to do as much of our public health mission as we possibly can. I think how we arrive at that number is constantly a challenge for us. As you well appreciate, sir, each year we have slightly fewer FTEs than we did the year before. We've reduced our FTE about 2.5 percent per year for the last several years. We're committed to a smaller agency. Our effective discretionary funds have decreased because of inflation erosion. You, of course, recognize that. So, when we identify a figure it's not based upon an historic need. It's based upon a real recognition that we are trying to become more efficient and more effective with the dollars that we have. Mr. Walsh. In the Legislative Branch Appropriations Subcommittee, which I now will attempt to Chair, we've reduced our budget by over 10 percent in the last several years. Although, we might have trouble getting user fees for the services that we provide, we've shown some real leadership in reducing our staffs. And I think the people in general expect us all to do that. Dr. Friedman. Absolutely, sir. Mr. Walsh. Let me just---- Dr. Friedman. I hope I conveyed to you that we reduced by 2.5 percent per year. Mr. Walsh. Okay. Dr. Friedman. I didn't want you to think it was 2.5 percent overall. Mr. Walsh. Okay. You've made your point and I think it's a good one. Dr. Friedman. Thank you. Mr. Walsh. Let me just, if I could, Mr. Chairman, just pursue this with one of these fees. Can I do that? Mr. Skeen. Go ahead. user fees for food additive petitions Mr. Walsh. The FDA has proposed a $12.5 million regulatory fee for food additives. How did you arrive at that? And question number two, if you only reviewed 40 of these cases last year, and you only reviewed half that many this year, how do you know $12.5 million is enough? It would seem to me that it's probably more than would be required. Dr. Friedman. I'd like to have Mr. Byrd answer. Let me just point out that the number of food additive petitions that were acted upon was, I believe, about 90 Those were final actions taken. While 40 new petitions were coming in these old petitions were being acted upon. There was a net gain, if you will, a difference of 48 between receipts and the actions taken on the 88. That's a small technical detail. I'm really proud of this part of the center and I think they deserve credit for the efforts they've made. With respect to your other question though, sir, let me ask Mr. Byrd to please respond. user fee distribution Mr. Byrd. Thank you, Dr. Friedman. Let me first say that the user fees that were developed within FDA were done also with consultation with the Office of Management and Budget. We put together these user fees as our contribution to the President's five-year balanced budget initiative. The $131 million that was our share of filling the gap between reduction in our budget authority of $68 million and our increase in our program level. Our contribution to filling that gap was done in a way that we sought broad-based participation from segments of the industry. We were very sensitive to affecting the small businesses adversely or affecting any particular part of any segment of the industry adversely. So, looking at this broad-based approach to user fees, we developed a general understanding of the types of user fees that we were going to seek. This general application was about $47 million for foods; about $26 million for human drugs; about $45 million for medical devices; about $13 million for animal drugs; and about $2 million for biologics. We did that in the broadest sense. As we go down to the level of detail and to the $12.5 million that you're discussing, I don't want to suggest that there was a tremendous amount of precision in the $12.5 million number that we anticipated that we would get food additive petitions, applications from GRAS that generally recognizes safe color additives and then direct additives. We anticipated just in the broadest sense, how we would get that $12.5 million. Obviously, we intend to work with Congress and with industry to make this user fee program more specific. Mr. Walsh. Thank you. Mr. Chairman, I yield back. I'd just like to, for the record, say it just strikes me that this approach is a budget balancing approach. It's a budget gap filling approach as opposed to a provision of services that are derived from these fees. I yield back. Mr. Skeen. Thank you. Mr. Nethercutt. medical device user fees Mr. Nethercutt. Thank you, Mr. Chairman. Dr. Friedman and gentlemen, welcome. I want to follow-up on Jim's comments about user fees, especially as they relate to medical devices which is something that you called--I think it was in last year's or the year before testimony with me. I was involved in the follow-up to the 1976 Act with the first product development protocol through the Agency designed to provide fast relief, and approval or disapproval, fast decisions for small medical device companies, many of whom reside and are very much a part of the State of Washington's economy. So, I looked at your budget, and I just heard Mr. Byrd say that you're requesting $45 million in user fees for medical devices. That's $20 million more than last year. That is going to, I believe, in an attempt to supplement the lack of appropriations, I think it's going to do some harm to some small medical device manufacturers, again, that can bring good devices on the market and help public health. So, I'm wondering, how did you derive at this $20 million additional figure in terms of increasing the medical device user fee amount? What's the basis for it? Mr. Byrd. Again, Congressman Nethercutt, I don't want to give any sense of real precision to our methodology. We were trying to spread the costs of the user fee program over as large a base as possible. We recognize that the medical device industry was mostly small businesses. There are about 37,000 medical device establishments. And we were hoping that with a fee of about $500 per establishment we could obtain the $19.7 million that we referred to. But, again, we did this not in consultation with industry and not in consultation with Congress. We are willing to do that. We're looking at these user fees not as taxes, but as offsets against our operations. We feel that those industries benefit from our oversight and regulation, and because they benefit from our operations they should absorb at least some of our operational cost. That's the underlying philosophy of these user fees. Mr. Nethercutt. I don't dispute the philosophy. I'm not speaking for all medical device manufacturers. But I would imagine that many medical device manufacturers would say--fair, but don't diminish the service and raise the user fees if we're going to have a shorter turn around time for approval. You know, we're going to extend out now to more months than they should. And time is money in business. Then that's not a very good deal. It's costing more and performance less on the part of FDA. So, I think the challenge you all have, and certainly we do too, is to make sure that if the user fee concept is going to be in place that we at least get some corresponding beneficial performance on the part of the Agency. Mr. Byrd. I certainly agree. Mr. Nethercutt. Would you agree that that's the goal and that that's your objective? Dr. Friedman. I think it is, sir. I'm reluctant though to say that we could improve performance in all of these areas in all of these fees. I don't say that because I'm reluctant to improve performance. I'm just very concerned about the challenges that we're facing right now, irrespective of the user fee activity, the general principles that you've just articulated. We want to provide more efficient service without compromising the medical or scientific integrity of the process. It is what we have to do. In order to do that, even if we got this budget, which would be very important to us, we have some tremendous challenges to overcome. We're going to be working on that and doing that. I would say that the general hypothesis that if all of these user fees were instituted, we would have better performance in all of these areas. I think that's not likely to occur. And I have to be very honest with you, sir. youth tobacco prevention initiative Mr. Nethercutt. And I want your honesty. I want you to be frank on the record here. I guess that leads me then to my final comment as it relates to tobacco regulations. You're looking for $34 million more, and really a tremendous regulatory obligation. I'm no fan of smoking. I lost my dad to lung cancer. So, that's not an issue with me. But in terms of the efficiency of the Agency and trying to look at what you do and why you do it, and what you want to take on in more responsibility in a tough area, how do you justify that? Dr. Friedman. As you can imagine, sir, we've given considerable thought to this. Let me give you just a couple of observations and then I'll have Mr. Schultz or others give you theirs as well. No matter what sort of moral arithmetic you use, if you look critically and carefully at how we spend our dollars within the Agency, and you ask the question for an investment of, and in this case we're talking about $34 million, what would the potential gains be? The scale is so vastly weighted toward doing it that it seems very self-evident to some of us. There are more than 400,000 deaths and billions of dollars, $50 billion, lost in health care costs to the American public. If one were to take just a general societal view this is such a tiny investment. Since there are roughly a million new smokers among children each year. If one simply divided and said $34 for each one of these, I just can't think of a better investment. You're right, and I accept the challenge that we should look critically and coldly at each program we have and ask the question, what does the American public gain from this; not is this an interesting program, or is there a lot of popular support for it? What does the American public gain from this. It just seems so obvious to us that not just children but our entire country benefits from that. That's my answer. I'll let Bill. Mr. Schultz. Let me just make two points. Mr. Nethercutt. Certainly. Mr. Schultz. We are the Food and Drug Administration. Mr. Nethercutt. Sure. Mr. Schultz. And what we found in our investigation is that nicotine in cigarettes is a classic drug and an addictive drug. And so it falls in our view squarely within our responsibility. The second point is that we've designed the regulation to be very clear which we think will mean that we need minimal resources to actually implement it. For example, a billboard is either within 1,000 feet of a school or a playground or it is not. A vending machine is either in the store or it is not. All of the rules, with the exception of the one that goes into effect tomorrow, have that kind of clarity. The hardest piece is the piece that every state already has a law about which is enforcing the rule that prohibits retailers from selling to kids. And that's really the challenge. Under the approach that we're taking, I think the resources are pretty modest compared to the task but we think we can do it, to work with the existing state programs and to take advantage of a sort of renewed enthusiasm to enforce old laws. Mr. Nethercutt. Well, I would hope that you would. And Doctor, you can make the same argument about diabetes. I mean, we can save billions of dollars in health care costs if we can educate the population to prevent the complications of diabetes. It's 27 cents out of every Medicare dollar is spent on the complications and the consequences of diabetes. I don't disagree with you on tobacco. But I also think you need to make sure--we ought to have a medical device that's approved, and I think there are some within your agency, that will allow diabetics to accurately test their blood glucose levels in a non-invasive way. That would help millions of diabetics. And so I understand the balancing of the equity. I'm not here to argue with you about it. Dr. Friedman. No. No. Mr. Nethercutt. We can say that about a lot of diseases that need attention from the Federal Government. Dr. Friedman. I think your point is very well-made. We must have the broadest possible view that there aren't just certain diseases or certain conditions that are selective ones. But we're here to serve all the citizens. And I accept that. I would make the same argument about food safety where I think there is a growing problem that we need to pay very close attention to. If you look at the investment is it likely that our citizens will gain substantially? I believe that a very, very convincing case can be made. Mr. Nethercutt. Thank you. Thank you, Mr. Chairman. Mr. Skeen. Mr. Bonilla. Mr. Bonilla. Thank you, Mr. Chairman. Dr. Friedman, I'm going to continue the questioning along the lines as Mr. Nethercutt. Dr. Friedman. Please. tobacco regulation Mr. Bonilla. Let me say that I, for the record, don't approve of and hope that the laws are enforced to keep minors from smoking. So, we're not in disagreement about that. I am sometimes concerned about whether or not ideas for solutions are indeed solutions. I don't want to speak for Mr. Nethercutt, but maybe we're coming from the same page. In line with the Synar Amendment, I'm also on the Subcommittee on Labor, HHS, Education. I'm concerned about whether or not there is overlap between the laws in place. The Synar Amendment force states to enforce the law, to have inspections of stores; to do a lot of things that I think are good. I'm asking you.--Do you think there are so don't you think there are enough regulations already out there? And what we're talking about now is trying to change behavior and perhaps substitute another federal regulation for the responsibility of a mother and father to keep their children from smoking. I feel it's my responsibility to keep my kids from smoking. And I aim to do that. And I don't know that a federal regulation, when we already have state laws, local laws, and cities that want to ban smoking in restaurants--and that's their business and that's great.--But I'm just concerned if this is a solution that really truly is a solution. Dr. Friedman. You ask at least two very important questions. Let me try and, with Mr. Schultz or others, respond to both those. With respect to the Synar Amendment, we've considered this very carefully. I'm convinced, at least at this point, that what we're proposing is really complementary. You asked a very reasonable question. Are these overlapping? Is this a duplication? Is this a redundancy that's unnecessary or expensive? This is a very appropriate question to ask. We see these as being complementary with the Synar activities doing part of the job, but that our proposal really deals with other aspects that aren't covered at all and the two really are complementary. Mr. Schultz or others can speak in more detail about exactly the way in which they're complementary. Mr. Schultz. The one point I would make is there are two sides to this. There is supply and demand. The supply side is retailers selling cigarettes to kids, or companies giving them away, or vending machines where it's very easy. The Synar Program gets at that issue. I think, as Dr. Friedman said, what we're doing complements it. Together, they'll be stronger. But the other half of it is demand. And that is the very effective appeal of advertising that gets kids to want cigarettes and gets them to try the first time. What we've found is they get addicted and they can't stop. That can only be done through the FDA regulation. The Synar approach doesn't touch that. Mr. Bonilla. I guess my concern is maybe more esoteric perhaps in whether or not the Federal Government can substitute for parental responsibility and behavior within homes and neighborhoods. I'm not convinced that that's the case. Theoretically, let me ask you a loaded question here. If we had ten more regulations that you could propose today and we pass tomorrow and $10 billion to add new programs like this, would that eliminate smoking among adolescents? Mr. Schultz. Our goal is in the next seven years to reduce smoking by adolescents by 50 percent. Today, everyday, 3,000 kids start smoking. And we think by limiting the abilities of the companies to appeal to kids and by basically enforcing what are already state laws, but making them federal laws so that retailers aren't selling to kids, we can make a very significant impact on that 3,000 a day. But you're absolutely right. This cannot be dealt with unless the schools are involved, the parents are involved, the community is involved. It's a huge task, but it's a huge opportunity. It is such a large public health problem, that even if we make small progress, it will overwhelm many of the other public health initiatives that we've taken. Mr. Bonilla. The figure is profound that you state about 3,000 young people a day. How do you know that? Mr. Schultz. This is based on surveys that the Centers for Disease Control and others have done. It's about a million kids year start smoking; 3,000 every day. The other half of that figure, which is even more profound, is that a third of them, 1,000 of them, will die as a result of diseases related to their smoking. They'll die early. medical device user fees Mr. Bonilla. I have more questions in this area, but I'd like to ask one about user fees if I have time left, Chairman? Mr. Skeen. Go right ahead. Mr. Bonilla. All right. Briefly, then let's talk about an example here that I think Mr. Nethercutt touched on earlier. I was taking a call at the time. The user fees proposed for medical device approval total $44.7 million which is over one- third of the total new user fees. The amount requested in user fees is about $5.2 million greater than the loss in budget authority. FDA budget justification proposes this amount to be targeted to the speeding up of the pre-market review process. Yet, your budget justification proposes no increase in full-time employees to review applications. So, my question is, why is this? Isn't the need for additional reviewers one of the reasons for imposing user fees in the first place? Dr. Friedman. Let me begin with the last part of your question if I may. If you look at successful user fee programs and, again, the prescription drug program is the one that springs to mind. An important part of that program certainly was the recruitment and retention of more than 600 new staff. That can certainly be a very important part of the program. But we are looking at not simply doing the same work faster, but in fact re-engineering it and doing it better by a variety of means. Certainly, there are information technologies that need to be brought to bear on these things. We're trying to move to a thoroughly paperless program and very much want to achieve that, not just in our drug and biological area, but in device areas as well. If you think about opportunities for having certain parts of our activities under contract mechanisms, these are all goals that we want to explore in order to speed up the process. So, that while you're quite right that in some areas recruitment of new staff is an important way to speed it up, we think there are other important things that can be done that will improve the process that don't require the addition of new staff. Mr. Bonilla. Thank you, very much Dr. Friedman. Dr. Friedman. Thank you. Mr. Bonilla. Thank you, Mr. Chairman. tobacco Mr. Skeen. We've been so involved with tobacco here it's almost become habitual. Let me ask you, Doctor, one question on the reality of timing in this thing. We know that you're in the courts with this situation now. What do we do about mark-up? I'm sure it won't be resolved before the mark-up time. What does this do with the whole equation? Dr. Friedman. Sir, we're very confident in the merits of our case. Mr. Skeen. So, you've got a good case for it. Dr. Friedman. And that certainly influences our thinking in this regard. Mr. Schultz has followed the legal aspects very carefully and he can give you more details. Mr. Skeen. Well, I'd appreciate that because that has a lot to do with the time. Mr. Schultz. I think the important detail is that when the tobacco companies filed the lawsuit they didn't ask for what's called a stay. In other words, they did not formally go into court and say put the regulation on hold while we resolve the lawsuit. So, that means the Agency is free and obligated to go ahead and implement the regulation. There will at some point be a decision. But I think the important thing to understand is that decision could do any number of things. The Court could or could not stay the implementation of the regulation. For example, it could end up that we're told to go ahead with the retailer part of it, which is the major effort for this $34 million. That's where the major expense is, not for another part. We think it's very likely we'd be going ahead with the whole thing. So, in a sense, this is no different from any number of other programs which the Agency goes ahead with and there is litigation over. We think that the only appropriate way to handle this, particularly given the importance of it, is to go ahead and implement it beginning tomorrow. Mr. Skeen. Then I'll ask the question once again. What are you going to use for money? Where are you going to fund it from? Dr. Friedman. For this year, the initial phase of it mostly has to do with educating retailers about what the rules are. That will then have to be followed with inspections and visits and a real enforcement program which is what the principal role of the request is for next year. So, we're very dependent on you and on the appropriation to be able to follow through with this. Mr. Skeen. You sure have picked on a weak link here. Dr. Friedman. No, sir. We consider you the strongest link. Mr. Skeen. I really had to work on this. Since discussing all of this tobacco it is almost becoming habitual. Dr. Friedman. This year the costs will be relatively modest to do this. Mr. Skeen. You can handle it with your present budget. Dr. Friedman. Yes, sir. Mr. Skeen. That's what I'm trying to get at. Dr. Friedman. Yes, sir. It will take a modest amount of money which we have already identified and a number of staff who are currently engaged in this. The ramp up for the more effective activities next year will require this. We're talking roughly in the range of $4 million this year. Mr. Skeen. This year for educational efforts. Dr. Friedman. $4.5 million. Mr. Skeen. Mr. Schultz was talking about it. This is the educational aspect of it. Dr. Friedman. Education and the early phases of enforcement; principally contracting with a selected number of states to begin the enforcement later in the year. Mr. Skeen. Thank you. I appreciate your response to that. Mr. Fazio. genetically altered food products Mr. Fazio. Thank you, Mr. Chairman. A couple of years ago a small business in my district, Calgene, now a subsidiary of Monsanto, promoted the Flavor-Saver Tomato over a lengthy period of time. It was ultimately approved. But it was a drawn out process because I think it was your first exposure to genetically altered food products. I've become aware recently of EPA getting into this whole area by announcing last fall some additional regulations that they would like to impose after another law that they have in their purview, and I think also in their implementation of the bill that eliminated the Delaney clause, the Food Safety Act that we passed at the end of last session. I'm beginning to be troubled by the multiplicity of bureaucratic stopping points, perhaps, overlapping regulatory responsibility, in the area, for example, dealing with plant breeding. I'm very much interested in integrated pest management. I want to reduce pesticide applications. So, I think one of the most effective things we can do is to breed resistant plants to many of the pests that we now use chemicals to deal with. Are you aware of these regulations? And how do they interact with and overlap with what you folks are doing? My sense is we're not going to gain as much as we're simply going to have a lot more check points on the process of trying to bring these products to the market. Dr. Friedman. Let me try. I think it's confusing, but we try to and make the lines very clear. Mr. Fazio. Well, I hope you can help me. Dr. Friedman. I want to try. EPA has responsibility for issuing what we call pesticide tolerances. In other words, what is the amount of the pesticide that's allowable on the food, and how much of the pesticide can a farmer use. So, that's EPA's job. And even though a part of that is in the Food, Drug, and Cosmetic Act, that's EPA. FDA has the responsibility for enforcing the tolerances. So, we go and actually check it. But they set the tolerances. Now when it comes to the breeding, if the genetic alteration rises to the level where it's a food additive, then they come to FDA. That's not a pesticide issue. Anybody that wants to market a food additive that's new would come to us for approval. So, I think the lines are fairly clear. I'm not saying that for a company out there it's easy. Mr. Fazio. Well, those are often the people I hear from. Dr. Friedman. I know. Mr. Fazio. Go ahead. Dr. Friedman. There is something really important about what you said which is if you think about what the challenges are that we face, one of the most fundamental challenges is just keeping up with new scientific information. And you're quite right when you have a first product in an area you are establishing the intellectual framework and the regulatory framework. You're pushing the boundaries of what was considered the usual interpretation of regulations to see whether those interpretations are still timely and reasonable with these new products. Mr. Fazio. Sure. Dr. Friedman. And so this is an enormously difficult sort of situation. As we deal with each of these technologies, if you will, we become faster with them. And the time to review them and to interact with the companies becomes much shorter and much more satisfactory. I think there is evidence of that in this very area that you're talking about in terms of genetically altered foods. Mr. Fazio. I used to tell my friends from Calgene just that. You know, don't worry. You're creating the slip stream for everybody else. And they're all going to be better off because of your misery. And of course then they were swallowed up by Monsanto because probably it took a long time to bring this product to market. That may not be a bad thing in the long-run. We have a lot of small start-up companies that are more than happy to be bought out. It does make it more difficult for them perhaps to get into the business flow and market a product. Whereas others have more staying power and ability to absorb lengthy time frames. Perhaps it would have been better for a large corporation to bring the first application. Dr. Friedman. The problem for us is that these are very important products which affect large portions of the population in ways that we can't predict. Our threshold of being careful for the public is one of the things that influences how carefully things are studied, and documented, and so forth. So, it's really sometimes not so much the size of the company as the amount of scientific information that we have to operate with. Mr. Fazio. But you have seen these new regulations from EPA and they're not troublesome? You have no problem with them expanding their purview into plant breeding which has, you know, on the surface nothing to do with the introduction of the pesticide. Dr. Friedman. Well, I think we ought to go look at that. To the extent it is pesticides, then that's clearly in their jurisdiction. Mr. Fazio. Well, it doesn't seem to be. Dr. Friedman. Well, maybe we should look into that. Mr. Fazio. We have, I think, 11 scientific societies which say this is simply not acceptable science for EPA, given the current law that they have in their purview to take this additional responsibility on. So, I would like, for the record, any further thought that you might perhaps be able to give the committee as to how you feel. We may have duplicative responsibility here. Dr. Friedman. We will look at that, sir. [The information follows:] The FDA and the EPA have worked together to clarify for industry and the public how each agency will exercise its statutory authority to avoid duplication of oversight of food crops, including crops developed through the newer methods of genetic modification. Frequently, issues may be raised regarding a product that requires evaluation by both the EPA and the FDA. However, the agencies evaluate different issues under their respective statutes. Under FIFRA, the EPA has authority to register pesticides used on raw agricultural products, and the reorganization plan of 1970 granted to the EPA the authority under the FFDCA to regulate pesticide residues in foods and in animal feeds. Thus, the EPA has authority to evaluate safety and establish tolerances (or exemptions from the need for a tolerance) for pesticides in food. Thus, if a crop is developed through genetic modification to produce its own pesticide, the pesticide substance (not the food) falls under EPA oversight; nonpesticide substances added to food through genetic modification fall under the FDA's authority, as is the case for other nonpesticide substances added to food. The FDA is also responsible for any food safety questions beyond those associated with the pesticide, such as questions that may be raised as a result of unexpected or unintended compositional changes. For example, the EPA evaluates the safety of the B.t. toxin (a protein) in insect protected corn and registers the B.t. toxin as a pesticide. The corn per se when used as animal feed or when used to produce corn sweeteners falls under the FDA's authority. Similarly, in the case of virus-protected squash, the EPA evaluates the safety of the pesticide substance, the viral protein expressed in the squash; the squash as food falls under the FDA's authority. This jurisdictional separation between the pesticide substance and the food or feed per se is reflected in the FDA's 1992 statement of policy for foods derived from new plant varieties: ``FDA and EPA are agreed that substances that are pesticides as defined by FIFRA (7 U.S.C. section 136(u)) are subject to EPA's regulatory authority. The agencies also agreed that FDA's authority under the Federal Food, Drug, and Cosmetic Act (the act) extends to any nonpesticide substance that may be introduced into a new plant variety and that is expected to become a component of food'' (Reference: Federal Register, May 29, 1992; 57 FR 22984 at 23005). When developers consult with the FDA on scientific (e.g. nutritional equivalence) and regulatory issues (e.g. appropriate labeling) regarding a crop that has been modified to produce a pesticide substance, the FDA does not evaluate the safety or regulatory status of the pesticide substance. Rather, the industry-FDA consultation is focused on the nutritional aspects of the food or feed and other nonpesticide issues. The Congress passed the Food Quality Protection Act last year amending pesticide law. We are not aware of any amendments in the new legislation that would affect the jurisdictional responsibility for plant pesticides. Therefore, the FDA believes that the EPA's proposed rule regarding plant pesticides is appropriate in terms of jurisdiction. prescription drug labeling Mr. Fazio. I just wanted to ask something that might be deemed a more positive approach than the three I've taken so far. I am new on the committee. I'll eventually be cooperative with everybody else. You know, I've got to get off my frustrations. But this one seems to be something you're about to embark on that impresses me and that is the attempt to simplify labels on prescription drugs. Could you indicate where you are in the process of bringing that to the public? And assess the cost to the industry that might be involved here. I understand it's rather modest. Dr. Friedman. We've just announced the issuance of the proposed rule. We estimate the cost is $12 million to the industry and that's because we put a long lead time in. And they change the labels anyway periodically. We've worked very closely with the Trade Association for the non-prescription drug industry, which is quite enthusiastic about the idea of having a single rule that's nationwide to simplify the label so they don't have to fight this battle in every state. Mr. Fazio. So, drug interactions with non-prescription drugs will be far more easily understood by the general public. Mr. Schultz. It will be much easier to see. It will be clearer. There will be fewer words. We think this will do for over-the-counter drugs what the Agency and Congress did for the food label a number of years ago. Mr. Fazio. Just a last follow-up on this, Mr. Chairman and then I'll hold off. I understand there are some food products that nutritionists have been telling us increasingly interact badly with drugs. Are you looking at, for example, some day requiring grapefruit cans to say don't drink this in interaction with some prescription or non-prescription drug or visa versa? Because I understand these are significant issues. Dr. Friedman. I was going to say that you're absolutely right in saying that there are certain medications, especially rays medications that are influenced by, as you point out, grapefruit juice. I think this is more properly the domain for the medical product label rather than the food product label. Mr. Fazio. Do you see that coming about in a very meaningful, readable, understandable way, not on the fourth page of the thing we throw away? Dr. Friedman. May I change the venue just a little bit in that. You see, there is a lot of information that is useful to the individual who takes a prescription medication. And as we become more knowledgeable, that information grows, not just in terms of interactions with other medications, interactions with foods, with activities, and so forth. This has been something of great importance to the Agency. There has been quite a discussion, again, involving pharmacists, involving their organizations, the patient and public communities, and others asking the question, how do you get the best information to an individual who is getting a prescription from the drug store? We think this is a terribly important area. It will be literally impossible to put all of the warnings, and all of the interactions, and all of the information you might want to have on a small bottle. That just isn't realistic or reasonable. It is, however, reasonable to provide good, readable, clear information in a format that's tailored for that audience. That's really what our MEDGUIDE proposals are doing. And that's something that we're going to be tracking over the next several years working with the appropriate industries to come up with the best information. We have expectations that by early in the next millennia there will be 90 percent or more of individuals who receive their prescriptions getting this sort of good information. We have specific time lines and expectation. Mr. Fazio. Thank you. Mr. Skeen. I want to tell you that ABC did a great job this morning because they are announcing the new readable labels. Mr. Serrano. Mr. Serrano. Mr. Chairman, let me apologize for being late. At the request of the Caucus Chairman I was participating in a special order on education and children on the House Floor. Mr. Skeen. It sounds real good. drug review Mr. Serrano. That's why I'm late. I was wondering, when you were talking about not mixing grapefruit juice with anything else, if you were referring to the Rum industry, that would probably advertise that you should do it only with Coca-Cola, but not so. Gentlemen, there is something I'm interested in that you can help me out with. How does a new medication, a new drug, get to you for approval? Is it that a manufacturer wants to introduce that? Assume there is something--and I'm speaking specifically about situations where there might be something in another country that people are using or testing and we are not aware of if yet in this country. How does that come to you? Is it a manufacturer introducing it? Is it the medical and the scientific community coming to you? How do you get it? Dr. Friedman. The most common way in which that is done is for the manufacturer, either the manufacturer in that foreign country or some subsidiary or licensee in the United States to come to us with that. As you've recognized, the pharmaceutical industry is really a global one at this point. And there are so many interactions and markets are so freely flowing one into the other that there is a great deal of communication. I'm not sure exactly the direction in which your question is going. But let me provide you with a piece of information that you might find interesting and then please ask me more. Last spring the President announced some cancer initiatives along with Dr. Kessler and the Secretary. One of the portions of those provisions was the recognition that although the vast majority of effective medications were available in the United States, there were examples of medications available in other countries that were not available in the United States. What we proposed at that time and what we've been following up on is that when we see a product approved in another country that hasn't been submitted to us, and there has been no discussion whatsoever, we would actively go to the company, write them a letter and solicit their interest, and say we understand that you've been approved in another country. And we want to make sure that you understand that we would be very happy to work with you to have the clinical trials either performed or evaluated with the basic and the applied data looked at. Then if the product is a truly valuable one we have a commitment to moving that forward. It would be wrong for me to suggest that we do that uniformly in all drug areas. We do not, sir. But we are very interested in doing that. It really is the companies who are the ones who stimulate that activity usually. Mr. Serrano. I see. One of the reasons, probably the specific reason, why I was asking you is that I imagine that as a federal agency you have to deal with all existing federal laws that deal with our relationships with other countries. So, for instance--my specific interest--if the Cuban society has created medications and drug therapy that are available in Europe, but not available to us because of our lack of a government-to-government relationship, you would not be empowered to go to those European countries and invite them to bring that in here because somehow that would run into existing laws that talk about how we deal with the Government of Cuba. Am I correct in that? Dr. Friedman. I'm not sure I understand your question and I want to be very careful about this. Mr. Serrano. The country of Cuba is known to produce at this moment medication that deals with everything from cholesterol to high blood pressure, which we have not taken advantage of (assuming this is all true that we hear) because we don't have any official relationship with Cuba. And I'm an advocate, as everyone on this panel knows, for relationships starting tomorrow morning or this afternoon, in baseball and everything else. But in Europe and in other places, either people are coming to Cuba for treatment or these medications are being used and produced, if you will, in these foreign countries. We have a Cuban embargo law. We have laws that say do not deal with Cuba at all. Do not take their bananas or their baseball players or anything from them except anyone who wants to defect and beat up on the government. Are you allowed to go and speak to---- Dr. Friedman. I don't know the answer to that question. I'm happily turning to other thoughtful people from the Agency who are with me today. Anyone? [No response.] Dr. Friedman. May I say then that we will consider that. I don't know the answer. I have a feeling it is a Department of Commerce or a State Department issue. Mr. Serrano. I really did want to know, but I bet you that since I just put it on the air, there will be a bill introduced tomorrow saying you cannot ask any foreign nation to bring in here anything that was produced in Cuba, unless it bears a label denouncing the Cuban Government. I think that there is interest in that in many communities through this country because there is medication available and people travel to Cuba every day. But I don't want you to in any way to feel uneasy that you may not know the answer. That is the gist of our relationship with that island; that we don't know answers to why we do certain things and why things happen in a certain way. home testing Let me move on to another subject. In my community in the South Bronx, unfortunately, HIV is a serious issue, as it is throughout this country. And I know that there has been some hope in terms of drug therapy. Multi-drug therapy has been very encouraging. Is there something in the pipeline that indicates that we're going more and more in that direction? Secondly, as an added question, with the issue of home testing kits, the whole issue arose of having someone over the phone tell you, yes, you're infected. In approving these kinds of kits, did people take into consideration the counseling that should go along with that kind of a statement rather than just the cold statement over the telephone? Dr. Friedman. I'd very much like to ask Deputy Commissioner Pendergast to deal with the second part of your question. The first part had to do with hopes and opportunities for the new therapies. As you know the agency, under Dr. Kessler, has been extremely aggressive about reviewing and approving new products. And we're gratified with the progress, albeit not complete and not satisfactory, but progress that's been made to-date. We're very committed to looking at new products, new techniques. We want to work with every conceivable methodology from vaccines to other novel kinds of antiviral medications. Our division that looks at this in the drug program and in our biologics experts are very creative. And we work very closely together to try and do that. I'm careful not to promise something there because this is a really formidable problem. But the Agency has demonstrated in the past a real interest in commitment in this area. The second question you asked though had to do with how we deal with the very sensitive area of informing patients. Ms. Pendergast. Ms. Pendergast. We took quite seriously the question of whether or not people should learn over the phone that they had a very serious if not fatal disease. We studied the question and turned to the medical profession, and other public health service agencies to ascertain whether a system could be devised that people could sensitively learn over the phone this information, get referred to care givers in their local community so they would have someone to turn to. And also to understand the consequences or the meaning of the information they were getting. A lot of study went into the question of how precisely to do the counseling program; how best to communicate the news. And we determined that on balance it was something that could be done. Since the time the first products were approved patients who were some of the early people involved in home testing have been followed and we've found, to our satisfaction, that it is a sensible way of approaching the issue. Mr. Serrano. Thank you. Mr. Skeen. Mr. Walsh. Mr. Walsh. Thank you, Mr. Chairman. I'm not sure what drug my friend was referring to, but if you have proof that Cuban cigars will reduce cholesterol, you might want to hand it over to the FDA. They like to embark on reducing---- Mr. Serrano. If that's the case, then I'll tell you first. Mr. Walsh. And can you get me some of that---- Mr. Serrano. That's right. And we'll do it at Yankee Stadium while watching Cuban ball players. Mr. Skeen. It's on your time. user fees Mr. Walsh. I'd watch the Yankees on my time any time. Back to the user fees for a second, Mr. Byrd mentioned that you had met for the process of putting this budget together on the user fees. You had met with OMB. Whose idea was this, FDA's or OMB's? Mr. Williams. As everyone has pointed out, a part of these proposals are designed as one of many strategies in the President's budget to reach balance by the year 2002. In the Department of Health and Human Services outside of FDA, for example, we have proposals for the Medicare Program that will save $100 billion over the five-year period of the budget. That's on the entitlement side of the budget. It's the biggest part of the federal budget. It's the fastest growing part of the federal budget. On the discretionary side of the budget, strategies are more difficult because there are caps in the discretionary spending. So, finding ways to save money and still provide services under the discretionary is something that people have sought ways to do. Mr. Walsh. This is a budget-driven decision. Mr. Williams. User fees is one way to do that under the discretionary side of the budget. It serves clearly a budget objective, balancing the budget. It's a way to try to do it without cutting the budget, without reducing the amount of resources available for any given service. It's a way of maintaining those resources but not charging all of them to the Federal Government, sharing some of those costs with, in this case, the industries that we have a relationship with, that the government has a relationship with. dr. burzynski Mr. Walsh. Okay. Thank you. This case I'd like to mention to you was brought to me by a constituent. You may or may not be aware of the specifics of the case. This individual had a relative child, an infant, with a very serious case of cancer. She asked me if I had ever heard of a Dr. Burzynski. And I hadn't. So, she told me that there was some understanding that this doctor had developed an approach at treating cancer. It was very successful, although not blessed by the establishment so to speak. So, she asked me and I volunteered to see if I could locate him. So, I did and found out that he is involved in a lawsuit with the FDA. And I just wanted to know if you could explain to me why the FDA would sue this individual, on what grounds, and what's the status of the case right now. Dr. Friedman. I would ask Ms. Porter if she would please join us at the table. A trial has just been completed. The jury is still considering what decision they will make. I can't give you any closure as to what actually is going on. The distinction I would like to draw--and I certainly want our General Counsel to answer your question more fully--the distinction is what we don't know about these products that Dr. Burzynski has been using. I think we all take a very pragmatic view which is whatever product is effective and is acceptably safe for patients should be provided. And that's based just on the scientific data. Our requirements for any individual like Dr. Burzynski are exactly the same as they would be for any company or any other academic. The standards, if you will, are blind to the individual or the company submitting them. The standards are simply for serious diseases like cancer, is the intervention an effective one, for what kind of patients, and under what circumstances. I feel very strongly about that because my background is as a cancer doctor. And I've had too many patients where I wasn't able to do anything satisfactory or meaningful for them. And so we can't afford to not look at anything for which there is a scientific data base. Having said that as a general background, I would ask our General Counsel to please give you some information about why the case was brought. Ms. Porter. As Dr. Friedman has explained, there have been criminal proceedings brought against Dr. Burzynski for his repeated failure to comply with the existing federal regulations for studying unapproved new drugs. And that was the basis of the indictment on which Dr. Burzynski has been tried and the case is now pending with the jury. Mr. Walsh. Would the FDA bring this suit themselves or would an individual sue for malpractice? How would this come about? Ms. Porter. Well, again, this case has been brought by the United States Department of Justice. It is being prosecuted by the U.S. Attorney's Office in Houston. Mr. Walsh. Who brought the case to the Justice Department? Ms. Porter. FDA eventually referred the matter. Dr. Friedman. That's correct. Mr. Walsh. How long has he been practicing this procedure, or this practice, or using these drugs? Ms. Porter. Well, he has been for at least ten years violating an injunction that was initially entered against him for providing these drugs on an unapproved basis without complying with the FDA regulations. So, it's been going on for some time, but the U.S. Government's consistent position has been that it has not been in compliance with existing requirements. Mr. Walsh. At any time in this ten years has the Food and Drug Administration looked at the safety and efficacy of these drugs that he's using? Dr. Friedman. I guess the most regrettable thing from my point of view is that there have apparently been thousands of patients treated by Dr. Burzynski. And there has been virtually no formal data collected or submitted to us. I'm balancing two concerns here. Let me tell you what those two concerns are. I care very much about the individual patients. Obviously, individual patients should get the very best. I also care about all the patients with that disease either today or in the future. And so you want to do the best by both of those groups. I think what's regrettable is over all these years and these thousands of patients, Dr. Burzynski has never collected any of the data or presented any of the data in a way that allows us to make a judgment that this might work in this kind of tumor or it might work in this sort of a situation. And so we simply don't know at this time. And I have a very open mind about this that maybe this technique is valuable for certain individuals or maybe it's not valuable for anyone. But we simply don't know. Mr. Walsh. Obviously he's concerned about, I think it's safe to assume, he's just as concerned about these individuals as you or I would be. Was there an attempt to work with him to document the cases, the degree of success, or the reaction to these chemicals? Dr. Friedman. There certainly have been more recently than in the past. But there certainly have been very vigorous attempts, long conversations, long exchanges of correspondence to try and gather the sort of information that would allow a practicing physician and a suffering patient to make an informed choice. Mr. Walsh. Lastly, what is the question that the jury will decide upon? Dr. Friedman. Margaret, may I ask you to respond. Ms. Porter. The jury is deliberating the multiple-count indictment which focuses on mail fraud and numerous introductions into interstate commerce of unapproved new drugs. That is, Dr. Burzynski's failure to comply with the investigation on new drug provisions, as well as a contempt count for his failure to comply with the earlier civil injunction that was entered against him. And that is what the jury is currently deliberating on. Mr. Walsh. If he were to be acquitted, and let's say for a second that he's acquitted because the jury thinks that what he's doing is worthwhile even though it may not be scientifically acceptable. For the sake of argument, what do you do then? Do you go back after him or do you start trying to figure out whether these drugs work or not? Dr. Friedman. I think it wouldn't be very useful to think of all the different hypotheticals that could be. But let me deal with one part of what you've said which is just to reinforce the idea that what we should be concerned about is whether a product, in this case Dr. Burzynski's product, is an effective product and can be prescribed in an acceptably safe fashion. That's going to be our enduring interest in this, no matter what kind of legal activity occurs. I just don't think it's very valuable for us to think about all the different hypotheticals that could occur. But our interest is helping to identify, for health practitioners and for patients, effective interventions. Mr. Walsh. I'm going to leave it at that. Thank you. Dr. Friedman. Thank you. Mr. Skeen. Ms. DeLauro. youth tobacco prevention initiative Ms. DeLauro. Thank you, Mr. Chairman. I wanted to make one comment and ask one question. The comment goes back to the tobacco issue. I concur with the colleague who earlier said that parental responsibility is a very important role in what youngsters are doing with regard to smoking. I will just say that I have found it almost exhilarating to walk into classrooms where today the force of what youngsters are understanding or learning is having a profound effect on whether or not their parents or their grandparents are smoking. I mean they are--our young people are carrying this issue in the same way and in a similar vein that they did with the environment some years ago. I talked to my son who was at my shoulder every moment making sure that I was recycling everything and doing what I needed to do to be environmentally correct. I find fourth graders, fourth graders--I was with two groups last week--are setting the example for their parents which I think is very powerful. As we've done in other areas-- we have provided parents with an assist, if you will, against a barrage and millions of dollars of advertising which kids are the recipients of. We've done this with school uniforms. We are trying to help families. We are trying to help them make their way. I view this in looking at the millions of dollars that are being used in terms of advertising with our youngsters. With your statistics, we've got smoking rates of eighth graders increased 30 percent in three years. We have some proven facts of what is going on with our young people. We truly need to assist parents in that issue of responsibility and to make sure we are there walking with them hand-in-hand so that what happens with the next generation of kids is not what's happened with their parents and with their grandparents. Dr. Friedman. Can we ask Mitch Zeller who is the Associate Commissioner in charge of implementing the rule to explain how our program will coordinate with those kinds of efforts. Mr. Zeller. First, let me start by acknowledging that I was in Ms. DeLauro's district in September at a very successful ``Kick Butts'' event and felt the energy of those sixth, seventh, and eighth graders that have made the commitment to be role models for younger kids. They've made the decision not to smoke and are reaching out to the kids that are very vulnerable to try to spread the word. The problem today is that the messages that we're sending as parents to our kids not to smoke are bombarded by the billions of dollars of advertising and marketing and promotion that kids are exposed to wherever they go; in the home and in the magazines that are laying around on the way to school, on the billboards, on the T-shirts, on the hats, in the stores where there is over $1 billion worth of in-store promotion. And what we've tried to do is draw the line in a way that will limit the appeal and the imagery of that promotion, make it harder for kids to get their hands on the products in the first place through the provisions that go into effect starting on Friday. As a tool, as a series of tools that will be used at the community level, because this is a problem that exists at the community level. There are a half a million retailers that sell tobacco. And when all is said and done about the FDA Tobacco Program, it's a rule that's two pages long. After the 700,000 comments, the litigation, and everything it comes down to a two-page rule. And it's going to be up to everybody else to use the tools in those rules so that we can change the landscape by which the products are sold and marketed so that we can be in place as a public health agency with a commitment to protecting kids, to help the parents, to help the communities, to help the health educators at the community level do their job and make their job easier; working with Synar, working with our colleagues at the state and local level to make it happen. taxol Ms. DeLauro. If I can, just very quickly. The issue of taxol is one that I'm particularly interested in. I've been impressed by the effectiveness of taxol as a cancer-fighting drug. But we all know how expensive it is to get it from the Pacific Yew tree. So, I just wanted to have you comment on efforts to produce taxol through other means and what the status of that is. Dr. Friedman. The incredible achievement of moving from a system where whole trees had to be sacrificed just in order to get the bark, which was not only environmentally inefficient, but very expensive. Moving from that to a semi-synthetic program where trees are not cut down, but the needles are harvested was a very substantial achievement. There a number of scientific articles about other ways in which to produce taxol. And there is a considerable amount of excitement in that area. This is a family of compounds, taxol which is made by Bristol-Meyers-Squibb and taxotere that's made by Rhone-Poulenc. This is a very important family of cancer products, the breakthroughs, whether it's in terms of botany or cell biology, being able to produce it more cheaply is something that's being looked at now. That's a question--having said that which is sort of general background, and is really a question that's sort of more appropriate for the producers, for the drug companies than it is for us. Our position would be that if the product is chemically identical to the parent compound from wherever it was derived wholly synthetically or wholly naturally, this would be acceptable to us as long as the chemical standards and other sorts of pharmacologic standards remain the same. Ms. DeLauro. Thank you. Thank you, Mr. Chairman. Mr. Skeen. I want to thank you once again, Dr. Friedman and the whole group with you. You've done a masterful job of covering the issues and we appreciate you being up here. We're going to try to work with you the best way we know how, despite some differences about user fees. Dr. Friedman. Thank you, sir. We appreciate it very much. Mr. Skeen. Thank you. We're adjourned. [The following questions were submitted to be answered for the record:] Tobacco Mr. Skeen. Let me just start with the big issue--tobacco. Everybody knows you are in court related to your stance on tobacco regulation. I believe no one can argue with the premise that kids should not smoke or use tobacco products, but there sure is consternation over whether the Food and Drug Administration is the right regulator or not. Let's start with what is going on in the court case. Bring us up to date on what has transpired so far. When does the judge expect to rule? Response. I'll be happy to bring you up to date on the court case. Four lawsuits were filed in the Middle District of North Carolina, Greensboro, relating to FDA's initiative concerning cigarette and smokeless tobacco. These cases were Coyne Beahm v. FDA, American Advertising Federation v. Kessler, United States Tobacco Company v. FDA, and National Association of Convenience Stores v. Kessler. On November 21, 1995, the court consolidated the cases. Originally, the complaints challenged FDA's proposed rule and jurisdictional analysis issued on August 10, 1995. The government moved to dismiss each of the four cases on grounds of lack of finality, ripeness, exhaustion, and standing. Some of the plaintiffs filed motions for summary judgement. The government moved to stay proceedings on the summary judgment motions pending resolution of the government's motion to dismiss. The court granted the stay November 21, 1995. After FDA issued the final rule in August 1996, the government withdrew its motion to dismiss. After FDA issued its final rule and jurisdictional determination in August 1996, the plaintiffs amended their complaints and moved for summary judgement on three grounds: that Congress has precluded FDA's jurisdiction over cigarettes and smokeless tobacco; that cigarettes and smokeless tobacco cannot be regulated as drugs and devices under the FFDC Act; and that the First Amendment prohibits FDA's advertising restrictions. Those motions have been fully briefed and argued, and are ripe for disposition. At the oral argument, the court announced that it expected to issue its decision on these summary judgement motions between March 17 and April 21, 1997. A fifth lawsuit--Beatty v. FDA--was filed on February 28, 1997, in the Southern District of Georgia, Brunswick by Joel Beatty, who is proceeding pro se. The complaint makes the same allegations regarding FDA's regulation of cigarettes as the lawsuits pending in the Middle District of North Carolina, but does not alleges any facts that establish Mr. Beatty's standing to challenge FDA's regulation of cigarettes. The complaint has not been properly served on the United States, and no activity has occurred in this case. Mr. Skeen. Your budget includes $34 million to enforce the regulations you have published. What confuses me is your justifications show that you used about 38 FTE's to write the regulations and you only expect to use 21 FTE's to implement and enforce your regulations. Can you explain how you would spend $30 million more, but do it with 17 less people? Response. In FY 1997, FDA began a process for commissioning selected state and local officials to conduct compliance and enforcement activities on behalf of FDA. FDA anticipates continuing this process and expects that $20 million will be provided directly to states for the day-to-day monitoring and enforcement activities. FDA's responsibility will be to direct this process and prosecute violations. The bulk of the work on the regulation was done by employees of FDA--38 FTE--at its Rockville headquarters. Over 700,000 comments from the public were filed in response to the proposed regulation published by FDA in August 1996. In addition, the comments from the cigarette industry comprised approximately 2,000 pages and contained 45,000 pages of exhibits. Staff had to read and analyze each comment and prepare responses. Review of these comments required the commitment of a large number of employees over a short period of time. Agency staff produced a final product in a little over one year from the date of the proposed rule and provided answers to every major concern raised. FDA's proposed budget request anticipates an active two- part program of continuing outreach activities designed to educate the public and affected industries about the rule and its requirements, and vigorous monitoring and enforcement of the regulation's requirements. Mr. Skeen. Please describe for us how you will do field enforcement of the new rules? Response. FDA will commission state and local officials to conduct compliance and enforcement activities on behalf of and in coordination with the Agency. The commissioned officials will conduct random unannounced visits of retail stores, using minors to attempt purchases, and to conduct follow-up inspections. Each visit will result in a letter to the retailer from FDA, either notifying the retailer that he/she has complied with the regulation, or informing the retailer of the violation and indicating that another visit may occur in the future. If on a second visit the retailer again sells to the minor, a civil money penalty notice will be sent. The actual visit will require the minor to attempt to purchase a tobacco product. The minor will be instructed to answer truthfully if asked his or her age and to answer ``me'' if asked for whom the product is being purchased. If asked for identification, the minor will respond that he/she does not have it. The minor will leave the store, report the results of the transaction to the official, and give the tobacco product to the official to mark as evidence. The official immediately will fill out a report of the visit and indicate whether a sale was made or refused. The forms will be sent to FDA for processing. Mr. Skeen. Of the people you expect to have working on tobacco, how many would be in the Washington headquarters office and how many would be in the field? Response. We anticipate fewer than two dozen FTE working on tobacco in headquarters. Assuming we are able to contract with all 50 states, the only task that will be asked of the field will be to train state officials to perform the unannounced visits to see if retailers are selling tobacco products to minors. The training session will take no longer than a half a day. Mr. Skeen. Please provide an object class breakout of the tobacco request for fiscal years 1996, 1997 and 1998. Response. Let me take this opportunity to make you aware of an issue that has just come to our attention regarding our FY 1996 costs for promulgating the final rule for tobacco. Our budget shows a total of $4.6 million spent for tobacco activities in FY 1996. However, in the course of developing responses to congressional inquiries, we discovered an error in the calculation of costs for FY 1996. The $4.614 million calculation inadvertently excluded the salaries for a portion of the individuals involved in the effort. The amount of this error is $1.005 million. The corrected total costs for FY 1996 is $5.619 million. The number of FTE is unaffected by this error in the cost calculation. We regret the error and apologize for any misunderstanding it may have caused. [The information follows:] YOUTH TOBACCO PREVENTION INITIATIVE [Dollars in thousands] ------------------------------------------------------------------------ 1996 1997 est. 1998 est. ------------------------------------------------------------------------ Personnel Compensation and Benefits........................ 3,084 1,713 1,801 Travel........................... 24 50 50 Rent and Utilities............... 20 60 40 Printing......................... 508 500 500 Other Services (Contracts)....... 1,551 2,522 31,569 Supplies and Materials........... 28 35 30 Equipment........................ 404 20 10 -------------------------------------- Total...................... 5,619 4,900 34,000 ------------------------------------------------------------------------ Mr. Skeen. If the Court rules against you, does this mean we can save $34 million? Response. No. None of the plaintiffs in the lawsuit sought to prevent the February 28 access provisions from going into effect. The bulk of the money requested for FY 1998 is for state contracts to enforce the February 28, provisions. While one cannot predict how the court will rule, there is a plausible scenario under which the access provisions remain in effect, and in need of funding, even if the court rules against FDA on other issues. User Fees Mr. Skeen. To help balance the President's budget, how much in user fees was subtracted from the President's request? First give me just the total for FDA user fees and also the total for the entire Federal Government. Response. For FDA, the President's FY 1998 budget includes $131,643,000 in new user fees, of which $122,436,000 is to replace existing base resources. A total of $244,272,000 in user fees is included for FDA in the FY 1998. Across the entire Federal Government, I believe the total for new and increased user fees is about $1.6 billion for FY 1998. Mr. Skeen. With the exception of the Prescription Drug User Fee Act, your track record is not so hot. What makes you think this proposal is going to happen? Response. In addition to PDUFA, which has been a tremendous success, FDA is also seeking reauthorization of the Mammography Quality Standards Act of 1992 for FY 1998. MQSA user fees have paid for the costs of inspecting mammography facilities to ensure compliance with national quality and safety standards. These activities ensure that women continue to have access to quality mammography--an effective tool in reducing mortality from breast cancer. Instead of seeking general authorization, as has been proposed in the past, the President's budget identifies by program area and dollar amount where fees could be derived. This provides a more substantial basis from which to develop reasonable and achievable user fees for FY 1998, with input from both Congress and the affected regulated industries. Further, FDA's budget must also be looked at in the context of the overall plan the President has proposed for a balanced budget by FY 2002. New and expanded user fees have been proposed across the Federal Government. Mr. Skeen. Give me the details in terms of manpower cuts and function effects that will happen if you do not get user fees but do get your appropriations request. Response. The level of new user fees requested is $131,643,000, including funding for 1,120 FTE. If these user fees are not approved and the existing base resources are not restored, the cuts will be felt across each program area of FDA. At this point in time, I cannot say with any degree of certainty where specific cuts would be taken, but given the magnitude of the potential reduction, I can safely say that review times and backlogs for all FDA-regulated products would increase substantially. FDA's ability to fulfill its mission of protecting and promoting the health of the American public would be undermined seriously. User Fee Legislation Mr. Skeen. The budget justifications say you will submit legislation to Congress. When do you expect to do that? Given our track record of getting to mark-up in May do you think this legislation will be enacted into law before this subcommittee marks-up your appropriations? Response. The Administration is in the process of developing legislation to implement the budget proposal. It is our understanding that the proposed legislation is nearing completion and will be submitted soon. Upon enactment of user fee authorizations, a budget amendment to the current appropriations language may be proposed to make the fees available for expenditure. Mr. Skeen. Have you had any discussions with the authorizing Committee on when they would take up your proposal? Response. No. The Administration is developing legislation for these fees, and has indicated to the Department its intention to submit this legislation in the very near future. Once that proposal is known and forwarded, FDA will work collegially with the Congress, its committees and staffs, to be as responsive as possible to Congressional and public concerns and inquiries. User Fees Mr. Skeen. Since your budget proposal has been in the works for several months, please give us the details of how each of your user fee proposals would work. Response. The budget justification on page 8 through 10 provides the available specifics by program area and dollar amount of the types of user fees being proposed by the Administration, including those in need of reauthorization-- PDUFA and MQSA--and existing fees for exports and certification fund activities. We are prepared to work with Congress and FDA's many constituencies, including the regulated industry, to further develop these or other proposals to achieve the goal of collecting $131,643,000 in new user fees in FY 1998. USER FEES--FY 1998 BUDGET Consistent with the recommendations of the Vice President's 1993 National Performance Review report, the budget proposes $236,813,000 in reauthorized and new user fees to finance FDA activities. Combined with the $7,459,000 in fees already authorized for export certification and the certification of insulin and color additives, this brings the FY 1998 user fee level to $244,272,000. Specifically, the budget proposes to reauthorize PDUFA and MQSA and to collect new fees in each of the major programs. These fees will be dedicated to FDA program activities and will be implemented in conjunction with performance measures and goals. FDA will work with its many constituencies, including the regulated industry, to develop appropriate performance goals to ensure that these fees will be used to finance and enhance program activities. FDA provides a public service by protecting consumers from unsafe and impure foods and ensuring that drugs, medical devices, and biological products are safe and effective. Further, industries with products under the regulatory jurisdiction of FDA profit enormously from a strong and efficient FDA capable of conducting product reviews in a timely manner. PDUFA is regarded as a success by industry and the Congress, so FDA actually has a strong track record in this area, primarily because PDUFA's stringent performance measures focused FDA on lowering review times and FDA has met or exceeded all the measures. This kind of user fee can be used to accelerate the FDA's review and approval process and reduce FDA budget authority as long as strategic plans, performance measures, and goals are an integral part of any user fee proposal. Further, fees from other agencies are raised in the FY 1998 Budget, including fees in the department of Labor, Transportation, Agriculture, and State. These proposals all highlight the importance of user fees that tie in performance measures in maintaining important government functions expected by the public, while achieving a balanced budget by 2002. Legislation will be proposed to authorize the fees and, upon enactment of the authorization, a budget amendment to the current appropriations language will be proposed to make fees available for expenditure. Because the current requirements of the Budget Enforcement Act of 1990 make it difficult to fund discretionary programs with receipts that are not authorized in appropriations acts, the Administration is proposing a change in the requirements to facilitate the enactment of proposals such as this one. The following are the types of user fees being proposed by the Administration. We intend to work with Congress and FDA's many constituencies, including the regulated industry, to develop these or other proposals to achieve the goal of collecting a total of $244,272,000 in user fees in 1998. User fees--FY 1998 budget User fee level ($000's) Reauthorized Fees: Prescription Drug User Fees......................... $91,204 Mammography Quality Standards Act................... 13,966 Existing Fees: Export Certification................................ 2,000 Certification Fund/Color Additive & Insulin......... 5,459 Proposed New Fees: Food Additive Petitions............................. 12,543 Generic Drugs....................................... 18,000 Animal Drugs........................................ 10,100 Medical Devices..................................... 25,000 Import Inspection................................... 15,000 Postmarket Surveillance Activities: 51,000 Foods & Cosmetics............................... (19,024) Human Drugs..................................... (7,508) Biologics....................................... (2,233) Animal Drugs & Feeds............................ (2,493) Medical Devices................................. (19,742) -------------------------------------------------------- ____________________________________________________ Total fees.................................... 244,272 USER FEES SUBJECT TO REAUTHORIZATION--$105.2 MILLION FDA is proposing reauthorization of $91,204,000 from collection of prescription drug user fees (PDUFA), and $13,966,000 from collection of inspection cost user fees authorized by the Mammography Quality Standards Act (MQSA). Included in these costs is an inflationary increase of $3,676,000 for PDUFA and $563,000 for MQSA over the FY 1997 enacted level. Public Law 102-571, the Prescription Drug User Fee of 1992, was enacted on October 29, 1992 and sunsets on October 1, 1997. Public Law 102-532, the Mammography Quality Standards Act of 1992 was enacted on October 27, 1992 and also sunsets on October 1, 1997. These pieces of legislation set increasingly stringent performance goals for FDA and provided the resources to meet those goals. PDUFA and MQSA have provided benefits to all affected entities--the public, industry, and FDA. The public benefits because drugs are approved much more quickly, while not sacrificing long-held national standards for safety and efficacy, and from the assurance of consistent quality and safety of mammography facilities. Industry benefits economically from a quicker and more predictable process and increased consumer confidence. FDA benefits in that our process has become much more efficient. We seek reauthorization so that we may continue this ``win-win-win'' proposition. REAUTHORIZATION OF THE PRESCRIPTION DRUG USER FEE ACT (PDUFA) The Prescription Drug User Fee Act of 1992 (PDUFA) authorized the collection of user fees to enhance the review process for new human drug and biological products through FY 1997. The Act established fees for applications, establishments, and approved products. FDA committed to twenty- nine aggressive performance-based goals spanning the five-year term of the statute. These goals directed FDA management efforts toward three broad priorities: eliminating overdue backlogs, building excellence into the review process, and achieving measurable, high performance. Just as the Agency has improved under PDUFA, so has industry. Sponsors are submitting more new product applications to the Agency, and the quality of these is greatly improved. As a result, more review decisions are positive, and record proportions of submissions are receiving approval. PDUFA is a success. The Agency and the industry have forged a working relationship based upon a commitment to excellence that is producing measurable benefits for the American consumer. For the third year in a row, the Agency has exceeded all performance goals. We met and surpassed a major 1997 performance goal in FY 1994--a full three years ahead of schedule. We continue to meet or exceed each of the performance goals established as a result of PDUFA. The Agency's record- setting results--achieved without sacrificing the Agency's high review standards--lead us to believe PDUFA to be a model for reinventing government, where Congress, the agency, the industry and consumer groups work together to provide necessary resources, set performance goals, and hold the government accountable. User fees have enabled FDA to dramatically improve its performance for drug review and approval times. The median approval time for human drug applications in 1991 was 21 months. Since the enactment of PDUFA, the median approval time for PDUFA original applications in the FY 1993 and FY 1994 cohorts has decreased to 17 months. Approval times for priority applications have been even quicker, averaging only 12 months for the 22 priority applications approved under PDUFA. The highlight of 1996 was a 60 percent increase in the approval of new drugs over the previous year--at a rate 7 percent faster. REAUTHORIZATION OF THE MAMMOGRAPHY QUALITY STANDARDS (MQSA) USER FEES To ensure that women continue to have access to quality mammography--an effective tool in reducing mortality from breast cancer--FDA requests an increase in MQSA authorized inspection user fees of $563,000 to cover inflation, for a total of $13,966,000. MQSA required that mammography facilities be certified by October 1, 1994, to remain in operation and inspected annually to ensure compliance with national quality and safety standards. In FY 1998, Federal and State personnel will continue to conduct annual inspections of 10,000 facilities and certifications of 6,000 facilities as well as provide training for new inspectors. The fees collected will pay for the costs of the inspections. EXISTING USER FEES Currently authorized user fees include $5,341,000 in fees for certification activities and Freedom of Information Act (FOIA) services. We are requesting inflationary increases of $118,000 for these activities. Public Law 104-134, the FDA Export Reform and Enhancement Act of 1996, enacted as part of the Omnibus Consolidated Rescissions and Appropriations Act of 1996, allows FDA to collect up to $175 for each export certification granted. We anticipate annual collections of $2,000,000 a year beginning in FY 1997. These collections would offset costs associated with granting these certificates, and provide these approvals in a timely manner. PROPOSED USER FEES--$131.6 MILLION The industries regulated by FDA derive valuable benefits from some FDA activities, including increased customer confidence in their products and significant protection from liability. FDA's reputation also improves the competitive position of American firms in overseas markets. It is appropriate that the regulated industries contribute a share of FDA's cost of ensuring the safety and effectiveness of their products. A new basis for collecting these fees is offered in this budget. These proposed user fees will contribute to achieving performance goals as discussed in the program sections. We propose that user fees be applied to a wide range of FDA activities. The following are the types of user fees being proposed by the Administration. We intend to work with Congress, industry and other affected parties to develop these or other proposals to help achieve the goal of collecting a total of $244 million in user fees in FY 1998. FOODS--$46.6 MILLION Proposals include: premarket approval activities for food and color additive petitions ($12,543,000), to support FDA import monitoring activities ($15,000,000), and to partially fund postmarketing regulatory activities ($19,024,000). DRUGS--$25.5 MILLION Proposals include: review of original generic drug product applications ($18,000,000), and to partially fund postmarketing regulatory activities ($7,508,000). BIOLOGICS--$2.2 MILLION Proposals include: partially funding postmarketing regulatory activities ($2,233,000). ANIMAL DRUGS--$12.6 MILLION Proposals include: review of premarket applications ($4,000,000), FDA activities which substantiate that industry's clinical and non-clinical investigations are properly conducted ($6,100,000), and to partially fund other postmarketing regulatory activities ($2,493,000). MEDICAL DEVICES--$44.7 MILLION Proposals include: activities related to review and evaluation of premarket approval applications, premarket notifications (510(k)s), and investigational device exemptions (IDEs) for all medial and radiological devices to ensure that new devices meet the statutory requirements prior to commercial marketing ($25,000,000), and to partially fund postmarketing regulatory activities ($19,742,000). Postmarketing regulatory activities include not only traditional domestic postmarketing activities but also emerging strategies. These include partnering with state, local, professional and industry groups and individuals, to enhance the quality and safety of products. In addition, by increasing information sharing and technical assistance so that establishments are operating with strong quality assurance systems, the Agency anticipates that less formal regulatory intervention may be required. Traditional domestic postmarketing activities such as inspections, investigations, sample collections and analyses, regulatory analytical methods development, field exams, recall effectiveness checks, and injunctions and seizures will continue to play a role in postmarketing regulation. PDUFA Mr. Skeen. PDUFA will in all probability be reauthorized sometime this year. I have been told that industry is willing to support a higher user fee for fiscal year 1998 than you have in your budget request. Your request is for $91,204,000 while I am led to believe that industry would support a number closer to $105 million. Can you confirm what negotiations with the industry have developed? Response. Discussions between industry and FDA have identified some activities for which new performance goals could be attainable under an enhanced PDUFA program, conditioned on FDA receiving additional resources necessary to achieve them, and that those resources not be added at the expense of other programs in the Agency. In a meeting with industry representatives in November 1996, FDA presented an initial cost model for projecting user fees over the five-year span from FY 1998 through FY 2002. Based on the meetings with industry, the model calculated that the expected level in FY 1998 would be $126 million and eventually rise to $193 million by FY 2002. This projection assumes that all of the increased costs of the program would be borne by increased user fees and that government funding would remain fixed at the FY 1997 level. Over the course of subsequent discussions, the performance expectations and cost estimates were significantly refined. For FY 1998, the revised estimate is about $107 million, increasing to about $110 million by FY 2002. Let me provide, for the record, a summary table that we have developed in support of this. Please note, this information is subject to change based on an Administration User Fee bill which is expected to be released this spring. [Page 368--The official Committee record contains additional material here.] Mr. Skeen. The original PDUFA listed 29 performance based goals for FDA to meet. Please list each of those and show what you have done to accomplish each of those. Response. We will be happy to provide you with the Fourth Annual Performance Report, December 1, 1996, which outlines the Agency's results for the performance based goals. [Clerk's note.--The information provided was deemed too lengthy for printing and has been retained in Committee files.] Field Lab Consolidation Mr. Skeen. Another big feature of your budget request is $14,550,000 for continuation of the field laboratory consolidation. When will you let the contract for the 1997 construction work? Response. The construction contract for Phase I of the Arkansas Regional Laboratory--ARL--is on schedule to be awarded in June 1997. The FY appropriation included $13,000,000 for Phase I construction of the ARL. Phase I begins construction and provides the ARL building, foundation, substructure, superstructure, exterior enclosure, and roofing. major building systems, such as fire protection, HVAC, electrical and some site work, also are included. Mr. Skeen. Do you have the planning and design work for phase II of the construction work finished? Response. Yes, the planning and design work for Phase II is complete. The work was done simultaneously with Phase I. Phase II continues the ARL project to conclusion by completing the building systems and providing the entire laboratory fit-out. Mr. Skeen. Can you break the budget request into usable pieces? Response. The entire laboratory facility was already designed when the FY 1997 funding for a Phase I was appropriated. Therefore, the phasing of the project is based on a logical sequence of construction for the entire facility, rather than construction of discrete functional elements. At the completion of Phases I and II, FDA's Office of Regulatory Affairs, or ORA will have a state-of-the-art field laboratory which is a cornerstone of the FDA field laboratory consolidation plan. The estimated savings associated with the construction of the Arkansas Regional Laboratory and closure of the six existing labs with work to be reassigned to ARL is about $56.8 million over 20 years. The FY 1997 appropriation of $13,000,000 for Phase I will support construction of the building, foundation, substructure, superstructure, exterior enclosure and roofing, as well as major building systems such as fire protection, HVAC, electrical and some site work. The FY 1998 request for $14,550,000 will complete Phase II--the laboratory portion of the project--of the construction of the Arkansas Regional Laboratory, by completing building systems and providing the entire laboratory fit-out. Subject to additional budgetary requests and funding, a planned Phase III completes the common ORA/NCTR administrative and support area. The total estimated cost for the construction of ARL, including office and administrative space, is $37,400,000. Mr. Skeen. When do you expect to close field stations and move personnel to the Arkansas facility? Response. ORA's Laboratory Consolidation Plan has coordinated the new facility and expansion of existing facilities to coincide with closing laboratory facility lease expiration dates. Accordingly, the ARL construction is planned to be completed in calendar year 1999. ARL occupancy will begin almost immediately and continued into early 2000. ARL will house and accommodate the scientific testing, investigations and research activities for most of the food and drug related programs of the Midwest and Southwestern states, currently undertaken at Chicago, Detroit, Minneapolis, Denver, Dallas and Kansas City laboratories. In the interim between 1997 and 2000 and before the ARL building is completed, Chicago's dioxin program will be transferred and operational at renovated laboratory space at the National Center for Toxicological Research--NCTR. These staff and equipment will be joined by the Dallas, Detroit and Minneapolis staffs, including equipment and programs, which will move into the new facility by 2000. Upon lease expirations at Denver in 2010 and Kansas City in 2014, these laboratories, too, will be consolidated at the ARL facility. Mr. Skeen. For the record, please provide us with an update of your consolidation plan including locations and time frames. Response. I would be happy to provide a listing of impacted field locations, with a description of the impact on that location under the FDA field laboratory consolidation. Laboratory personnel in each closing laboratory either have been or will be offered relocation expenses to move to the new site along with their work. Under the plan, other district office functions and staff would remain in place. This includes a complement of inspectors, consumer safety officers, consumer affairs officers, and administrative staff at each location where labs were to be phased out. Only the lab staffs would be affected by the plan. Field Laboratory Consolidations Arkansas Regional Laboratory (ARL) (NCTR at Jefferson, AR).--Planned as a multi-purpose laboratory. FDA will transfer staff from the Chicago District laboratory dioxin activity, scheduled to close in July 1997, to Arkansas where they will occupy renovated temporary space until completion of ARL in 1999. The Dallas, Minneapolis and Detroit District laboratories will close in the year 2000 with programs and staff reassigned to ARL. The Denver District laboratory will close in 2010, with reassignment of work and staff to ARL. Baltimore.--The lab closes in 1999. Human Drug work will go to Philadelphia, in-vitro diagnostics to WEAC; and all other programs to the Southeast Regional Lab in Atlanta. Buffalo.--The lab closed in October 1996. All analytical laboratory functions were transferred to New York Regional Lab. Chicago.--The lab closes in July 1997. All analytical laboratory work to include a dioxin lab will be transferred to the Arkansas Regional Lab at the NCTR, and reside in renovated temporary space until ARL is completed. Cincinnati.--The analytical functions at that facility will close June 30, 1997. Human drug work will be reassigned to Philadelphia; all other work will go to Atlanta. The Forensic Chemistry Center will remain as a specialized laboratory in Cincinnati. Dallas.--The lab closes in 2000. All analytical and laboratory functions will be transferred to the Arkansas Regional Laboratory. Denver.--The lab closes in 2010. Analytical resources distribution will be reassessed yearly. Functions will be transferred to the Arkansas Regional Laboratory. Detroit.--The lab closes in 2000. Human Drug work will be assigned to Philadelphia; all other work will be reassigned to the Arkansas Regional Laboratory. Kansas City.--The lab closes in 2014. Analytical resources will be reassessed yearly. Functions will be reassigned to the Arkansas Regional Laboratory. Los Angeles.--Planned as a multi-purpose laboratory. FDA has acquired approximately 10 acres of land on the campus of the University of California at Irvine. Architectural and engineering design efforts are underway preparatory to construction of a replacement laboratory at the site. Minneapolis.--The lab closes in 2000. Functions will be reassigned to the Arkansas Regional Laboratory. New Orleans.--The lab closes in 1998. Human Drug work will be reassigned to the San Juan District laboratory. All other work will be transferred to the Southeast Regional Laboratory. Northeast Regional Laboratory (New York).--Planned as a multi-purpose laboratory. A site for replacement space for the Northeast Region, District and Regional Laboratory has been negotiated by GSA with York College in Jamaica, Queens. FDA plans to sign a lease this spring, with occupancy anticipated for spring 1999. Philadelphia.--Planned as a drug specialty laboratory. Portions of human drug programs from closing laboratories have been transferred to Philadelphia. GSA is proceeding to expand the current laboratory facility, located in Federal space, by 8,000 square feet to accommodate this additional drug work transferred from other labs. San Francisco.--Laboratory will close upon lease expiration in 2014. Analytical resources will be reassessed yearly. San Juan.--Planned as a drug specialty laboratory. All other analytical work will be reassigned to the Southeast Regional Laboratory. The site is FDA owned; Agency plans to renovate and expand the current laboratory are currently underway. Seattle.--Planned as one of five multi-purpose laboratories. FDA expanded the laboratory by 5,000 square feet in 1996 to complete the project. Seafood or alternative analytical programs will be consolidated at Seattle. Southeast Regional Laboratory (Atlanta).--Planned as a multi-purpose laboratory. FDA recently signed a lease with GSA for the construction of a 42,000 net square feet laboratory annex adjoining the existing facility which houses the Southeast Region, Atlanta District, and the current Southeast Regional laboratory. Occupancy is anticipated by December 1997. Winchester Engineering and Analytical Center (WEAC).-- Planned as a specialty laboratory for radio nuclides/radio pharmaceuticals and engineering functions for medical devices. Site is FDA owned. Human Drug work will be reassigned to Philadelphia; all other analytical work will go to the Northeast Regional Laboratory. Federal Pay Raise Costs Mr. Skeen. What is the total cost in fiscal year 1998 to cover the annualization of the 1997 Federal pay costs? Response. The projected total costs in fiscal year 1998 of the annualization of the calendar year 1997 federal pay costs is $4,430,000. Mammography Mr. Skeen. For the record, please provide an object class table for fiscal years 1996, 1997, and 1998 for the Mammography Quality Act services. [The information follows:] [Page 372--The official Committee record contains additional material here.] Mr. Skeen. The Prescription Drug User Fee Act allows collections for three separate kinds of fees. For the record, please provide a table that shows the amount collected, by year, for each category. [The information follows:] ---------------------------------------------------------------------------------------------------------------- Collections ------------------------------------------------------- FY 1993 FY 1994 FY 1995 FY 1996 ---------------------------------------------------------------------------------------------------------------- Product fees............................................ $12,922,000 $19,808,000 $25,864,000 $25,590,600 Establishment fees...................................... 11,700,000 18,291,000 25,413,000 25,842,300 Application fees \1\.................................... 11,187,490 18,164,250 24,310,000 16,441,500 ------------------------------------------------------- Total fees collected.............................. 35,809,490 56,263,250 75,587,000 67,874,400 Amount authorized in appropriations act................. 36,000,000 56,284,000 79,423,000 84,723,000 ---------------------------------------------------------------------------------------------------------------- \1\ Fifty percent of applications fees are collected upon issuance of an action letter which may skew the timing of fee collections. \2\ Collections to date (9/30/96). Mr. Skeen. The Government Performance Review Act--GPRA-- passed a couple of years ago. We know that many agencies are working hard at finding meaningful goals and standards to meet. It would seem that an agency such as the FDA would be able to find very meaningful standards to set. The law calls for consultation between the executive branch and Congress. When do you expect to present something to us to talk about? Response. For several years, FDA has been laying the groundwork for full-scale implementation of the GPRA. Our well established budget communication that has extensive workload and performance measurement provides us with a strong starting point. A recent example of this is the Prescription Drug User Fee Act of 1992, which expires this year, and is based on multi-year customer oriented performance goals, and has provided nearly 2,000 FDA employees with day-to-day working experience in a performance-based management environment. The Congressional consultation process that is called for in the GPRA will take place within the framework of the Department of Health and Human Services strategic plan which is designed to incorporate all of the Department's operating divisions. This consultation is scheduled for May 1997. Export User Fees Mr. Skeen. Last year Congress passed the export user fee program. Have rules and regulations been published yet to implement that legislation? Response. The Agency published a notice in the November 6, 1996, Federal Register which describes FDA's costs for issuing export certificates, and the fees per certificate subject to the $175 ceiling mandated by the FDA Export Reform and Enhancement Act of 1996. Mr. Skeen. When do you expect to start collecting fees? Response. Consistent with the FDA Export Reform and Enhancement Act of 1996, the new fees for issuing human drug, human biologic, animal drugs, and device export certificates became effective October 1, 1996. We expect to send out bills by the end of March and should start receiving fees in April. Civil Service Retirement Costs Mr. Skeen. Your budget justification shows an increase of $2,225,000 for increased Civil Service Retirement contributions. Is this a result of proposed changes in the system or a reflection of increased salary costs? Response. FDA's estimate of an increase of $2,225,000 in Civil Service Retirement contributions is a direct result of proposed changes in the system. This additional $2,225,000 reflects a proposed increase of 1.51 percent in agency contributions to the CSRS retirement fund in fiscal year 1998. Office of the Commissioner Staffing Mr. Skeen. On page 14 of your budget justification the chart indicates the Office of the Commissioner had 127 FTE's in fiscal year 1996 and you will have 141 in fiscal year 1997. Yet you are using $1 million less. Can you explain how this is possible? Response. The $1 million difference is due to two factors. First, about half reflects the error in our calculations of resources spent on tobacco activities in FY 1996. The remainder reflects our attempts at streamlining operations throughout every sector of FDA. As an agency, we have worked, and will continue to work, at improving how we do business, while not sacrificing the high quality standards we have maintained in assuring that the products under FDA regulation are both safe and effective. The 127 FTE figure for the FY 1996 is an actual based on utilization for the entire fiscal year. The 141 FTE figure for FY 1997 represents the ceiling for the various components under the Office of the Commissioner. This ceiling is estimated prior to the start of the fiscal year and reflects anticipated workload and subsequent FTE requirements. In order to properly compare these two numbers, we would have to wait until the FY 1997 actuals are known which will not occur until sometime after the fiscal year ends after September 30, 1997. Our budget shows a total of $4.6 million spent for promulgating the final rule on tobacco in FY 1997. We discovered an error in the calculation of costs for FY 1996. The $4.6 million calculation inadvertently excluded the salaries for a portion of the individuals involved in the effort. The amount of this error is just over $1 million. The corrected total cost for FY 1996 is $5.6 million. Estimates for FYs 1997 and 1998 remain unchanged. The number of FTE is also unaffected by this error in the cost calculation. We regret the error and apologize for any misunderstanding it may have caused. I am providing a table showing the numbers originally shown in our submission plus a summarization of the changes this error causes: ------------------------------------------------------------------------ FY 1996 actual FY 1997 FY 1998 obligations estimate estimate ------------------------------------------------------------------------ Original request: Tobacco...................... $4.6 $4.6 $34.0 Other activities............. 94.0 89.6 89.8 (Office of the Commissioner). (12.6) (11.5) (11.5) Revised numbers: Tobacco...................... 5.6 \1\ 4.9 34.0 Other activities............. 93.0 89.3 89.8 (Office of the Commissioner). (12.1) (11.5) (11.5) ------------------------------------------------------------------------ \1\ Reflects most recent estimate. Food Safety Mr. Skeen. One of the major features of the President's budget for 1998 is a food safety initiative. While you are requesting $20 million more you will implement this initiative with fewer people. Obviously you must be going to cut out a lot of existing work or do many things with outside contacts. Can you give us the details of your initiative and what will change as a result? Response. The Clinton Administration's Interagency Food Safety Initiative includes a total of $24 million for FDA, $20 million for our Foods Program and $4 million for our Animal Drugs and Feeds Program: The initiative is based on the public health principle that society should identify and take preventive measures to reduce the risk of illness, while focusing its efforts on those hazards that present the greatest risks. Achieving this goal will require joint commitment to the principles of preventive control, and long-term commitment and action from government agencies, industry, and academia to incorporate these principles into all components of the food safety system. Developing appropriate responses and control strategies for emerging foodborne disease threats depend on a number of factors, including using innovative approaches to combine surveillance and research. Identifying the cause of foodborne infections is only one element in reducing foodborne illnesses. Risk assessment, education, prevention, and control are critical to achieve this goal. This Food Safety initiative attempts to identify the critical elements of a comprehensive and more effectively coordinated program to improve the safety of the food supply. Specific initiatives needed to strengthen the food safety system will focus on surveillance, risk assessment, inspections, coordination, research, and education. The implementation of the initiative is still in the formative stage. Meetings are underway with the White House, USDA, EPA, CDC, and the private sector, to address the most meaningful and efficient approach. We expect--through a coordinated federal, private sector effort--to increase the use of partnerships and contracts to leverage scarce resources. oasis Mr. Skeen. How much has FDA spent on the OASIS system to date and what will the total cost of the system be? Is the system now complete and in place in all FDA sites? Response. The system development cost up to now for OASIS is $9,243,000. Total system development cost is not expected to exceed $10,000,000. The OASIS system is expected to be complete and in place at all FDA sites in early FY 1998. Medical Devices Mr. Skeen. For the Medical Device program, please provide a table that breaks out how much is spent on reviews versus inspection and or enforcement for each of the last five years. Response. The following table breaks out the resources expended for the entire Medical Device program, including center and field, for premarket review activities and compliance/enforcement-related activities. A second table outlines resource utilization in the same categories for the center only. Table one shows the resources expended for all authorities for FYs 1995 through 1998. Table two shows the center resources expended for the medical device authority only for FYs 1995 and 1996. Resources expended on activities conducted under the Mammography Quality Standards Act (MQSA) and the Radiation Control for Health and Safety Act (RCHSA) are excluded. Separate authority data are not available prior to FY 1995. TABLE 1--COMPARISON OF CDRH RESOURCES EXPENDED ON PRODUCT EVALUATION AND COMPLIANCE/ENFORCEMENT--ALL AUTHORITIES ---------------------------------------------------------------------------------------------------------------- FY 1995 FY 1996 FY 1997 FY 1998 Activity --------------------------------------------------------------- FTE $000 FTE $000 $FTE $000 FTE $000 ---------------------------------------------------------------------------------------------------------------- Product evaluation.............................. 609 52.1 643 55.9 643 59.1 643 64.3 Compliance enforcement.......................... 625 50.8 524 45.7 512 48.3 512 48.3 ---------------------------------------------------------------------------------------------------------------- TABLE 2--COMPARISON OF CDRH RESOURCES EXPENDED ON PRODUCT EVALUATION AND COMPLIANCE/ENFORCEMENT MEDICAL DEVICE AUTHORITY ONLY ---------------------------------------------------------------------------------------------------------------- FY 1995 FY 1996 Activity --------------------------------------------------- FTE $000 FTE $000 ---------------------------------------------------------------------------------------------------------------- Product evaluation.......................................... 499 38.0 577 46.5 Compliance/enforcement...................................... 150 11.7 132 11.7 ---------------------------------------------------------------------------------------------------------------- Mr. Skeen. For the record, how many devices are in each of the three classifications? Response. There are currently 1,702 regulatory classification categories of products. This is an increase from 1,695 from last year and is due to the continued diversity of the medical device industry. [The information follows:] REGULATORY CLASSIFICATION ------------------------------------------------------------------------ Premarket Class Categories submissions ------------------------------------------------------------------------ I............................................. 769 30,504 II............................................ 788 44,452 III........................................... 145 \1\ 5,347 ------------------------- Total................................... 1,702 80,303 ------------------------------------------------------------------------ \1\ Includes 3,942 510(k)s and 1,405 original PMAs. Mr. Skeen. For the record, please provide a list of all CDRH grants, contracts, and interagency research agreements for fiscal year 1996. [The information follows:] CDRH FY-96 EXTRAMURAL PROJECTS ------------------------------------------------------------------------ Project title Contractor/Agency Cost ------------------------------------------------------------------------ Contracts: Operation & Management of KRA Corporation...... $1,177,912 Document Control ctrs. MQSA/Support Operation of the Sachs Freeman & 66,880 Certification and Inspection Associates. Cost--Task #13. MQSA/Technical Documentation Sachs Freeman & 66,880 Writing support to DMQRP--Task Associates. #14. MQSA/Admin. Support for Mentor Technologies.. 41,571 Mammography Facility Certificat'n Activity--Task #10. MQSA/Inspection Program Support Mentor Technologies.. 44,074 of FDA/DMQRP--Task #12. MQSA/Inspect'n/Techn'l Software/ Sachs Freeman & 67,258 Software Infrastructure Associates. Support--Task #12. MQSA/Inspection/Operation of x- Mentor Technologies.. 61,741 ray film processing--Task #8. MQSA/Ins./Technician support for Mentor Technologies.. 69,267 Radiation Devices in Mammog'phy--Task #9. MQSA/Inspection/Operation of x- Sachs Freeman & 54,510 ray film processing--Task #3. Associates. MQSA/Inspection/Interface Sachs Freeman & 97,586 Patient Monitors to a System-- Associates. Task #1. MQSA/Inspection/Characterize Sachs Freeman & 84,102 Reference Equipment--Task #2. Associates. Medical Device Reporting........ Logistics 1,201,481 Applications, Inc. Sentinel System for DAE Reports. CODA, Inc............ 630,132 Automated Medical Records--Task Harvard Pilgrim 50,153 #1. Health Care. Effects of Ionizing/Nonionizing Mentor Technologies.. 50,253 Radiation--Task #7. Deficiencies of PCR Diagnosis of Mentor Technologies.. 35,690 M. Tuberculosis--Task #11. Eval. of Disinfectant Mentor Technologies.. 34,975 Effectiveness for Disinfection Medical Devices--Task #13. ------------ Total, Contracts.............. ..................... 3,834,465 ============ Grants: Symposium to Career Moorehouse School of 3,000 Opportunities in Biomedical and Medicine. PHS. Workshop on Advances in MR Society Magnetic 5,000 Safety & MR Compatibility. Resonance. Assuring Radiation Protection... Conf on Radiat'n 194,285 Control Prog Dirs Inc. Planning Conference on Mgmt Society for 7,000 Regulation for Nat'l Data Biomaterials. System. ------------ Total, Grants................. ..................... 209,285 ============ Inter-Agency Agreements (IAG's): Oak Ridge Fellowship Program.... Department of Energy. 35,000 Conference on Safety of National Institute of 1,000 Repetitive Transcranial Health. Magnetic Stimulators. Condom Preference & Failure Department of Defense 88,500 Rates in a Military Population. Evaluation of Explaned Medical Armed Forces 10,000 Devices. Institute of Pathology. Medical Device Testing.......... Nat'l Aeronautics & 15,000 Space Admin. 1996 National Home & Hospice National Center for 25,000 Care Survey. Health Statistics. ------------ Total, IAG's.................. ..................... 174,500 ============ Grand Total, Contracts, ..................... 4,218,250 Grants, IAG's. ------------------------------------------------------------------------ Mr. Skeen. How much did the Center for Devices and Radiological Health spend on research in fiscal year 1996? Response. The Center spent approximately $13.3 million on science activities in FY 1996. This includes activities conducted under the medical device authority at a cost of $10.4 million, the Mammography Quality Standards Act, or MQSA, at $.6 million, and the Radiation Control for Health and Safety Act, or RCHSA, at $2.3 million. More than three-fourths of the total resources expended on science pertained to the medical device authority. Of these resources, approximately 60 percent were used for laboratory-based scientific investigations and nearly 40 percent were used for domestic and international voluntary standards activities. 510(k)s Applications Mr. Skeen. The FDA is very proud of its reductions in the backlog of 510(k)s. What was the total backlog in each of the past five years? Response. A chart will be provided for the record which shows the number of 510(k)(s) that have been under review in the current review cycle for more than 90 days, at the end of each fiscal year. This is the commonly used definition of ``backlog''. A different measure of backlog is those applications whose total FDA review time to date exceeds 90 days, regardless of which cycle. By this measure the ``backlog'' has decreased by 38 percent since the end of FY 1995. STATISTICS FOR 510(K)S: FY 1992-FY 1996 ---------------------------------------------------------------------------------------------------------------- Number of 510(k)s under Fiscal year review greater than 90 days Number of 510(k)s pending in current cycle \1\ greater than 90 days ---------------------------------------------------------------------------------------------------------------- 1992.............................................. 331 1,549 1993.............................................. 1,894 3,247 1994.............................................. 460 2,215 1995.............................................. 9 991 1996.............................................. 0 661 ---------------------------------------------------------------------------------------------------------------- \1\ Cumulative FDA review days (this includes all pending 510(k)s--under review and on hold). Mr. Skeen. How many were approved each year? Response. The number of 510(k)s approved from FY 1992 to FY 1996 is approximately 4,000 to 5,000 per year. The following shows the number of 510(k)s cleared by fiscal year. Number of 510(k)s cleared FY 1992................................................. 3,776 FY 1993................................................. 4,007 FY 1994................................................. 5,498 FY 1995................................................. 5,594 FY 1996................................................. 4,501 -------------------------------------------------------- ____________________________________________________ Total............................................. 23,376 Mr. Skeen, How many were returned to the manufacturer for more work each year? Response. I will provide for the record a table showing the number and percentage of 510(k)s that were returned to the manufacturer with a Deficiency letter. THE NUMBER AND PERCENTAGE OF 510(K) WITH A DEFICIENCY LETTER FROM FY 1992-FY 1996 ---------------------------------------------------------------------------------------------------------------- Percent with deficiency Number of 510(k)s with a Fiscal year Number of receipts lettrs \1\ deficiency letter ---------------------------------------------------------------------------------------------------------------- 1992.............................. 6,509 70 4,557 1993.............................. 6,288 66 4,150 1994.............................. 6,417 65 4,171 1995.............................. 6,078 51 3,100 1996.............................. 5,316 48 2,552 ---------------------------------------------------------------------------------------------------------------- \1\ For FY 1992 to FY 1994, the percentages were based on random samples of applications. FY 1996 is as of March 7, 1997. Mr. Skeen. Of the approved list for fiscal year 1994, 1995, and 1996 how many were considered new technology? Response. New technology has been defined in the past as being the first or second device of its kind. In FY 1994, the figures were 10 out of 26 approvals, or 38.5 percent. In FY 1995, it was 8 out of 27 approvals, or 29.6 percent, and in FY 1996, the figures were 20 out of 45 approvals, or 46.5 percent. However, new technology can include new applications or new uses of technology. Using this definition, 24 out of 43 approvals, or 55.8 percent, were approved in FY 1996. Mr. Skeen. For the record, please provide a table that shows the average review time and median review time for 510(k)s for each year since 1989. [The information follows:] FDA 510(k) REVIEW TIME ---------------------------------------------------------------------------------------------------------------- Fiscal year Average \1\ (days) Median (days) ---------------------------------------------------------------------------------------------------------------- 1989.............................................. 66 64 1990.............................................. 78 71 1991.............................................. 81 73 1992.............................................. 102 88 1993.............................................. 162 144 1994.............................................. 184 134 1995.............................................. 137 91 1996.............................................. 110 85 ---------------------------------------------------------------------------------------------------------------- \1\ FDA time. Nutrition Supplements Mr. Skeen. Have you taken any enforcement actions related to nutrition supplements since final rules were published? Response. Dietary supplements are a very important part of the FDA food program. While FDA did not initiate any enforcement actions in fiscal year 1996, the Agency has taken several positive steps to protect the consumer from dietary supplements which posed health hazards. Working cooperatively with the dietary supplement industry, FDA developed good manufacturing practices, or GMPs for these products and published an Advance Notice of Proposed Rule making on February 5, 1997. To facilitate label claims, the Agency reviewed comments on final rules for nutrition labeling and nutrient content claims and published proposed procedures that provide for statements of nutritional support. FDA also published proposed procedures for new dietary ingredients. However, over this past year, new concerns have arisen over street drug alternatives which are being sold as dietary supplements. What may be an unintended consequence of the Dietary Supplement Health and Education Act may be contributing to the marketing of illegal street drugs. Products such as Herbal Ecstasy and Ultimate Xphoria, as well as many others, are being sold as dietary supplements and promoted as natural alternatives to drugs such as MDMA, commonly referred to as Ecstasy. These products bear claims on their labels such as ``creates feelings of euphoria, increases sexual sensations, and provides a natural high or tranquility.'' Tragically, these products resulted in the death of one young college student. Before we could take action, however, the distributor shut down its operation. In October 1995, FDA convened a Special Working Group on Food Products Containing Ephedrine Alkaloids of the FDA Food Advisory Committee to discuss the potential public health problems associated with dietary supplements and other food products containing botanical ingredients that are sources of ephedrine alkaloids. The agency did so in response to hundreds of reports of adverse reactions associated with these products. The following April, we issued a public statement warning consumers not to purchase or consume these products. Last August, FDA held a Food Advisory Committee and Special Working Group Meeting to consider the safety of food products containing a source of ephedrine alkaloids. Warning letters were issued to six manufacturers articulating that the Agency considered the marketing of these products irresponsible. The Agency has recently written to other manufacturers of these types of products advising them of the risk and asking them to stop making these products. FDA is continuing as well as strengthening its efforts in dealing with these products. Most recently, at a New Year's Eve concert attended primarily by those 18 years of age or younger, over 100 young people experienced symptoms of a drug overdose which were traced back to vials of Cherry fX Bombs, Lemon fX Drops and Orange fX Rush, distributed as promotional samples. FDA's Los Angeles Offices worked over the weekend immediately upon hearing of this problem. Product labeling indicated the primary ingredient was Kava. However, FDA analysis did not find Kava, but found the compound 1,4 butanediol, which is a precursor to GHB, gamma hydroxy butyric acid, an illegal drug. We were fortunate. if these products had been distributed at ``head shops'' instead of at this single event, the Agency may not have discovered this problem for months, if at all, which could have resulted in hundreds or even thousands more illnesses. As a result, we issued, on January 1, a public statement warning consumers not to ingest these products. On January 3, FDA notified the distributor that these products presented an unreasonable risk of illness or injury when used in accordance with label directions, and are adulterated and illegal under terms of the Food, Drug and Cosmetic Act. FDA is in possession of the remaining product--approximately 9,000 vials--which were obtained by the Los Angeles Police Department. FDA is still investigating. In addition to the actions listed above, four firms recalled dietary supplement products in FY 1996. Each of these recalls were classified as Class III. However, none of these recalls were precipitated by the final regulations. [A list of enforcement actions related to nutritional supplements follows:] The Key Company recalled Calcium & Magnesium Chelate Rice Bran Chelate Capsules because they contained only 4 percent of the declared amount of magnesium. Puritan's Pride Natural Vitamins recalled melatonin tablets because the bottles were labeled as 200 mcg tablets but contained 3 mcg tablets. Magno-Humphries recalled Performance/Plus KSA Incorporated's ``Tone and Shape Your Body All Natural Fat and Cellulite Burning Formula'' because the product's label declared 60 mg iron, but the product was formulated to contain 6 mg iron. International Labs recalled vitamin E capsules because some bottles contained stray capsules of chloral hydrate. Mr. Skeen. For the record, please tell us what resources were used for nutrition supplement work in fiscal year 1996. Response. FDA expended about $6.9 million on nutrition supplement work in FY 1996. Resources Mr. Skeen. Please provide a table that shows the FDA resources for each of the past three years by program title, and the difference between field and headquarters. [The information follows:] [Page 380--The official Committee record contains additional material here.] Mr. Skeen. Also please provide a table that shows each program title, and breakout the different project titles by field and headquarters resource allocations. [The information follows:] [Pages 382 - 383--The official Committee record contains additional material here.] Mexican Border Crossing Mr. Skeen. Will you please provide a three-year table that shows, by border crossing, the resources allocated to each Mexican border crossing. [The information follows:] FDA BORDER RESIDENT POSTS AND ASSOCIATED CROSSINGS ------------------------------------------------------------------------ Number of employees on board ----------------------------------------- 10/1/94 10/1/95 4/1/96 ------------------------------------------------------------------------ Southwest region: Los Indios, TX............ 1 1 3 Includes: Brownsville/ Matamoros, B&M Bridge, Los Indios/ Licio Blanco, Progresso/N. Progresso. Hidalgo/Pharr, TX......... 2 1 2 Includes: Pharr/ Reynosa Bridge, Hidalog/Reynosa, Los Ebanos/Diaz Ordaz ferry, Rio Grande/ Camargo, Roma-Miguel Aleman, Falcon Dam. Laredo, TX................ 2 3 3 Note: Plans are to increase to 6 employees in Laredo in the future. Includes: Laredo/ Nuevo Laredo, Webb/ Colombia, Eagle Pass/ Piedras Negras II, Del Rio/Cuidad Acuna, Amistad Dam. El Paso, TX............... 2 2 4 Includes: Presidio/ Ojinaga, Ft. Hancock/ Porvenir, Fabens/ Guadalupe Bravo, Ysleta, El Paso/ Juarez Bridge of the Americas, Good Neighbor & Paso Del Norte crossings Santa Teresa/Juarez, Columbus, Antelope Wells. Pacific region: Nogales, AZ............... 2 3 3 Includes Douglas/Agua Prieta, Naco, Nogales RR track, Nogales/ Nogales, Sasabe. San Luis, AZ.............. 1 1 1 Includes: Lukeville/ Sonoita, San Luis/San Luis. Calexico, CA.............. 1 1 1 Otay Mesa, CA............. 6 6 6 Includes: Otay Mesa/ Mesa de Otay, Virginia Street/El Chaparral, San Ysidro/ Tijuana. ------------------------------------------------------------------------ PDUFA Obligations Mr. Skeen. What is the unobligated balance in the prescription drug user fee account as of the end of fiscal years 1995 and 1996, and what do you expect it to be at the end of fiscal year 1997? Response. The unobligated balances were $30,251,705 and $27,517,075, for FYs 1995 and 1996, respectively. At this juncture, we estimate the unobligated balance in FY 1997 at $25 million. Generic Drug Applications Mr. Skeen. What is the backlog of generic drug applications? Response. As of January 31, 1997, there were 659 ANDAs pending before the FDA. Of those, 60 were pending for more than 180 days. Mr. Skeen. What is the average and median time for generic drug approvals in each year since 1991? Response. Please note that the approval times shown in the table are different from the statutory requirement establishing time frames for reviewing applications and abbreviated applications. The statutory requirement, set forth in 21 Code of Federal Regulations (CFR) Sec. 314.100(a), states that, and I quote, ``Within 180 days of receipt of an application for a new drug under section 505(b) of the act, or of an abbreviated application for a new drug under section 505(j) of the act, or of an application or abbreviated application for an antibiotic drug under section 507 of the act, FDA will review it and send the applicant either an approval letter under Sec. 314.105, or an approvable letter under Sec. 314.110, or a not approvable letter under Sec. 314.120.'' This 180-day period is called the ``review clock.'' This ``review clock'' describes the time it takes the Office of Generic Drugs (OGD) to review and respond to an applicant's original submission and amendments made to the submission, not the total time to approval shown in the table above. This review becomes FDA's portion of a ``review cycle.'' The first ``review cycle'' is the time it takes OGD to review and comment on the applicant's original submission. The second and subsequent ``review cycles'' are composed of the time it takes the applicant to answer OGD's deficiencies and submit an amendment, and the time it takes OGD to review the amendment. Approval time thus is composed of multiple ``review cycles.'' ANDA REVIEW TIMES ------------------------------------------------------------------------ Average approval Median approval Fiscal year time (months) time (months) ------------------------------------------------------------------------ 1991.............................. 36.3 32.7 1992.............................. 35.4 34.5 1993.............................. 40.4 39.7 1994.............................. 29.4 24.4 1995.............................. 35.3 28.2 1996.............................. 33.2 24.7 ------------------------------------------------------------------------ Mr. Skeen. For the record, can you give us a table showing the resources allocated for the generic drug approval process for each of the past 10 years? Response. The data on generic drug approval process will be provided for the record. RESOURCES FOR GENERIC DRUG APPROVAL PROCESS ------------------------------------------------------------------------ Fiscal year FTE\1\ $(000) \1\ ------------------------------------------------------------------------ 1986.............................. 227 11,733 1987.............................. 227 12,702 1988.............................. 213 12,344 1989.............................. 243 15,988 1990.............................. 300 20,574 1991.............................. 355 40,943 1992.............................. 426 41,670 1993.............................. 448 40,025 1994.............................. 432 37,605 1995.............................. 396 42,643 1996 \2\.......................... 327 33,634 ------------------------------------------------------------------------ \1\ Figures reflect actuals shown in the Distribution of Resources tables from Congressional Justifications. \2\ Change in presentation in response to FY 1997 Senate Report Language. Pesticides Mr. Skeen. As you are well aware, the issue of pesticides residues in foods has been a major issue with me for many years. Over the years, you have indicated that around 97-98 percent of the fruits, vegetables, and other foods produced in the United States or imported, either had no pesticide residues or levels detected were well within federally permitted limits according to FDA standards and testing. Did you find this to continue to be true for fiscal year 1996? Response. Domestically produced and imported fruits, vegetables and other foods have a high rate of compliance with the pesticide tolerances established by the Environmental Protection Agency--EPA. Between 1988 and 1995, we examined between 10,000 and 19,000 foods samples annually for pesticide residues. In any given year, we found that about 98 percent of these domestic and imported foods samples complied with EPA tolerances. Similarly, in 1996, about 98 percent of all foods sampled for pesticide residues were in compliance with EPA tolerances. Food Sample Analysis Mr. Skeen. How many food microbiological samples did you take in each of the past 5 years? How many on domestic products? How many on imported products? Response. Samples may be collected for a variety of problems, such as microbiological, filth, and additives. Based on additional information obtained during an investigation or by the laboratory, the samples may be analyzed for additional or even totally different attributes than what was indicated at the time of collection. To provide the most accurate information, I will provide for the record, the number of samples analyzed for one or more microbiological attributes. For instance, a product analyzed for Salmonella sp. and Listeria monocytogenes is counted as one sample analyzed. [The information follows:] MICROBIOLOGICAL SAMPLES ANALYZED ---------------------------------------------------------------------------------------------------------------- Year Domestic Import Total ---------------------------------------------------------------------------------------------------------------- 1991............................................................ 3,601 5,565 9,175 1992............................................................ 2,998 6,696 9,694 1993............................................................ 2,898 5,037 7,935 1994............................................................ 2,691 4,861 7,552 1995............................................................ 2,592 4,747 7,339 1996............................................................ 2,303 3,969 6,272 ---------------------------------------------------------------------------------------------------------------- \1\ Total Domestic Microbiological Samples Analyzed includes imported products in domestic status. Skeen. How quickly can you turn your samples around so the product is not delayed in shipping? Response. Field laboratories are very sensitive to timeliness in program operations requiring sample analyses. The turn-around time is situational depending on the products tested and the analyzes performed. Sample analysis results can be reported in some instances in two to three days from the date that the sample arrives in the laboratory. Contaminated samples and those products requiring extensive testing can take several weeks of analyses before results are reported. Laboratories are moving toward the use of more rapid methods to improve the response time for the detection and identification of several significant pathogens, such as Salmonella and Listeria. We expect this trend to continue as more rapid methods become available. When samples are collected and the investigator cannot personally deliver a sample to the examining laboratory, it is shipped by the most economical means commensurate with the need for rapid handling. Mr. Skeen. Do you do all the analysis at FDA laboratories or is it contracted out? Response. FDA sample analyses are conducted in FDA laboratories. FDA does not contract out any analytical testing. Foodborne Illness Mr. Skeen. For the record, please provide a table showing the confirmed foodborne disease outbreaks by group and etiology for the most recent year. Response. For tracking foodborne diseases outbreaks, our sister agency, the Centers for Disease Control and Prevention, or CDC, has primary responsibility for surveillance and tracking of both communicable and foodborne illness. FDA provides support to CDC for coding efforts related to the Foodborne Diseases Surveillance system. CDC relies on reports from state and local health departments to estimate the number of foodborne illness cases occurring in the United States. State and local health department reports are based on outbreak information from at least one or two or more individuals experiencing a similar illness, depending on the source. Local and state health departments conduct an investigation to identify the source of contamination and the specific food, if possible, before notifying CDC. Reports are limited by the ability of state and local health departments to follow up leads and to report investigations to CDC. Typically, outbreaks involving restaurants or institutions are more likely to be recognized than those involving foods prepared in the home or processed foods. This difference exists because of greater numbers of individuals served by a commercial kitchen at any one mealtime and perhaps also because of the health departments' responsibility to protect consumers from commercial sources and processed foods. Data differ widely by state, and reflect, for the most part, the vigilance of health departments and their priorities for food safety. Decisions regarding foodborne disease surveillance activities are made on an individual basis by each state. Twelve states have no surveillance staff specifically assigned to monitoring food or water for pathogens. As a consequence, outbreaks are not routinely reported from these states. CDC does not have the authority to require states to report data on foodborne illnesses, but CDC does require two or more people be confirmed with cases before a report is submitted, thus eliminating the reporting of sporadic cases. In addition, many cases of foodborne illness which are mild and do not require medical treatment, are not reported. For example, most seafood borne illnesses are sporadic or mild, and therefore are not included in the CDC outbreak data. In other cases, a foodborne illness may contribute to the death of an already ill person; in these cases, foodborne illness may not be reported as the cause of death. CDC estimates based largely on data collected from local and state health departments, show that millions of people become sick from contaminated food each year, and several thousand die. Further, for every reported case of Salmonella-- the foodborne pathogens for which surveillance information is most complete--between 50 and 100 cases are undetected. Estimates provided by several studies conducted over the past 10 years indicate that between 6.5 million and 33 million cases of foodborne illness and as many as 9,000 deaths occur each year. FDA, along with other public health and food safety officials, believe that current data on foodborne illnesses do not indicate the level of risk, the sources of contamination, and the populations most at risk in sufficient detail. More uniform and comprehensive data on the number and causes of foodborne illness is required to fully assess the situation and to develop effective control strategies. Beginning in 1995, federal and state agencies began taking steps to collect such data at five sentinel sites. Data collected from participating laboratories will provide a framework for identifying current and emerging trends in foodborne illness. This uniform national database will permit public health officials to link specific illnesses with certain foods, to determine appropriate control and prevention programs, and to see emerging trends. CDC has completed the coding for the years 1988 through 1992. I will provide, for the record, the limited data from the latest CDC Morbidity and Mortality Weekly Report, or MMWR, Surveillance for Foodborne-Disease Outbreaks-United States, 1988-1992, dated October 25, 1996. [The information follows:] [Page 388--The official Committee record contains additional material here.] Animal Drug Applications Mr. Skeen. For the record, please provide us a table showing the number of animal health drug applications approved in each of the past 10 years by the Food and Drug Administration. [The information follows:] ANIMAL DRUG APPLICATIONS APPROVED OVER THE LAST 10 YEARS \1\ ---------------------------------------------------------------------------------------------------------------- Original Supplemental Original Supplemental Fiscal year NADA's NADA's ANADA's ANADA's approved approved approved approved ---------------------------------------------------------------------------------------------------------------- 1987............................................ 4 808 0 0 1988............................................ 16 624 0 0 1989............................................ 37 649 0 0 1990............................................ 23 605 0 0 1991............................................ 4 462 0 0 1992............................................ 14 518 2 0 1993............................................ 14 445 7 3 1994............................................ 11 514 21 8 1995............................................ 8 760 23 37 1996............................................ 14 788 16 54 ---------------------------------------------------------------------------------------------------------------- \1\ This table includes approval actions. Past submissions have included all actions completed in each category. SMART Mr. Skeen. Could you describe for us how much you have spent in each fiscal year since 1993 on the SMART system, and what you expect to spend in 1997 on this process? How is this system different from OASIS? Response. The objective of the Prescription Drug User Fee Act, or PDUFA, was to provide FDA with additional resources in the form of user fees charged to product sponsors to facilitate the review process, and thus, reduce the time to market for new human drug and biologic products. Within this objective, the SMART Program became the umbrella initiative under which PDUFA resources were used to implement process improvements and supporting information technology. On the hand, the Operational Administrative Systems for Import Support--OASIS--is designed to facilitate the inspection of imported products subject to FDA regulations. By providing such an automated link to the U.S. Customs Automated Commercial System, OASIS will speed entry of information related to an import, automate screening and identification of entries of regulatory concern, and shorten time to action. Some system components of the SMART Program contain interfaces with OASIS. However, in accordance with the requirements of PDUFA, SMART is limited to the pre-market review process of the Agency program areas that focus only on human drug reviews, while OASIS largely covers post-market surveillance of all FDA regulated products, such as human and animal drugs, foods, and medical devices. It should be noted that the Agency-wide Information Systems Architecture initiative and FDA's Information Technology investment review process provide a forum for the identification of opportunities for closer integration. The following table summaries SMART expenditures. [Pages 390 - 391--The official Committee record contains additional material here.] Mr. Skeen. What are the plans for the SMART system, including the timeframe and total costs? Response. Under PDUFA I, the FDA applied these additional resources to eliminate pre-1992 backlogs, reduce review times, address future projected workloads, and invest in improvements to product-review processes and systems that will provide future efficiencies and improve quality of reviews. Investments of PDUFA I resources for information technology have been focused on replacing an archaic technology infrastructure, and in some cases, creating an initial infrastructure. This has included purchasing hardware, software, and customizing commercial-off-the-shelf software to meet specific requirements of the Agency. These investments were designed to provide reviewers with automated tools to facilitate information access and the decision-making processes associated with the review cycle. I would be happy to provide a table on PDUFA, for the record, as well as a document that describes our plans for information technology under a reauthorized PDUFA. [The information follows:] SMART I INVESTMENTS, OBLIGATIONS BY FISCAL YEAR \1\ [$000] ---------------------------------------------------------------------------------------------------------------- FY 1997 FY 1993 FY 1994 FY 1995 FY 1996 estimate Total ---------------------------------------------------------------------------------------------------------------- SMART................................... 50 1,875 10,841 9,563 8,333 30,662 ---------------------------------------------------------------------------------------------------------------- \1\ Reflects actual or estimated obligations in each year. Information submitted previously included commitments as well as obligations in FY 1994, making that figure larger and the FY 1995 figure smaller. This chart reflects a consistent portrayal of obligations for SMART over the last five years. Advisory Committees Mr. Skeen. For the record, please provide us a list of all advisory committees used during fiscal year 1996 and the cost associated with each advisory committee and your proposals for fiscal year 1997. Response. For the record, the following charts reflect actual advisory committee activities and costs during FY 1996 and projections for FY 1997. This information was reported in the FY 1996 Annual Report to the President on Federal Advisory Committees. During FY 1996, FDA maintained a total of 33 standing advisory committees. Thirty of the Agency's standing advisory committees were active during this time period. The Board of Tea Experts, the National Task Force on Acquired Immune Deficiency Syndrome, Drug Development, and the Drug Abuse Advisory Committee did not hold meetings. FDA's advisory committees meet as required rather than on any regular basis. Although the Drug Abuse Advisory Committee did not hold any meetings during FY 1996, it is anticipated that the committee may need to meet two or three times during FY 1997. No further meetings are planned for the Board of Tea Experts as it was terminated with the repeal of the Tea Act, on April 9, 1996. The same holds true for the National Task Force on Acquired Immune Deficiency Syndrome Drug Development which was terminated on November 22, 1995, since the committee had completed its mission and the committee's charter was allowed to lapse. In FY 1997, FDA will have a total of 31 standing advisory committees. It should be noted, however, that the Agency also may be responsible for funding one additional committee. The Advisory Committee on Blood Safety and Availability was established by the Secretary on November 6, 1996. The total estimated annual cost reported in the Committee's charter is $282,182. [The information follows:] [Pages 393 - 396--The official Committee record contains additional material here.] National Center for Toxicological Research Mr. Skeen. For the record, please provide a five-year table showing the resources used by NCTR. Response. would be happy to provide the requested information for the record. Note, these are the resources devoted to NCTR consistent with the program activity structure as shown in the FY 1998 request to Congress. NCTR Resources FY 1991....................................................... 31,172 FY 1992....................................................... 30,245 FY 1993....................................................... 37,808 FY 1994....................................................... 34,259 FY 1995....................................................... 38,171 FY 1996*...................................................... 30,774 --------------------------------------------------------------------------- * Change in presentation in response to FY 1997 Senate Report Language. --------------------------------------------------------------------------- Seafood Mr. Skeen. For the record, please provide a five-year table showing the manpower and funding resources used for seafood safety. [The information follows:] FDA RESOURCES EXPENDED ON SEAFOOD SAFETY ------------------------------------------------------------------------ Funding-- $ Fiscal year Thousands FTE ------------------------------------------------------------------------ 1992.................................... 43,326 522 1993.................................... 43,600 507 1994.................................... 41,206 471 1995.................................... 40,406 454 1996.................................... 36,321 \1\ 382 ------------------------------------------------------------------------ \1\ Does not include overhead in accordance with the new budget structure required in the FY 1997 Senate Appropriations report. Mr. Skeen. As you did last year, could you provide us with a synopsis of the activities related to the National Shellfish Sanitation Program? [The information follows:] FY 1996 Accomplishments National Shellfish Sanitation Program (NSSP), October 1, 1995--September 30, 1996, State Program Evaluations, Training, Technical Assistance Two hundred ninety three (293) state growing areas were evaluated for compliance with the NSSP minimum requirements. Twelve (12) states were placed on some corrective action plan to improve their levels of compliance with respect to growing areas. Five (5) Marine Biotoxin Plans were evaluated and found in compliance with the NSSP minimum requirements. Two hundred sixty one (261) state shellfish plants within 29 states were evaluated for compliance with the NSSP minimum requirements. The Food and Drug Administration (FDA) Regional Shellfish Specialists standardized 35 State Standardization Officers during joint plant evaluations. Seventeen (17) states were placed on some corrective action plan to improve their levels of compliance with respect to plant evaluations. Nineteen (19) state patrol programs were evaluated for compliance with the NSSP minimum requirements. Fifteen (15) states were found in compliance having an updated patrol document as the NSSP requires. Seven (7) state laboratories were evaluated for compliance with the NSSP minimum requirements. Two (2) laboratories were found in non-conformance. Five (5) foreign programs were evaluated. A Patrol Pilot Assignment was issued to all Regional Shellfish Specialists to obtain specific information about six shellfish growing areas from each shellfish producing state to determine the practicality of establishing minimum patrol frequencies for closed areas according to: a) amount of shellfish; b) market value of the shellfish; c) ease of harvest; d) difficulty in marketing the shellfish; and, e) difficulty of patrol. Hydrographic studies were conducted on Jamestown, Rhode Island and Mystic, Connecticut Wastewater Treatment Plants. High priority was placed on shell stock tagging and record keeping during plant evaluations. Frequently, shell stock with inadequate tag information, false information, or no tag at all, are found in interstate commerce. Many times, tags are illegible because the ink used is not water proof. Tagging and record keeping are essential to the ability to trace product through the distribution chain and back to its point of origin. Therefore, to resolve the tagging problem, we began the implementation of a strong enforcement action against the product and the shellfish plants. We requested the assistance of the National Marine Fisheries Service (NMFS) regarding the enforcement of untagged product using the Lacey Act. Mr. Skeen. Could you tell us what the incidence of reported seafood illnesses was for fiscal year 1996, and whether that was from fish or shellfish? Response. During FY 1996, FDA received 495 consumer complaints about injury and/or illness symptoms, treatment by a physician, or a hospital visit associated with the consumption of fishery or seafood products. A complaint may be of an individual illness or of a large scale outbreak. Of these consumer complaints, 338 concerned finfish products, 70 concerned shellfish or molluscan products, 61 concerned crustacean products, and 26 concerned miscellaneous fishery products. CDC tracks illness outbreaks associated with food commodities based on reports from state health departments. These data are available for 1988 through 1992. [The information follows:] NUMBER OF REPORTED FOODBORNE DISEASE OUTBREAKS--SEAFOOD RELATED--1992 ---------------------------------------------------------------------------------------------------------------- Vehicle of transmission ----------------------------------------------- Etiology Poultry, fish, Shellfish Other fish egg salad ---------------------------------------------------------------------------------------------------------------- Clostridium botulinum........................................... .............. 2 .............. Clostridium perfringens......................................... .............. .............. 1 Salmonella...................................................... .............. .............. 2 Ciguatoxin...................................................... .............. 1 .............. Scombrotoxin.................................................... .............. 14 .............. Other chemical.................................................. .............. 1 .............. Unknown......................................................... 5 2 2 ----------------------------------------------- Total..................................................... 5 20 5 ---------------------------------------------------------------------------------------------------------------- AIDS Mr. Skeen. As you did last year, Dr. Friedman, please provide us a table that shows the therapies and drugs that have been approved for AIDS and the time it took to approve those drugs. [The information follows:] [Pages 399 - 402--The official Committee record contains additional material here.] Mr. Skeen. For the record, would you please provide us a five-year historical table that shows the funding provided for AIDS activities, broken out by drugs, biologics, devices, or other categories. [The information follows:] FDA AIDS ACTIVITIES [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- Fiscal year ---------------------------------------------------------------- Activity 1997 1993 actual 1994 actual 1995 actual 1996 actual estimate ---------------------------------------------------------------------------------------------------------------- Human drugs.................................... 25.3 25.2 25.4 22.1 22.1 Biologics...................................... 37.5 37.8 37.8 37.4 37.4 Medical devices................................ 9.8 9.4 9.5 8.1 8.1 Other activities\1\............................ -- -- -- 2.9 2.9 S&E rent and related \1\....................... -- -- -- 2.2 2.2 ---------------------------------------------------------------- Total.................................... 72.6 72.4 72.7 72.7 72.7 ---------------------------------------------------------------------------------------------------------------- \1\ Change in presentation in response to FY 1997 Senate Report Language. Mr. Skeen. Please provide an object class table for the resources available for AIDS for fiscal years 1996, 1997, and 1998. [The information follows:] FDA RESOURCES FOR AIDS 1996-1998 [Dollars in thousands] ------------------------------------------------------------------------ 1996 1997 1998 ------------------------------------------------------------------------ Personnel compensation and benefits........................ $41,589 $42,837 $44,122 Travel and transportation........ 1,980 1,980 1,980 Rent, communications and utilities....................... 3,088 3,088 3,088 Printing......................... 798 798 798 Contracts and other services..... 15,782 14,534 13,249 Supplies and materials........... 4,697 4,697 4,697 Equipment........................ 4,811 4,811 4,811 -------------------------------------- Total FDA.................. 72,745 72,745 72,745 ------------------------------------------------------------------------ Drug Applications Mr. Skeen. For the record, would you please update the table that appears on page 464 of last year's hearing which shows the summary of drug applications and the workload for each? Response. Please note that this table has been revised to clarify New Drug Application and supplement data by differentiating receipts in a fiscal year from actions, which can be on submissions received in previous years, and by presenting more information on pending and overdue applications. DRUG APPLICATION SUMMARY ---------------------------------------------------------------------------------------------------------------- Fiscal year ------------------------------------------------- 1992 1993 1994 1995 1996 ---------------------------------------------------------------------------------------------------------------- Original submissions filed in FY: IND's....................................................... 2,452 2,413 2,223 1,972 1,774 NDA's....................................................... 69 77 96 111 115 NDA efficacy supplements.................................... 68 76 83 76 102 NDA manufacturing supplements............................... 943 960 867 1,248 1,225 NDA labeling supplements.................................... 653 794 685 556 544 Submissions acted on in FY IND's reviews/actions............ 3,707 4,015 4,266 4,404 4,610 NDA's: Total actions (AP, AE, NA, WD).............................. 248 216 175 201 265 Total approval actions...................................... 86 83 62 71 121 Time from receipt to approval (median)...................... 24.2 26.8 20.8 18.7 15.0 NDA efficacy supplements: Total actions (AP, EA, NA, WD)............................ 112 152 116 169 183 Total approval actions.................................... 52 54 50 61 96 Time from receipt to approval (median).................... 23.1 17.7 13.2 18.1 14.1 NDA manufacturing supplements: Total actions (AP, AE, NA, WD)............................ 1,469 1,147 1,580 1,674 1,782 Total approval actions.................................... 926 848 1,065 1,024 1,422 Time from receipt to approval (median).................... 10.5 8.2 7.7 5.9 5.4 NDA labeling supplements: Total actions (AP, AE, NA, WD)............................ 700 848 762 857 731 Total approval actions.................................... 437 406 504 505 465 Time from receipt to approval (median).................... 7.9 5.1 7.4 8.3 8.8 Submissions at CDER at end of FY IND's active................. 10,261 10,682 11,171 11,678 12,198 NDA's: Total pending............................................. 156 174 182 165 142 Pending overdue........................................... 35 31 38 14 1 Pending not overdue....................................... 121 143 144 151 141 NDA efficacy supplements: Total pending............................................. 103 102 134 97 109 Pending overdue........................................... 60 58 59 37 8 Pending not overdue....................................... 43 44 75 60 101 NDA manufacturing supplements: Total pending............................................. 966 1,094 599 578 425 Pending overdue........................................... 560 470 236 76 19 Pending not overdue....................................... 406 624 363 502 406 NDA labeling supplements: Total pending....................... 1,558 1,402 1,440 1,255 1,214 ANDA's: Original ANDA/AADA received............................... 339 308 332 404 378 Total number ANDA/AADA approved........................... 239 215 255 288 340 Time from receipt to approval (median).................... 34.5 39.7 24.4 28.2 24.7 ---------------------------------------------------------------------------------------------------------------- Note: Under NDA's, applications filed in FY 1992 and FY 1993 refers to the number of initial NDA submissions received in that FY that were filed. Starting in FY 1994, the number reported also includes submissions received following refusal to file. The number filed starting in FY 1994 is the same as the number reported as filed in the FY user fee cohort as of November 30 of the FY (to allow 60 days for all receipts to be filed). Actions include approved, approvable, not approvable and withdrawn. Median review time includes the time that the application is with the applicant. The number of pending overdue refers to the number overdue based on either the user fee goal date (for applications received on or after 9/1/92) or the regulatory due date (for applications received prior to 9/1/92). Historical data has been adjusted to present a consistent statistical approach for all of the data. Mr. Skeen. Please provide a ten-year table showing the average, mean, and median time for an NDA approval process and for new molescular entities. Response. I will provide a table which shows the requested data. Note, in each case the mean and median times will be given in months. We have data for the last ten years by calendar year, and since 1988 by fiscal year. [Page 405--The official Committee record contains additional material here.] Orphan Drugs Mr. Skeen. Please provide for the record an object class table of your expenditures in the orphan drug product area for fiscal years 1996, 1997, and 1998. [The information follows:] ORPHAN PRODUCT EXPENDITURES [Dollars in thousands] ------------------------------------------------------------------------ 1996 1997 est. 1998 est. ------------------------------------------------------------------------ Personnel compensation and benefits........................ 1,795 1,775 1,775 Travel and transportation........ 122 98 98 Printing......................... 1 9 9 Other services................... 898 727 727 Supplies and materials........... 176 165 165 Equipment........................ 58 50 50 Grants........................... 12,270 11,345 11,345 -------------------------------------- Total...................... 15,320 14,169 14,169 ------------------------------------------------------------------------ Mr. Skeen. Please provide a list of all products approved as part of the Orphan Drug Product Authorities in fiscal year 1996. Response. In 1996, 23 orphan products were approved for marketing. [The information follows:] Orphan Products Approved for Marketing \1\ Albendazole--Treatment of hydatid disease (cystic echinococcosis due to E. granulosus larvae or alveolar echinococcosis due to E. Multilocularis larvae). --------------------------------------------------------------------------- \1\ Entries in small capitals and bold type indicates products for which the clinical research was funded, in part, by the Orphan Product Grant program. Those in bold italics-- are New Molecular Entities (NME's). --------------------------------------------------------------------------- Albendazole--Treatment of neurocysticercosis due to Taenia solium as: 1) chemotherapy of parenchymal, subarachnoidal and racemose (cysts in spinal fluid) neurocysticercosisin symptomatic cases and 2) prophylaxis of epilepsy and other sequelae in asymptomatic neurocysticercosis. Allopurinol sodium--Management of patients with leukemia, lymphoma, and solid tumor malignancies who are receiving cancer therapy which causes elevations of serum and urinary uric acid levels and who cannot tolerate oral therapy. Amphotericin B lipid complex--Treatment of invasive fungal infections. Betaine--Treatment of homocystinuria. Bleomycin sulfate--Treatment of malignant pleural effusion. Buffered intrathecal electrolyte/dextrose injection--For use as a diluent in the intrathecal administration of methotrexate and cytarabine for the prevention or treatment of meningeal leukemia and lymphocytic lymphoma. Clonidine--For continuous epidural administration as adjunctive therapy with intraspinal opiates for the treatment of pain in cancer patients tolerant to, or unresponsive to, intraspinal opiates. Corticorelin ovine triflutate--For use in differentiating pituitary and ectopic production of ACTH in patients with ACTH- dependent Cushings syndrome. Daunorubicin citrate lipsome--Treatment of patients with advanced HIV-associated Kaposi's sarcoma. Fosphenytoin--For the acute treatment of patients with status epilepticus of the gran mal type. Ganicilovir intravitreal implant--Treatment of cytomegalovirus retinitis. Glatrimer acetate--Relapsing remitting multiple sclerosis. Interferon beta-la--Treatment of multiple sclerosis. Midodrine HCl--Treatment of patients with symptomatic orthostatic hypotension. Mitoxantrone--Treatment of hormone refactory prostate cancer. Ofloxacin--Treatment of bacterial corneal ulcers. Pentosan polysulfate sodium--Treatment of interstitial cystitis. Polifeprosan 20 with carmustine--Treatment of malignant glioma. Respiratory syncytial virum immune globulin (human)-- Prophylaxis of respiratory syncytial virus lower respiratory tract infections in infants and young children at high risk of RSV disease. Sodium phenylbutyrate--Treatment of urea cycle disorders: carbamylposphate synthetase deficiency, ornithine transcarbamylase deficiency, and arginiosuccinic acid sythetase deficiency. Somatropin for injection--Treatment of AIDS-associated catabolism/weight loss. Somatropin for injection--Treatment of short stature associated with Turner's syndrome. Mr. Skeen. How many requests for grants related to orphan products do you have on hand that are unfunded? Response. Applications eligible for FY 1997 funding are received on October 15 and March 15. Forty-one applications were received and reviewed in response to the first deadline. Twenty-seven were given a priority score high enough to warrant funding. Applications for the second FY 1997 deadline have not yet been received; however, based on previous years, an additional 70 applications are anticipated. Approximately 45 of these applications will likely be scored high enough to warrant funding. Therefore, the total number of anticipated FY 1997 applications in the fundable range is 72. In addition, there are 25 unfunded, high quality studies from FY 1996 which remain eligible for and merit funding. We anticipate that approximately 15 applications will be funded as new grants in FY 1997. Thus, 82 high quality applications will not be funded in FY 1997. Mr. Skeen. What is the total needed to fund all these grants? Response. The cost of funding the 25 unfunded/deserving studies from FY 1996 is approximately $5.5 million. The total cost of funding all of the 72 deserving studies in FY 1997 is about $16.5 million. Because continuing studies are funded before new applications, only $3.5 million out of our current appropriation of $11.4 million will be available to fund 15 new studies in FY 1997. Therefore, an additional $18.8 million is needed to fund the approximately 82 remaining unfunded studies. For the record, the following is a summary of the grants, as well as their costs. [The information follows:] ------------------------------------------------------------------------ New grants Grants no. Costs ------------------------------------------------------------------------ Unfunded/deserving studies 25.................... $5.5 million from FY 1996. ($220,000/ grant). Number of deserving studies 72 (approx)........... $16.8 million from FY 1997. ($233,000/ grant). Total of all deserving studies 97 (approx)........... $22.3 million. funded. ================= Number of grants to be funded 15 (approx)........... $3.5 million in FY 1997. ($233,000/ grant). Shortfall..................... 82 (approx)........... $18.8 million. ------------------------------------------------------------------------ \1\ Note: Grants are available for $100,000 or $200,000 in direct costs depending on the phase of development of the product under study plus applicable indirect costs. The per grant cost reflects the pattern of supporting studies in later stages of development which traditionally are more expensive. At this time, the number of studies to be funded at each level and the associated indirect costs is based on available information. Pending Drug Applications Mr. Skeen. How many NDAs are currently pending before FDA, and of those, how many have been pending for more than 180 days? Response. As of January 31, 1997, there were 145 NDAs pending before the FDA. Of those, two NDAs were pending beyond the due date. For user fee applications, the due date is the user fee goal date. For pre-user fee applications, those applications received prior to September 1, 1992, the due date is calculated by the regulatory clock, 180-day clock plus allowable extensions. Mr. Skeen. How many ANDAs are currently pending at FDA, and of those, how many have been pending for more than 180 days. Response. As of January 31, 1997, there were 659 ANDAs pending before the FDA. Of those, 60 ANDAs were pending for more than 180 days. Food Labeling Mr. Skeen. What do you anticipate spending on food labeling issues during fiscal years 1997 and 1998? Response. FDA estimates that 74 FTE and $7.0 million will be used for food labeling issues in FY 1997. For FY 1998, we estimate 71 FTE and $6.7 million will be expended. Emergency Fund Mr. Skeen. Over the years the Committee has provided $2 million to go into FDA's special or emergency fund. Did you use this fund in fiscal year 1996, and if so, for what purposes? What is the current status of this fund? Response. The Contingency Fund was utilized in FY 1996 for evidentiary storage costs of $114,000 associated with criminal investigations and seizures of adulterated products regulated by the FDA and intended for public consumption. The current balance available is $3,040,347. Food Surveillance Mr. Skeen. Every year FDA responds to several special assignments related to food surveillance. For the record, please provide us a list of each of these that occurred in fiscal year 1996. Response. FDA responded to five unplanned assignments in fiscal year 1996. In addition to these unplanned field assignments, FDA's Center for Food Safety and Applied Nutrition--CFSAN--issued several guidance documents to the field regarding ephedra-related consumer complaint follow-up, sample collection, and analysis. CFSAN also issued an assignment related to the Cyclospora outbreak associated with raspberries from Guatemala. [The information follows:] SPECIAL ASSIGNMENTS Potency and Disintegration/Dissolution of Folic Acid Dietary Supplements Assignment. Phthalates in Infant Formula Assignment. Salmonella enteritidis outbreak associated with the Egg and I Company, Inspection and Sampling Assignment. Salmonella enteritidis outbreak associated with the Daylay Company, Inspection and Sampling Assignment. Garlic and/or Succulent Plant Parts in Oil Assignment. Seizures of Food Mr. Skeen. Please provide a table showing the number of food products that were recalled or claimed through seizure during fiscal year 1996 and to date in 1997. [The information follows:] FOOD AND COSMETIC PRODUCT SEIZURES ------------------------------------------------------------------------ FY 1997 to Product FY 1996 date ------------------------------------------------------------------------ Bean sprouts.................................. 1 0 Canned evaporated milk........................ 1 0 Canned shrimp................................. 1 0 Chinese mixed vegetables...................... 1 0 Cocoa beans................................... 1 0 Cumin seeds................................... 1 0 Frozen crabmeat............................... 1 0 Frozen shrimp................................. 4 5 Infant formula................................ 4 1 Olive oil..................................... 1 1 Red and green peppers......................... 1 0 Various articles of food...................... 4 1 ------------------------- Total................................... 21 8 ------------------------------------------------------------------------ FOOD AND COSMETIC PRODUCT RECALLS ------------------------------------------------------------------------ FY 1997 to Industry FY 1996 date ------------------------------------------------------------------------ 02--Grains/Milled grain....................... 4 1 03--Bakery products........................... 58 13 04--Macaroni/Noodle........................... 12 0 05--Cereal preparation........................ 5 1 07--Snack food items.......................... 11 10 09--Milk/Butter/Dried milk.................... 4 0 12--Cheese/Cheese prod........................ 13 11 13--Ice cream/Related......................... 199 36 15--Egg/Egg products.......................... 1 1 16--Fishery/Seafood........................... 49 33 20--Berries/Citrus/Core fruit................. 0 1 21--Mixed/Pit/Imit/Sub and trop............... 3 1 23--Nuts and edible seeds..................... 4 0 24--Beans, Leaf, stem veg..................... 17 2 25--Mixed, root tuber, fungi.................. 9 3 26--Vegetable oils............................ 2 1 27--Dressing/Condiments....................... 20 2 28--Spices/Flavors/Salt....................... 14 34 29--Soft drinks/Waters........................ 95 45 30--Beverage bases............................ 15 2 31--Coffee/Tea................................ 2 0 33--Candy w/o chocolate....................... 13 2 34--Chocolate/Cocoa prod...................... 9 8 35--Gelatin/pudding........................... 10 0 36--Food sweeteners (nutritive)............... 0 0 37--Multiple foods............................ 95 1 38--Soups..................................... 4 0 39--Prepared salad products................... 10 21 40--Baby food products........................ 1 1 41--Dietary conventional...................... 6 0 45--Food additives............................ 1 0 50--Color additives........................... 4 0 52--Misc food related......................... 16 9 53--Cosmetics................................. 26 1 54--Vitamins/Unconventional dietary specialties.................................. 8 1 ------------------------- Total................................... 740 241 ------------------------------------------------------------------------ Medical Device Regulatory Actions Mr. Skeen. Please provide a table showing the number of regulatory actions taken by FDA in regard to medical devices in each of the past three years. [The information follows:] REGULATORY ACTIONS--MEDICAL DEVICE AND RADIOLOGICAL PRODUCTS ------------------------------------------------------------------------ FY 1994 FY 1995 FY 1996 ------------------------------------------------------------------------ Seizures......................... 19 8 4 Recalls.......................... 1,437 1,237 495 Regulatory/Warning letters....... 595 657 417 Prosecutions..................... 2 1 0 Civil money penalties............ \1\ 3 0 2 Injunctions...................... 4 7 4 ------------------------------------------------------------------------ \1\ Two of the three civil money penalty cases involved radiological devices. Medical Devices Mr. Skeen. How many 510(k) applications are on hand? How many are overdue? Response. At the end of FY 1996, there were 2,229 510(k) applications on hand or under review in FDA's Center for Devices and Radiological Health. There were no applications under review for more than 90 days in the current cycle. Mr. Skeen. Please provide a five-year table showing the expenditure for medical devices. [The information follows:] MEDICAL DEVICE EXPENDITURES ------------------------------------------------------------------------ Dollars Fiscal year ($000) FTE ------------------------------------------------------------------------ 1992.......................................... $116,731 1,604 1993.......................................... 129,025 1,683 1994.......................................... 159,359 1,798 1995.......................................... 157,021 1,831 1996\1\....................................... 152,274 1,646 ------------------------------------------------------------------------ \1\ Change in presentation in response to FY 1997 Senate Report language. Food and Drug Tampering Mr. Skeen. In the past several years, food and drug tampering made headlines across the country. For the record, please provide an updated table that reflects the emergency tampering complaints and threats for each of the past five years. [The information follows:] TAMPERING COMPLAINTS ---------------------------------------------------------------------------------------------------------------- Program FY 1992 FY 1993 FY 1994 FY 1995 FY 1996 ---------------------------------------------------------------------------------------------------------------- Foods............................................... 148 397 172 111 86 Drugs............................................... 66 82 44 31 29 Cosmetics........................................... 0 0 1 0 2 Devices/R.H......................................... 4 4 14 6 0 Vet. med............................................ 3 0 0 0 0 Biologics........................................... 0 0 0 0 0 ----------------------------------------------------------- Totals........................................ 221 483 231 148 117 ---------------------------------------------------------------------------------------------------------------- Freedom of Information Activities Mr. Skeen. How many requests did you receive during fiscal years 1994, 1995, and 1996 for Freedom-of-Information related activities? Response. FDA received 50,037 and 50,606 requests for FOI- related activities for 1994 and 1995, respectively. In 1996, FDA received 46,656 requests. Mr. Skeen. What resources did you expend on Freedom-of- Information activities in each of those years? How much did you receive in fees from FOIA requests? Response. FDA expended approximately $7.7 million in FY 1994 and $8.5 million in FY 1995. In 1996, the Agency expended $8.9 million. To offset these costs, the Agency received fees in the amount of $825,000 in 1994, $996,000 in 1995, and $1,025,000 in 1996. Building and Facilities Mr. Skeen. For the record, please provide a brief description of each of the projects that was funded under your Buildings and Facilities account during fiscal years 1996 and 1997, and your proposal for fiscal year 1998. [The information follows:] Fiscal year 1996 projects Construction of New Facilities: 1. LORA, NCTR; ARL--Preliminary site preparation work on project................................... $3,800,000 Repair and Improvement of Existing Facilities: 2. LORA, Nationwide; Miscellaneous Repair and Improvement (R&I) projects (Repair malfunctioning HVAC systems, replace defective fume hoods, upgrade MEP systems, etc.)........................ 1,200,000 3. LNCTR, Jefferson, AR; Miscellaneous R&I projects (Roof repairs, road repairs, painting, utility system repairs, etc.)............................. 975,000 4. LCBER, Bethesda, MD; Building 29A, Convert outmoded animal rooms to laboratories............. 200,000 5. LCFSAN, GCTSU, Dauphin Island, AL; Miscellaneous R&I projects (Hurricane damage repairs, lab repairs/improvements, etc.)....................... 135,000 6. LCDRH, Rockville, MD; Twinbrook and Wilkens Laboratories, Miscellaneous R&I projects.......... 250,000 7. LCBER, Bethesda, MD; Buildings 29 and 29A, Renovation of Laboratories........................ 240,000 8. LORA, San Juan, PR; Renovate Existing On-Site Utilities and Laboratory Space.................... 500,000 9. LORA, Cincinnati, OH; New National Forensic Chemistry Center, Laboratory Fixtures for New Facility, Decommissioning of Old Facility, etc.... 3,000,000 10. LNCTR, Jefferson, AR; Replacement/Retrofit of HVAC Chillers to comply with CFC Ban.............. 1,200,000 11. LCFSAN, Beltsville, MD; Module I, Replacement/ Retrofit of HVAC Chillers to comply with CFC Ban.. 650,000 -------------------------------------------------------- ____________________________________________________ Total......................................... 12,150,000 ======================================================== ____________________________________________________ Fiscal year 1997 projects Construction of New Facilities: 1. LORA, Jefferson, AR; Construction of the Arkansas Regional Laboratory Phase I (Construction of the building, foundation, substructure, superstructure, exterior enclosure and roofing; includes building systems)........................ $13,000,000 Repair and Improvement of Existing Facilities: 2. LORA, Nationwide; Miscellaneous Repairs and Improvements (Repair malfunctioning building systems, replace defective fume hoods, roof and structural repair, laboratory casework, etc.)..... 1,000,000 3. LNCTR, Jefferson, AR; Miscellaneous Repairs and Improvements (Boiler plant repairs, replace HVAC systems, renovate existing lab/office space, etc.) 800,000 4. LORA, Jamaica (Queens), NY; Laboratory Casework, and Fume Hoods for Northeast Regional Lab......... 5,000,000 5. LCDER, Kensington, MD; Nicholson Laboratory Research Center, Miscellaneous Repairs and Improvements to existing lab space................ 50,000 6. LORA, Atlanta, GA; Laboratory Fixtures for Southeast Regioinal Laboratory Expansion and Renovation of HVAC................................ 500,000 7. LCFSAN, Beltsville, MD; Module 1--Miscellaneous Repairs and Improvements.......................... 1,000,000 -------------------------------------------------------- ____________________________________________________ Total......................................... 21,350,000 ======================================================== ____________________________________________________ Fiscal year 1998 projects Construction of New Facilities: 1. LORA, Jefferson, AR; Construction of the Arkansas Regional Laboratory Phase II (Completing the building systems, providing the entire laboratory fit-out)............................... $14,550,000 Repair and Improvement of Existing Facilities: 2. LORA, Nationwide; Miscellaneous Repair and Improvement Projects.............................. 1,500,000 3. LORA, Baltimore, New York; Decommissioning of Closed Laboratories............................... 1,300,000 4. LORA, Atlanta, GA; Laboratory Fixtures for New Facilities (Partial funding)...................... 500,000 5. LNCTR, Jefferson, AR; Miscellaneous Repair and Improvement Projects.............................. 1,150,000 6. LCFSAN, Beltsville, MD; Module 1--Miscellaneous Repairs and Improvements.......................... 2,300,000 7. LCBER, Bethesda, MD; Renovations to Buildings 29, 29A and 29B on the NIH Campus................. 900,000 8. LCFSAN, Various Locations; General Repairs and Improvements...................................... 250,000 9. LCDRH, Rockville, MD; Laboratory fixtures for Twinbrook facilities.............................. 250,000 10. LCDER, Rockville, MD; General Repairs and Improvements...................................... 200,000 -------------------------------------------------------- ____________________________________________________ Total......................................... 22,900,000 Mr. Skeen. Please provide us a list of the backolog of FDA Buildings and Facilities projects that are known. [The information follows:] Buildings and facilities [Headquarters consolidation not included] Project Backlog--March 1997: 1. LNCTR, Jefferson, AR; Construction of laboratory space and support facilities for thee Office of Regulatory Affairs (portion of ARL project currently unfunded)............................... $24,400,000 2. LORA, Los Angeles (Orange County), CA; Construction of new district office and laboratory facility.......................................... 37,500,000 3. LCBER, Bethesda, MD; Retrofit laboratories and modernize space in Buildings 20 and 29A; including LAN and physical security upgrade................. 17,640,000 4. LORA, Nationwide; Miscellaneous repairs and improvements (multiple years)..................... 10,870,000 5. LNCTR, Jefferson, AR; Miscelleanous repairs and improvements (multiple years)..................... 10,125,000 6. LNCTR, Jefferson, AR: Building 14--Major building renovation to provide for new laboratories...................................... 7,725,000 7. LORA, San Juan, PR; Laboratory expansion........ 3,435,000 8. LORA, Jamaica (Queens), NY; Laboratory casework and fume hoods (portion of NRL project currently unfunded)......................................... 5,625,000 9. LORA, Atlanta, GA; Laboratory casework for laboratory expansion (Portion of SRL project currently unfunded)............................... 1,770,000 10. LNCTR, Jefferson, AR; Miscellaneous building repairs to eliminate safety and environmental problems.......................................... 3,480,000 11. LCFSAN, Beltsville, MD; Module 1, Renovations of laboratories to suit OSHA and program requirements; and modifications to permit carcinogen work and miscellaneous repairs and improvements...................................... 4,200,000 12. LCFSAN, Dauphin Island, AL; Miscellaneous building repairs to eliminate safety and environmental problems............................ 345,000 13. LNCTR, Jefferson, AR; Repairs and improvements of utility systems; and, energy conservation projects.......................................... 4,665,000 14. LCDRH, Various Locations, Rockville, MD; Miscellaneous repairs and improvements............ 690,000 15. LORA, Chicago, IL; Facility restoration (Decommissioning of Laboratory when vacated)...... 750,000 16. LORA, Buffalo, NY; Facility restoration (Decommisssioning of Laboratory when vacated)..... 750,000 17. LCFSAN and CDER, Washington, DC; Federal Buiding-8, Interim repairs to laboratories and decommissioning of building when vacated.......... 4,680,000 18. LCFSAN, Beltsville, MD; Beltsville Research Facility; miscellaneous repairs and improvements to MEP infrastructure............................. 1,720,000 19. LORA, Various Locations, Decommissioning of laboratories (New Orleans, Baltimore, Brooklyn, Detroit, Minnesota, and Dallas) when vacated...... 3,900,000 20. LWEAC; Roof Replacement......................... 400,000 21. LCVM, BARC, Beltville, MD; Decommissioning of vacated laboratory and animal holding space....... 650,000 -------------------------------------------------------- ____________________________________________________ Grand Total................................... 145,320,000 Note.--Headquarters costs associated with consolidation are not included since funds for consolidated of FDA programs in the Washington, DC metropolitan area are appropriated directly to the General Services Administration. Mr. Skeen. In fiscal year 1995 the Congress provided funds to begin replacement of the Los Angeles laboratory. What is the status of that project? Response. In FY 1995, $9,800,000 was appropriated for land acquisition and design fees. A 10 acre land parcel located at the corner of Macarthur Boulevard and Fairchild Road on the University of California Irvine campus was acquired from the University of California on September 28, 1996, as the site of the new laboratory. Design of the replacement laboratory facility began in October 1996 and is schedule to be completed by February 1998. The project will then be awaiting appropriation of construction funding. The new Los Angeles facility project is comprised of three phased modules. The first is the replacement laboratory at an estimated cost of $26.5 million. The second is the District operations office at an estimate cost of between $10 and $11 million. Finally, the third is consolidated of the San Francisco lab personnel. FDA has selected an architectural and engineering joint venture firm to design the phases. The Phase 1 replacement laboratory is projected to be 75,000 gross square feet--gsf-- and 45,000 net square feet--nsf--of state-of-the-art laboratory facility, hosing 75 scientific staff. The estimated cost of $26.5 million includes laboratory casework, fume hoods, construction management and escalation costs to midpoint of construction in FY 2000, which does not include land price. The Phase 2 District operations office facility is projected to be 44,200 gsq and 28,00 nsq, and will house 120 management and staff, at an estimated cost of between $10 and $11 million. In Phase 3, the San Francisco laboratory personnel and programs, which is approximately 50 laboratory staff, will be consolidated to Los Angeles and Seattle multi-purpose labs in 2014. At Los Angeles, this will require replacement facility expansion for 35 additional lab personnel. The balance of the San Francisco lab personnel, which is approximately 15, will be consolidated at Seattle. Fair Packaging and Labeling Act Mr. Skeen. For the record, please describe your activities related to the Fair Packaging and Labeling Act in 1995 and 1996. Include with that a table showing the number of violations to the Fair Packaging and Labeling Act. [The information follows:] FAIR PACKAGING AND LABELING ACT--REGULATORY ACTIONS ------------------------------------------------------------------------ Fiscal years-- ----------------- 1995 1996 ------------------------------------------------------------------------ Warning Letters....................................... 1 0 Seizures.............................................. 0 0 Injunctions........................................... 0 0 Prosecutions.......................................... 0 0 ------------------------------------------------------------------------ FAIR PACKAGING AND LABELING ACT--OPERATIONAL ACTIVITIES ---------------------------------------------------------------------------------------------------------------- Domestic Import Domestic Import Fiscal year Inspections sample sample Wharf samples samples collection collection examinations analyzed analyzed ---------------------------------------------------------------------------------------------------------------- 1995................................... 45 42 527 2,540 57 605 1996................................... 46 26 680 3,258 25 658 ---------------------------------------------------------------------------------------------------------------- FAIR PACKAGING AND LABELING ACT--VIOLATIONS [Inspections--district decision OAI--domestic/import physical analysis or domestic/import label exams] ---------------------------------------------------------------------------------------------------------------- Lab class 3 Lab class 3 Lab class 3 Lab class 3 OAI domestic domestic import import Fiscal year inspections samples labels samples labels (percent) (percent) (percent) (percent) (percent) ---------------------------------------------------------------------------------------------------------------- 1995........................................... 9 [20] 39 [68] 3 [75] 453 [75] 72 [65] 1996........................................... 21 [46] 16 [60] 7 [100] 361 [55] 132 [78] ---------------------------------------------------------------------------------------------------------------- Mr. Skeen. What resources did you expend in each of the past 5 fiscal years for work on the Fair Packaging and Labeling Act? [The information follows:] FIELD RESOURCES EXPENDED ON FAIR PACKAGING AND LABELING ACT ACTIVITIES ---------------------------------------------------------------------------------------------------------------- Fiscal years-- -------------------------------------------- 1992 1993 1994 1995 1996 ---------------------------------------------------------------------------------------------------------------- $000s.............................................................. 581 525 531 547 424 FTEs............................................................... 7.2 6.3 6.0 7.0 5.3 ---------------------------------------------------------------------------------------------------------------- Health Fraud Mr. Skeen. Please provide for the record a table showing the resources that FDA committed to health fraud activities during each of the past 10 fiscal years. [The information follows:] HEALTH FRAUD RESOURCES ------------------------------------------------------------------------ Fiscal year FTE $(000) ------------------------------------------------------------------------ 1986.......................................... 39 2,016 1987.......................................... 39 2,194 1988.......................................... 46 2,665 1989.......................................... 41 2,698 1990.......................................... 37 2,537 1991.......................................... 59 4,198 1992.......................................... 64 4,591 1993.......................................... 61 4,594 1994.......................................... 52 4,153 1995.......................................... 27 2,313 1996.......................................... 22 2,276 ------------------------------------------------------------------------ Figures reflect actuals shown in the Distribution of Resources tables from the Congressional Justifications. Foreign Inspection Programs Mr. Skeen. For the record, please provide a table showing the resources expended on foreign inspection programs for fiscal years 1994, 1995, 1996 and 1997. [The information follows:] Foreign Inspection Travel (Transportation and Per Diem) Costs Fiscal Year: 1994................................................ $2,009,420 1995................................................ 2,009,420 1996................................................ 2,017,000 1997 estimate....................................... 2,000,000 Office of Criminal Investigations Mr. Skeen. What is the status of the Office of Criminal Investigations? Response. FDA's Office of Criminal Investigations--OCI--was formed in March 1992 and became fully operational in the summer of 1993. OCI is responsible for conducting and coordinating criminal investigations relating to violations of the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, the Federal Anti-Tampering Act, and other provisions of law related to matters within the jurisdiction of the FDA. Some examples of investigations in which OCI is involved include tampering with consumer products; trafficking in adulterated or misbranded foods, drugs, or medical devices; drug or medical device application fraud; product substitution; the manufacture, distribution or sale of unapproved drugs or medical devices; clinical investigation fraud; hazardous residues in food animals; diversion of prescription drugs and other products; and counterfeiting of items regulated by the FDA, such as infant formula and drugs. Today OCI employs the full range of investigative tools and methods that traditional Federal law enforcement uses to conduct criminal investigations. OCI Headquarters is located in Rockville, MD. The OCI field offices are located in Miami, FL, Jersey City, NJ, Chicago, IL, Kansas City, KS, San Diego, CA, and Calverton, MD. In 1994, Resident Offices were established in Austin, TX and San Francisco, CA. In 1996, Resident Offices were established in Boston, MA and Atlanta, GA. Mr. Skeen. What is the anticipated budget for the Office of Criminal Investigations for fiscal years 1995, 1996, and 1997? Of this amount, how much is budgeted for each field office? Response. I will provide a table showing OCI budget history since FY 1995. The figure for FY 1997 is the amount that has been allocated for current operating expenses. It should be noted that the FY 1997 operating budget includes $400,000 to fund a national contract for evidence transportation, storage and disposition services. This expense was not previously a part of OCI's budget. The FY 1997 amount also includes start-up costs related to the new Resident Office established in Atlanta. OPERATING BUDGET--FDA OFFICE OF CRIMINAL INVESTIGATIONS ---------------------------------------------------------------------------------------------------------------- Fiscal year Operating Payroll Total ---------------------------------------------------------------------------------------------------------------- 1995............................................................ $3,047,700 $11,851,000 $14,898,700 1996............................................................ 2,440,700 11,476,000 13,915,700 1997............................................................ 2,863,700 11,851,000 14,898,700 ---------------------------------------------------------------------------------------------------------------- The breakdown per field office is as follows: ---------------------------------------------------------------------------------------------------------------- Fiscal year-- Field/resident office ----------------------------------------------- 1995 1996 1997 ---------------------------------------------------------------------------------------------------------------- Chicago Field Office............................................ $204,900 $200,000 $145,000 Kansas City Field Office........................................ 222,731 181,000 125,277 Austin Resident Office.......................................... 68,566 58,300 63,723 Metro Washington Office......................................... 173,850 182,500 175,000 Special Prosecution Task Force.................................. 18,000 20,000 18,000 Miami Field Office.............................................. 231,959 236,000 180,000 San Juan Domicile............................................... 12,948 15,600 28,000 Atlanta Resident Office......................................... .............. 32,700 60,000 New York Field Office........................................... 227,000 222,000 170,000 Boston Resident Office.......................................... .............. 33,400 55,000 San Diego Field Office.......................................... 186,400 184,000 123,000 San Francisco Resident Office................................... 57,600 60,000 70,000 OCI Headquarters................................................ 1,653,746 1,015,200 1,650,000 ----------------------------------------------- Total OCI................................................. 3,047,700 2,440,700 2,863,000 ---------------------------------------------------------------------------------------------------------------- Mr. Skeen. Many of the investigative employees of this branch are authorized to carry firearms. Has the use of firearms been employed at any time by OCI staff? Response. The use of firearms by OCI staff has not been employed outside of authorized training activities. Mr. Skeen. Please provide, for the record, a breakdown of the dollars spent in fiscal years 1994, 1995, 1996, and 1997 for surveillance equipment for the Office of Criminal Investigations. [The information follows:] Fiscal Year 1994: $278,617. (Note.--An additional $49,000 was provided from the Department of Justice Asset Forfeiture Fund. These funds were expended to sustain operational requirements for newly established field and resident offices.) Fiscal Year 1995: $111,885. (Note.--An additional $364,000 was provided from the Department of Justice Asset Forfeiture Fund). Fiscal Year 1996: $45,900. (Note.--An additional $232,000 was provided from the Department of Justice Asset Forfeiture Fund.) Fiscal Year 1997: $2,505. (Note.--To date). Tobacco Mr. Skeen. Dr. Friedman, two years ago a Congressional Committee requested certain documents related to your tobacco activities. We are told that they still don't have them. In fact, the Committee had to ask GAO to look into the matter. It was not until that occurred did FDA even give a reason for its non-responsiveness. I have also read an analysis conducted by the American Law Division of the Congressional Research Service in regard to your claims. They make a pretty compelling case that at the time of the request you had no substantial legal basis for refusing Congressional access to your tobacco records. Let us face the facts. This seems to be a clear case of FDA not wanting to cooperate with Congress. I understand that FDA has a regulation that requires the agency to disclose documents to Congress pursuant to an authorized request (21 C.F.R. 20.80 & 87). Do you consider the request of the Agriculture Committee's Subcommittee on Risk Management and Specialty Crops in June of 1994 a legitimate request? Response. For the past three years, FDA has been engaged in a public health initiative to reduce disease and death in the United States by restricting children's access to tobacco products and limiting the appeal of these products to children. These efforts resulted in the landmark 1996 Federal rule restricting sales of tobacco products to minors and tobacco product advertising aimed at children and adolescents. Since the issuance of the proposed rule in August 1995, the tobacco companies have challenged the validity and contents of the Agency's actions in legal proceedings in federal district court. FDA respects the oversight role of Congress and makes extensive effort to cooperate with Congressional requests for information. As your question states, a GAO inquiry into the actions taken by FDA that led to the issuance of its proposed regulation restricting the sale and distribution of cigarettes and smokeless tobacco products to protect children and adolescents was requested during the pendency of the rulemaking and litigation by the Chairman and the Ranking Minority Member of the Subcommittee on Risk Management and Specialty Crops of the House Committee on Agriculture. This request required FDA to balance its obligation to accommodate Congressional requests for information with its obligation to protect the integrity of the regulatory deliberative process, to preserve the Government's interest in pending litigation, and to guard against the disclosure of confidential sources or information that would reveal the identity of confidential sources. FDA and HHS believe FDA has successfully managed to balance these competing interests. GAO has been provided interviews with twelve senior FDA officials who played integral roles in the Agency's investigative and regulatory efforts regarding tobacco products, including former Commissioner David Kessler. Moreover, FDA has provided GAO with hundreds of documents from the administrative record, including documents that contain trade secret and confidential commercial information. FDA has also provided GAO with names of individual contacts made with persons outside the Department of Health and Human Services by FDA employees relating to the tobacco initiative. FDA believes that this information provides a thorough description of the process the Agency followed in developing the regulation and a full justification for FDA's regulatory positions. The principal information not provided to GAO involves confidential investigative information and information about Executive Branch deliberations. Attached, for the record, is a copy of correspondence addressing your concerns, which we provided to Congressman Ewing on September 26, 1996, and a chronology of all responses to the Subcommittee's or GAO's requests for information, up to the date of the letter. [The information follows:] [Pages 417 - 423--The official Committee record contains additional material here.] Governemnt Performance and Results Act (GPRA) Mr. Skeen. GPRA, known as the Results Act, requires each executive agency to issue, no later than September 30, 1997, a strategic plan covering at least five years. In addition to a mission statement grounded in legislative requirements, the plans are to contain general goals and objectives that are expected to be outcome or results oriented (such as to improve literacy) as opposed to output or activity oriented (such as to increase the number of education grants issued). What progress is the agency making in developing its strategic plan, including defining its mission and establishing appropriate goals? Response. FDA has been an active participant in the strategic planning process within the Department of Health and Human Services. Although the formal GPRA requirement for a strategic plan is being addressed at the cabinet level with the development of an HHS-wide strategic plan, each HHS component is preparing a complementary strategic plan. FDA's strategic plan will align with goals and strategies outlined in the HHS plan, and provide the context for more specific goals in the FDA performance plan. FDA has the advantage of fairly explicit statements of purpose and activities embedded in its legislation. Such mandates provide clear guidance to the Agency as it articulates its mission and strategic goals in the context of GPRA requirements. FDA's strategic goals are necessarily congruent with the statutory intent that FDA-regulated products be safe and effective. Mr. Skeen. Has the agency identified conflicting goals for any of its program efforts? If so, what are the performance consequences of these conflicting goals and what action-- including seeking legislative changes--is the agency taking to address these conflicts? Response. FDA has worked closely with HHS to assure that any Department goals and strategies related to FDA programs are mutually supportive. There are no inherent conflicts at the goal level. As always, multiple goals will compete for available resources. This competition is not so much a conflict as it is a set of policy and managerial choices. Mr. Skeen. Strategic plans must be based on realistic assessments of the resources that will be available to the agency to accomplish its goals. As you are developing your strategic plan, how are you taking into account projected resources that likely will be available--especially as we move to a balanced budget? What assumptions are you making? How are you ensuring that your goals are realistic in light of expected resources? Response. The assumption taken in the Agency's strategic planning is that there will be a continuing annual resource decline from traditional appropriations, in order to contribute to the President's deficit reduction goals. Any reductions that are larger than this magnitude will have to be offset by new user fee initiatives. In general, strategic goals are being established within these conservative resource estimates. In its strategic emphasis for the next several years, the FDA realizes that the Agency will not be able to single- handedly carry out the regulatory role. The Agency continues leveraging its own capabilities by working closely with external institutions. FDA's partnering with external stakeholders such as states, other federal regulators, the regulated industry, health professionals, the international regulatory community, and the consumer helps to assure that products are safe and effective. An illustrative example of leveraging is FDA's joint effort with the American College of Radiology, or ACR, to implement requirements associated with the Mammography Quality Standards Act. FDA intends to work with ACR as a partner to certify organizations when they comply with provisions of the Act. This arrangement expedites the ability of that industry sector to accurately identify breast cancer, and ultimately to reduce mortality and morbidity rates associated with that disease. Mr. Skeen. For Congress, the heart of the Results Act is the statutory link between agency plans, budget requests, and the reporting of results. Starting with fiscal year 1999, agencies are to develop annual performance plans that define performance goals and the measures that will be used to assess progress over the coming year. These annual goals are to measure agency progress toward meeting strategic goals and are to be based on the program activities as set forth in the President's budget. What progress have you made in establishing clear and direct linkages between the general goals in your strategic plan and the goals to be contained in your annual performance plans? OMB expressed concern last year that most agencies had not made sufficient progress in this critical area. Response. FDA is planning to align each of its FY 1999 performance goals with those strategic goals outlined in the HHS plan that apply to this Agency. FDA is also striving to link performance plans with strategic goals. The nature of this ``linkage'' is dependent upon several considerations. Some strategic goals are inherently broad in nature, and so it is difficult to express causal connections, particularly in a fiscal year interval. The partnering strategy of many FDA efforts also complicates linkage. This complexity is particularly evident in the most recent Agency initiatives, such as food safety, tobacco, and mammography. So, while the Agency hopes to exert influence over improved health outcomes it is difficult to partition the contribution amidst the collective effort. Finally, the quality of available outcome data on health effects is often uneven. Many agencies are moving into the initial stages of GPRA by building the capability--often jointly--to develop and track outcome data. Despite the above complexities, FDA will continue to establish linkage to outcomes wherever possible. Mr. Skeen. More specifically, how are you progressing in linking your strategic and annual performance goals to the program activity structure contained in the President's budget? Do you anticipate the need to change or modify the activity structure to be consistent with the agency's goals? Response. Again, FDA is planning to align each of its FY 1999 performance goals with those strategic goals outlined in the HHS plan that apply to this Agency. FDA is also striving to link performance plans with strategic goals. Many agencies are moving into the initial stages of GPRA by building the capabiity--often jointly--to develop and track outcome data. FDA will continue to establish linkage to outcomes wherever possible. Mr. Skeen. Overall, what progress has your agency made--and what challenges is it experiencing--defining results-oriented performance measures that will allow the Agency and others to determine the extent to which goals are being met? Response. FDA is making progress in defining results- oriented performance measures through a vehicle which we are defining as ``process improvement'' goals. These are goals that position the Agency to be better able to strive toward outcome goals such as reduction in product hazards, and even reduction in mortality/morbidity rates. Process improvement goals can be one of two types. First are those that reinvent programs to be better able to produce outcomes. An example of this type of goal might be to establish a collaborative arrangement with states, and the regulated industry, so the appropriate persons are working together to produce results that these institutions working alone are not able to accomplish. An example of this would be the Agency's seafood initiative in which FDA, states, and the regulated industry are working together to establish an industry managed quality control system which will position the industry to produce consistently high quality and safe seafood products. The HACCP system--Hazard Analysis Critical Control Points--is an illustration of a reinvention performance goal that will make major differences in the safety of seafood to the U.S. consumer. Second are those that establish a capability to measure and track outcomes. Examples of such process improvement goals include the establishment of a seafood data base which will collect information on product hazard information. Another example would be the Agency working with other federal regulators to establish a Sentinel System which collects microbiological data on foods, and which will enhance several agencies' capability of tracking food safety outcomes that will be of interest to Congress and the public. The challenges to such endeavors include the expense associated with establishing such systems and institutional arrangements, the continuing uncertainty that causal links can ever be established between Agency efforts and desirable end outcomes, and the usual cultural resistance to moving from traditional organizational arrangements and measures that require reliance on influence rather than control to produce desired effects. Mr. Skeen. If applicable, what lessons did the Agency learn from its participation in the Results Act pilot phase and how are those lessons being applied to agency-wide Results Act efforts? What steps is the agency taking to build the capacity (information systems, personnel skills, etc.) necessary to implement the Results Act? Response. FDA participated in the FY 1996 GPRA pilot with the PDUFA Performance Plan. This experience provided several insights. Perhaps the most critical lesson learned was that it is very important to negotiate with relevant stakeholders before agencies can establish meaningful goals. FDA's discussions with the pharmaceutical and biological industries allowed both public and private sector parties to jointly commit to resources and performance targets that would be achievable with the resources. FDA also gained valuable experience in tracking and reporting on results in an environment of total accountability. The PDUFA experience also helped FDA learn how to establish uniform approaches to performance goal establishment across organizational lines. Finally, the Agency learned the importance of clear and compelling communication when establishing and reporting on performance goals to external stakeholders. In order to prepare the Agency for GPRA implementation, several tracks of activity were established including training, outreach, internal communications, linkage with the budget cycle, a data base of performance information, coordination of a GPRA planning process, and consultations with organizational components as they implemented the provisions of the Act. To date, about 75 percent of FDA's managers have participated in GPRA training. Over 500 professionals have participated in one of thirty, three-day workshops. FDA has participated in several inter-agency forums on GPRA implementation, including the inter-agency science symposium, and the inter-agency regulatory forum. Both of these forums have met on a monthly basis over an extended period of time. The exchange of good ideas through these forums has proven to be one of the most valuable activities in this GPRA learning period. In addition, the GPRA team has made several individual visits to agencies to learn first-hand about GPRA implementation experiences. The Agency has established a capacity to track all performance information, including the performance goals themselves, as well as other pertinent information about these goals, such as organization of origin, strategic goals that are supported, and the classification of the goal by activity, output or outcome. Internal communications have been enhanced through a network of GPRA training graduates. Through this network, all Agency employees involved with GPRA implementation are kept apprised on developments both outside and inside FDA. Those responsible for GPRA implementation have also worked closely with Agency staff who are responsible for formulating and executing the Agency's budget to ensure that strategic, performance, and budgetary planning and implementation are appropriately aligned. Mr. Skeen. The Results Act requires agencies to solicit and consider the views of stakeholders as they develop the strategic plans. Stakeholders can include state and local governments, interest groups, the private sector, and the general public, among others. Who do you consider to be your agency's primary stakeholders and how will you incorporate their views into the strategic plans? Response. FDA has primary stakeholders in both the public and private sector and we have a long history of sustained interaction with them. In the public sector, State agencies that have responsibilities comparable to FDA are being consulted. In the private sector, industry associations, consumer groups and associations of health care professionals are the stakeholders. The Department of Health and Human Services is coordinating stakeholder consultation for all of the Departments' operating divisions. Mr. Skeen. For the Results Act to be successful, agencies with similar missions, goals, or strategies will need to ensure that their efforts are coordinated. What other Federal agencies are you working with to ensure that your strategic plans are coordinated? What steps have you taken to ensure that your efforts complement and do not unnecessarily duplicate other federal efforts? Response. FDA has worked closely with other federal agencies to ensure that both the process and the content of FDA's plans are coordinated. From a process perspective, FDA's strategies are aligned with the goals and strategies contained in the HHS strategic plan. From a content perspective, FDA is coordinating efforts with several other agencies to ensure that its strategies in key areas are harmonized with related strategies being carried out in these other agencies. The recent Food Safety Initiative is a prime example of this strategic coordination. FDA is working closely with USDA's Food Safety Inspection Service, the Centers for Disease Control and Prevention, the Environmental Protection Agency, and the states to initiate a total system of monitoring, research, education and HACCP-based inspection to ensure a comprehensive network of food safety protection for the American public. FDA is also cooperating with the U.S. Customs Service to develop an automated import monitoring system that will raise the assurance that violative products will not enter this country's commerce system. Mr. Skeen. The Results Act requires agencies to consult with Congress as they develop their strategic plans. Since these plans are due in September, now is the time for agencies to begin the required consultations. What are your plans for congressional consultation as you develop your strategic plan? Which Committees will you consult with? How will you resolve differing views? Response. The Department of Health and Human Services has lead responsibility for directing the consultation process on behalf of all the operating divisions of the Department, using a Department-wide strategic plan as a vehicle. The consultations are scheduled for May 1997. Concurrently, FDA continues its dialogue with a number of stakeholders regarding goal-setting for particular FDA programs. The recent discussions with stakeholders in the PDUFA program are illustrative of this dialogue. Mr. Skeen. In passing the Results Act, Congress sought to fundamentally change the focus of federal management and decision making to be more results-oriented. Organizations that have successfully become results-oriented typically have found that making the transformation envisioned by the Results Act requires significant changes in what they do and how they do it. What changes in program policy, organization structure, program content, and work process has the agency made to become more results-oriented? How are managers held accountable for implementing the Results Act and improving performance? How is the agency using Results Act performance goals and information to drive daily operations? Response. FDA has made a number of changes in program policy that are supportive of the intent of the Results Act. One of the more significant examples is the implementation of the Prescription Drug User Fee Act, or PDUFA. PDUFA is a pilot under the Results Act and is based on multi-year customer oriented performance goals. Another emerging theme in program policy is to encourage active participation of the public and businesses in managing the health hazards associated with products that are regulated by FDA, thereby increasing the effectiveness of FDA in terms of promoting and protecting the public health. For example, the seafood HACCP initiative in the area of food safety will result in seafood processors taking a greater share of responsibility for quality assurance with FDA oversight, and ultimately creating a higher level of protection for the public. Similarly, individual citizens are being encouraged to play a greater role in achieving the proper use of medicine through improved labeling of over-the-counter and prescription drugs. No organization change has been necessary thus far in response to the Results Act due to the historical product/ program orientation of FDS's line organizations. This structure facilitates an alignment between the ultimate goal of a healthier American public through safe food, and effective drugs and medical devices, and the current agency organization components. FDA program content adheres to provisions of the laws under which it operates. Recent changes in the law, however, have created opportunities for innovative changes in program content, and in work process. For example, the Animal Drug Availability Act of 1996 made it possible to change the way that new animal drugs are reviewed, with the result that valuable new products will be available sooner. Also, changes in the law regarding food labeling have made it possible for FDA to call for labeling that will enable consumers to be more effective in regulating their diets to obtain health benefits. New initiatives such as customer focus have also influenced program content and work process in such ways as redefining the relationship between FDA and its customers and developing new customer service standards. Managerial accountability for performance improvement is long standing in FDA. The Results Act, however, has reinforced this tradition and given it more outcome orientation. Given certain legal and strategic guidelines, the goals for FDA operations originate within individual constituent organizations and are linked upward throughout the agency. For example, the performance goals that are called for in PDUFA are shared by approximately 2,000 FDA employees with accountability assigned to managers, as well as individual employees. Furthermore, the process that FDA has designed for implementing the Results Act calls for managers in every Agency program to develop outcome oriented performance goals that will be incorporated into the FDA Performance Plan for FY 1999. A good example of how FDA is using Results Act-type performance goals and information to drive daily operations towards new outcome measures involves compliance measurement. Prior to 1995, FDA investigators were measured by their efforts to develop evidence that supported administrative and legal action against businesses rather than achieving compliance by alternative means that may be more efficient or effective. Long delays and uncertain outcomes are part of the administrative and legal process. Thus, there was an opportunity for a better performance measure. Individual investigator performance plans were rewritten to give credit for encouraging regulated businesses to correct problems on the spot, thus saving money for both the government and the business, and providing better consumer protection. A related information system captures information about inspection activities, in the aggregate, that result in corrective actions by the business to achieve compliance. Ms. Kaptur. Again this year, you have made progress in bringing down the times for making drug approvals. What have you done to speed approvals? Have you had to cut any corners to speed the approval process? How will the reauthorization of PDUFA impact your ability to continue the progress you have made? Response. The success of reducing drug approval times under PDUFA is attributable to the working relationship--based upon a commitment to excellence--forged between the industry and FDA which is producing measurable benefits for the American consumer. The funding provided by PDUFA has enabled the Agency to recruit additional review personnel, and to support review related activities. The Agency has improved its application review process by implementation of project management methodology in the process. Elimination of application backlogs, and the increased emphasis on timeliness as a performance measure, are resulting in significantly improved Agency and industry performance, predictability, and accountability. Just as the Agency has improved under PDUFA, so has the industry. Sponsors are submitting more new product applications to the Agency, and the quality of these submissions is greatly improved. The result is more positive review decisions, and record proportions of submissions proceeding to approval in less time. The Agency has not had to cut any corners to speed the approval process. If PDUFA is reauthorized, the Agency and the industry, working together, will be able to continue the progress we have made. FDA Reform Ms. Kaptur. This year, we again face the prospect of FDA reform legislation. Has the process changed from last year? In your opinion, what issues addressing to ``reform'' the FDA? Is the authorizing committee dealing with these issues? Response. The FDA feels that the best way to decide which issues need reform, both administratively and legislatively, is to first identify the problem that needs to be addressed. By identifying problems first, we can assure that the solution will be tailored to solve the problem at hand. FDA has been working with industry, patient groups, and consumer groups to hear suggestions about areas needing reform and discussing problems that need to be addressed. This process is still currently underway. User Fees Ms. Kaptur. Your statement indicates that the FDA budget includes $131 million in new user fees for foods, drugs, biologics, animal drugs, and medical devices. If the Committee follows its usual practice and does not include funding for unauthorized user fees, what will be the impact on the programs affected by the user fees? Response. If the proposed user fees are not authorized and the base resources replaced by these user fees are not restored, the impact would negatively affect FDA programs. The Administration is proposing new user fees of $131,643,000, of which $122,443,000 is to replace existing base appropriation resources, and 1,120 FTE. Without new user fees or the restored base resources, the necessary reductions would be felt across each program area of FDA. At this point in time, I cannot say with any degree of certainty where specific cuts would be taken, but given the magnitude of the potential reduction, I can safely say that review times and backlogs for all FDA- regulated products would increase substantially. FDA's ability to fulfill its mission of protecting and promoting the health of the American public would be seriously undermined. Pending FDA Legal Suits Ms. Kaptur. Given the controversial nature and significant financial implications of much of the FDA's work, undoubtedly many parties who perceive themselves to be treated less than satisfactorily may resort to the courts for redress. What are some major legal suits that are currently pending against the FDA? Specifically, what about nicotine and tobacco? What active suits does the FDA have in this area? How much does it cost the FDA annually to deal with these suits? Response. The four pending cases against FDA regarding nicotine and tobacco have been consolidated and the court has under advisement plaintiffs' motions for summary judgment. Until we read the district court's decision, it is extremely difficult to estimate the number of hours it will take to brief an appeal, or to continue with the litigation at the district court level. As a general matter, appellate briefs require less time than district proceedings. FDA would likely assign at least two staff attorneys to work on appellate issues, and one or two managers. We will provide the pending nicotine and tobacco lawsuits for the record. [The information follows:] The four lawsuits were filed in the Middle District of North Carolina (Greensboro) relating to FDA's initiative concerning cigarette and smokeless tobacco. Coyne Beahm v. FDA, Case No. 2:95CV00591; American Advertising Federation v. Kessler, Case No. 2:95CV00593; United States Tobacco Company v. FDA, Case No. 2:95CV00665; National Association of Convenience Stores v. Kessler, Case No. 2:95CV00706. The court consolidated the cases on its own motion until further order of the court. (Nov. 21, 1995). Currently pending before the Court are plaintiff's motions for summary judgment on the following three grounds: (1) that Congress has precluded FDA's jurisdiction over cigarettes and smokeless tobacco; (2) that cigarettes and smokeless tobacco cannot be regulated as drugs and devices under the Federal Food, Drug and Cosmetic Act, or FD&C Act; and (3) that the First Amendment prohibits FDA's advertising restrictions. Those motions have been fully briefed and argued, and are ripe for disposition. At oral argument, the court announced that it expected to issue its decision on these summary judgment motions between March 17 and April 21, 1997. Food Safety Ms. Kaptur. What was the incidence of foodborne illness in FY 1996? In FY 1997? What was the incidence of foodborne illness attributed to seafood? How will your food safety initiative help us deal with this significant public health problem? Response. Our sister agency, the Centers for Disease Control and Prevention, CDC, has primary responsibility for surveillance and tracking of both communicable and foodborne illness. FDA provides support to the CDC for coding efforts related to the Foodborne Diseases Surveillance system. The CDC relies on reports from state and local health departments to estimate the number of foodborne illness cases occurring in the United States. The state and local health department reports are based on outbreak information from individuals experiencing illness for botulism, toxic fish, mushroom, and other chemical poisonings. Local and state health departments conduct an investigation to identify the source of contamination and the specific food, if possible, before notifying the CDC. Reports are limited by the ability of state and local health departments to follow up leads and to report investigations to the CDC. Typically, outbreaks involving restaurants or institutions are more likely to be recognized than those involving foods prepared in the home or processed foods. This difference exists because of greater numbers of individuals served by a commercial kitchen at any one mealtime and perhaps also because of the health departments' responsibility to protect consumers from commercial sources and processed foods. Data differ widely be state and reflect, for the most part, the vigilance of health departments and their priorities for food safely. Decisions regarding foodborne disease surveillance activities are made on an individual basis by each state. Twelve states have no surveillance staff specifically assigned to monitoring food or water for pathogens. As a consequence, outbreaks are not routinely reported from these states. The CDC does not have the authority to require states to report data on foodborne illnesses. The CDC does require that two or more people with confirmed cased investigated by local or state authorities before a report is submitted; this eliminates the reporting of sporadic cases. In addition, many cases of foodborne illness which are mild and do not require medical treatment are not reported. For example, most seafood borne illnesses are sporadic or mild, and therefore are not included in the CDC outbreak data. In other cases, a foodborne illness may contribute to the death of an already ill person; in these cases, foodborne illness may not be reported as the cause of death. According to estimates based largely on data collected by CDC from local and state health departments, millions of people become sick from contaminated food each year, and several thousand die. CDC estimates that for every reported case of Salmonella, the foodborne pathogens for which surveillance information is most complete, between 50 and 100 cases are undetected. FDA, along with other public health and food safety officials, believe that current data on foodborne illnesses do not indicate the level of risk, the sources of contamination, and the populations most at risk in sufficient detail. More uniform and comprehensive data on the number and causes of foodborne illness is required to fully assess the situation and to develop effective control strategies. Beginning in 1995, federal and state agencies began taking steps to collect such data at five sentinel sites. Data collected from participating laboratories will provide a framework for identifying current and emerging trends in foodborne illness. The uniform national database will permit public health officials to link specific illnesses with certain foods, to determine appropriate control and prevention programs, and to see emerging trends. CDC has completed the coding for the years 1988 through 1992. The limited data from the latest CDC Morbidity and Mortality Weekly Report, or MMWR, Surveillance for Foodborne- Disease Outbreaks-United States, 1988-1992, reported a total of 2,423 outbreaks of foodborne disease which caused 77,373 persons to become ill. Among the outbreaks for which etiology was determined, bacterial pathogens caused the largest percentage of outbreaks and the largest number of cases. Limitations concerning the quantity and quality of these data should be recognized. The number of outbreaks reported by this surveillance system represents only a small proportion of those that occur. The likelihood of an outbreak being brought to the attention of health authorities depends on consumers' and physicians' awareness, their interest, their motivation to report the incident, and the disease surveillance activities of state and local health and environmental agencies. A more recent report, ``Foodborne Pathogens: Risks and Consequences'', published by the Council for Agricultural Science and Technology, a private non-profit organization, estimated that as many as 9,000 deaths and 6.5 to 33 million illnesses in the United States each year are food-related. The current system for identifying and preventing foodborne illnesses is inadequate to properly identify, track, and prevent food-related illness and to prevent future cases from occurring. State and federal resources are not closely coordinated and duplication of effort is not uncommon. There are many causes of foodborne illness, many points at which foods can become contaminated, and numerous factors that make some groups of people more susceptible than others. Needless to say, no single preventive measure will ensure the safety of all foods. However, a number of practical preventive steps can be taken in the near term to reduce the incidence of many foodborne infections. Under the Food Safety Initiative, the federal government, in concert with state and local governments would conduct research and risk assessments to determine how foodborne illnesses occur; determine how they can be prevented or controlled; improve surveillance and investigative efforts to locate and monitor illnesses caused by food; achieve more effective and efficient monitoring of the safety of the food supply through inspections of food processors; and reinvigorate education of all those involved in food preparation, focussing on the sue of safe practices. Recognizing that food safety is not simply the responsibility of the Federal Government and that an effective, comprehensive food safety strategy must involve outside partners, we will work with consumers, producers, industry, States, tribes, universities, and the public to identify additional ways to improve food safety through Government and private sector action, including public-private partnerships. We are strongly committed to an open process that includes a full discussion of the wide range of issues that may be raised by various constituencies. Experience has shown that we are most successful in solving problems when we proceed in this manner. To begin this dialogue, a public meeting was held on March 5, 1997, to familiarize interested parties with the initiative and introduce the draft discussion document. A second meeting is scheduled for March 31 to present the key issues and solicit comment on the preliminary recommendations and additional suggestions. As a starting point, we have asked interested parties for their perspective on how best to enhance the safety of the food supply and reduce foodborne illness. We asked them to consider some particular questions when developing their responses. We plan to provide the President with a report outlining our recommendations for additional ways to reduce the incidence of foodborne illness and to ensure our food supply is the safest in the world. The questions we presented will be provided for the record. QUESTIONS RELATED TO THE SAFETY OF THE FOOD SUPPLY AND REDUCING FOODBORNE ILLNESS: 1. Have the critical elements of an effective food safety initiative been identified? Are there others? What are they? 2. Have the appropriate issues within each element been identified? If not, what additional issues should be included? 3. What are the priorities among the issues identified or added to each element of the initiative? 4. What steps should be taken to begin to resolve issues within each element of the initiative? 5. What are the responsibilities of various stakeholders in working toward resolution of the issues? 6. How can we better utilize public/private partnerships to reduce foodborne illness? 7. How should food safety activities be better coordinated across the federal agencies, accommodating the needs and perspectives of state and local agencies, consumers, industry, and academia, to maximize the effect of available resources? 8. How do we ensure and measure the effectiveness of the food safety initiative? 9. How should the evaluation be structured so that the results of the early evaluation can be factored into the strategic planning process? 10. What recommendations do you have for the structure of the strategic planning process? Imported Food Ms. Kaptur. Please provide for the record the type of imported food products seized during the previous fiscal year and the reason they were seized or recalled? Response. It is rare for FDA to seize or recall a product at the port of entry. In FY 1996, only one product seizure was classified as a seizure of an import, which means it was seized at the port and not allowed to enter the country. This product was cocoa beans from the Ivory Coast which were found to be adulterated. For imported products, if the articles appeared to be in violation of the laws FDA administers, the Agency would ordinarily detain the articles while in import status. Detained articles may be released if brought into compliance or rendered not subject to the Food, Drug, and Cosmetic Act, or refused entry if not brought into compliance. FDA detained 13,080 food import entries in FY 1996. Once products are admitted into the United States by FDA and the bond is liquidated by Customs, they are no longer considered to be in import status, but are referred to as domestic imports. If these products are subsequently found to violate U.S. laws, they can be seized. Eight domestic imports were seized in FY 1996. A table showing the recalls and seizures of domestic imported products for FY 1996, is provided. [Page 432--The official Committee record contains additional material here.] OASIS Ms. Kaptur. How does OASIS enhance your ability to identify problem shipments? Response. OASIS will enhance FDA's ability to identify problem shipments by improving our ability to target products with a history of non-compliance and those products which constitute a high risk for a potential public health hazard. Further, it will help assure that problem products and manufacturers are recognized as such in whatever port they are entered, thereby limiting the problem of ``port shopping''. Oasis operates in conjunction with the U.S. Customs Service's Automated Commercial System, or ACS. For lines-- unique items on an import entry differentiated by country of origin, manufacturer, container size, or product, and regulated by FDA--the filers send information required by both Customs and FDA when offering the shipment for entry. For electronically filed entries, ACS assembles a set of data for FDA by combining Customs and FDA data. The lines are then electronically screened against a set of criteria developed and maintained by FDA using OASIS. The screening determines if the lines match any of the established criteria based on product, manufacturer, shipper, country of origin, or any combinations of these four screening elements. The results of the screening are summarized at the entry level and passed as an electronic message back to the filer. The results are either ``May Proceed'' or ``FDA Review''. The entry data and screening result for each line is transmitted to and maintained in OASIS. Of FDA regulated entries, about 60 percent receive a ``May Proceed'' and a final Agency decision within 15 minutes, while the remaining 40 percent receive an ``FDA Review''. This initial electronic screening alerts FDA to the need for additional review of those products the Agency may have a further regulatory interest, while maintaining a uniform nationwide basis. The screening criteria takes into account such factors as FDA's previous experience with the product such as a high or low compliance rate, planned surveillance work in various program areas, emerging problems or trends, and the capacity of FDA field staff to collect and examine imported product. FDA is capable of changing the electronic screening criteria in OASIS within minutes as the need arises to respond to emerging problems. For those products that are flagged as ``FDA Review'' during the initial electronic screening, the entry data is loaded into a different database and screened again using more sophisticated criteria. It is then made available for review by the initial OASIS user--the FDA entry reviewer. At this time, OASIS enables the entry reviewer to request possible actions and presents all applicable guidance, such as Import Alerts, Surveillance Programs, and Assignments, which may apply to the line to assure that all available information is evaluated when an entry decision is made. Based on this additional review, the FDA entry reviewer will make a decision to detain the entry, sample the entry, or release the entry. Once all lines of an entry have been processed, a decision message for each line is electronically sent to the filer. OASIS enables FDA, for the first time, to maintain a readily accessible database of FDA regulated products that have entered the U.S. This capability of accessing information on previous shipments of products, who shipped them and who received them, has proven to be a very valuable tool in responding to possible health hazards associated with imported products. We are now able, in a very short time, to identify who may have received products of concern and plan appropriate follow-up. The OASIS system is programmed with decision criteria that make it possible for the system to make decisions to automatically admit entries or refer them for FDA review. Currently, about 65 percent of electronic entry lines proceed into domestic commerce because products pass the screening decision criteria. While FDA is expecting to automate additional decision criteria, the system will never fully replace FDA staff as decision makers on complex, novel, or emerging problems. BSE Ms. Kaptur. Please describe your activities to protect the public from the spread of BSE. What is the status of your proposed regulation on animal ruminant feed? Response. In March 1996, the British government announced their concern that exposure to BSE-infected beef might cause human disease. This concern grew because of the possible link between BSE and ten cases of a newly identified variant of Creutzfeldt-Jakob Disease in humans. In response, I would be happy to provide for the record the steps we have taken. In March 1996, United States industries announced a voluntary prohibition on the feeding of ruminant proteins to ruminants. In May 1996, an Advanced Notice of Proposed Rulemaking was published and as of January 3, 1997, FDA received 668 comments. On January 3, 1997, FDA published proposed regulations that would prohibit the use of rendered protein products, such as meat and bone meal, manufactured from ruminant or mink tissues in the feed of ruminants. The comment period for this proposed regulation closed on February 18 and FDA received an additional 660 comments which are currently under evaluation. This proposed regulation declares that the FDA has tentatively determined ruminant and mink proteins are not generally recognized as safe for feeding to ruminants and are food additives under the Act. In the absence of a food additive regulation or an exemption, their use in ruminant feed would be prohibited. Manufacturers will need to keep records to show that rendered ruminant proteins are not sold for use in the feed of ruminants. Immediately after the January 3rd publication of the proposed regulations, FDA sent copies of the Proposed Rule to the embassies and heads of foreign animal and public health organizations of our major trading partners. In 1996, the FDA initiated numerous interagency activities with CDC, NIH, and USDA, specifically, FSIS and APHIS. On February 4 and 13, public forums on BSE were held in St. Louis, MO and Washington, D.C., respectively. FDA engaged in a dialogue with the regulated industry and consumers on the Proposed Rule. Over 150 non-federal constituents participated and 45 of them made presentations. Food Additive Petitions Mr. Walsh. I was wondering if you could explain to me what is a food additive petition? What does it mean when someone comes to the FDA with a food additive petition? Response. A food additive is any substance, not generally recognized as safe, that directly or indirectly, may reasonably be expected to become a component of food or may otherwise affect the characteristics of food. Under the Federal Food, Drug, and Cosmetic Act, a food additive can be used only if a regulation is in effect to prescribe the conditions under which an additive may be safely used. Any person may submit a petition. Such a petition in essence requests FDA to establish or amend a regulation prescribing the conditions under which a food additive could be safely used. Safe is defined as a reasonable certainty of no harm. As with any premarket application, certain types of information, including test data that demonstrate the safety of the substance, must be contained in a petition to support the issuance of a regulation. Upon receipt of a fileable petition, FDA announces in the Federal Register that a food additive petition has been filed. If a petition establishes an adequate basis for finding that the use of a substance is safe, the Agency publishes in the Federal Register a regulation prescribing safe conditions of use of the additive. Mr. Walsh. Now, I understand the Food, Drug, and Cosmetic Act (21 USC 348(c)(2)) requires the FDA to approve or deny food additive petitions ideally within 90 days, but no later than 180 days after the petition is received. Can you tell me, on average, how long does it take the FDA to approve food additive petitions? Response. The average for approving food additive petitions in FY 1996 was 32 months. However, the median time to approval was 27 months. We use median time to approval, which is the point at which half the actual times are longer and half the actual times are shorter, rather than average time because the median time is not distorted by extreme values as the mean or average time would be. This is important as older petitions are completed to reduce backlogs. In addition, it is important to note that we have measured the total time to approval--that is, the time to approval equals FDA review time plus industry time to respond to data requests to remedy deficiencies in the petition. Because a food additive is approved only when an order specifying the conditions of use is published in the Federal Register, the time to approval includes time to review the data in the petition, draft an order that lays out the regulation and a preamble that explains the Agency's rationale for its decision, obtain appropriate administrative concurrence with the document, have the document signed by the appropriate agency official, and publish the document in the Federal Register. Mr. Walsh. Can you tell me why it takes so long? Why are you not doing what the law requires? Response. Petitions cover a broad range of substances used in food and packaging technology. These include fat replacers, high intensity sweeteners, preservatives, including microbial control agents and irradiation processes, colors, sanitizers, and packaging materials. Petitions may be lengthy, for example, a major use food additive may number 150,000 pages. Petitions must be reviewed by scientists with differing areas of expertise, such as toxicology, microbiology, chemistry, and environmental science. Petitions involving novel ingredients or precedent setting science issues require special areas of expertise not routinely available within FDA. Expertise must be developed on the spot or assistance sought from other sources, for example, in other Federal agencies or the scientific community at large. FDA must respond to all petitions in a fair manner consistent with provisions of the Federal Food, Drug, and Cosmetic Act. Frequently, however, a petition as submitted does not address all pertinent issues, or include all the data necessary to substantiate conclusions. Our policy is to communicate frequently with the petitioner regarding the status of their petition and work with them to resolve deficiencies and questions rather than simply deny the petition. In keeping with the statutory ``time clock'', agency questions and concerns are communicated promptly to the petitioner. The petitioner then has the option to amend their petition. Further, unless the petitioner opts to withdraw the petition while the necessary information is collected, the petition remains in active review status even though a significant expenditure of time may be necessary for the petitioner to resolve an outstanding issue. In sum, FDA makes every effort to allow the petitioner additional time to collect the material necessary for an acceptable package of information. The Agency is also revising its procedures to ensure that petitions that are not under active review because the petitioner is collecting data to remedy deficiencies in the data needed to establish safety, are no longer carried on the inventory of petitions in active review status. The amount of data necessary to demonstrate safety reflects the proposed conditions of use of the additive. An additive may be consumed by all citizens, of all ages and all health conditions, for a lifetime. The Agency considers this information in reaching a decision of whether the additive meets the safety standard of ``reasonable certainty of no harm.'' FDA's decision must be legally sound and the record established must be sufficient to allow defense of the decision in court. Given the importance of being promptly responsive to petitioners who have invested in the development of new products, we have taken a number of steps to enhance the review process. The food additive approval process is being actively revised to evaluate additives on a more timely basis while maintaining the integrity necessary to assure that only safe additives are introduced into the marketplace. FDA is committed to reforms that will permit the Agency to achieve its goals of timeliness, accountability and predictability in the long-term. Agency management has focussed significant resources on administrative and management reforms of the food additive review process. As a result, the petition inventory of 295, reported to Congress in June of 1995, has dropped to 235. The cohort of 295 petitions now stands at 176. This impressive turnaround was accomplished through a number of initiatives that I would be happy to provide for the record. Temporarily reassigned 23 FTEs to petition review activities. Established a threshold of regulation policy; over 40 submissions were processed under this policy last year that otherwise might have been petitions. Established a special project team to expedite the review of low exposure indirect food additive petitions; 13 petitions were processed in FY 1996. Increased use of external expertise, such as the Food Advisory Committee, to resolve scientific issues. Awarded two major contracts to assist in petition review: One for the review of studies (primary toxicology studies) contained in petitions; the other is for the review of study packages from indirect additive petitions. Benefits should be seen this fiscal year. Provided extensive petitioner guidance documents on the World Wide Web for easy access by prospective petitioners. Scheduled a series of workshops for potential petitioners, organized in conjunction with the National Center for Food Safety and Technology, which will be held this spring. Established a biotechnology policy to allow genetically engineered plants that present no safety concerns to be marketed without rulemaking. Awarded contracts to: (1) document petition review resource needs; (2) assist in developing a new threshold of filing; (3) advise FDA on alternative safety decision models; and (4) conduct petitioner workshops nationally. Developed new standard letters to submitters of filed petitions that are found to be critically deficient, to provide the option of requesting that the petition be placed ``in abeyance'' until the deficiencies are remedied. These letters provide an option other than withdrawal or denial of a deficient petition that will ensure that such deficient petitions are not carried on FDA's inventory. A final rule to expand the categorical exclusions from NEPA environmental assessment requirements is expected to publish this year. A proposed rule on reform of the GRAS review process is expected to be published this year. A new, improved workflow management system will soon be operational. Review Time--PMAs Mr. Walsh. I was wondering if you could also explain to me what is a ``PMA?'' What does it mean when someone comes to the FDA with a ``PMA?'' What types of products are these, and how important are they to patients? Response. A ``PMA'' is a premarket approval application. Premarket approval by FDA is required under the Federal Food, Drug and Cosmetic Act, or FD&C Act, to ensure the safety and effectiveness of Class III devices. A Class III device is one that supports or sustains human life or is of substantial importance in preventing impairment of human health or presents a potential unreasonable risk of illness or injury. Under Section 515 of the FD&C Act, all devices placed into Class III are subject to premarket approval requirements. A PMA submitted to FDA is expected to contain or reference comprehensive data about the device for the agency's scientific review. Examples of PMA approvals in FY 1996 include: the first blood test to monitor patients for possible breast cancer recurrence; a new use of ultrasound to help doctors decide if a breast biopsy is needed when a lump is found; a first-of-its- kind spinal fusion implant to treat degenerative disc disease; a first-of-a-kind system indicated for use as an adjunct to white light bronchoscopy to identify and locate bronchial tissue for biopsy; a first semi-automated test to aid in the rescreening of cervical Pap smears previously reported as negative; the first permanent urethral stent to relieve urinary obstruction in men; and two lasers that use breakthrough technology to treat nearsightedness. Mr. Walsh. The Food, Drug, and Cosmetic Act states the FDA must approve or deny PMAs ``as promptly as possible, but in no event later than 180 days after the receipt of an application'' (21 USC 360e(d)(1)(A)). Can you tell me, on average how long does it take the FDA to approve PMA applications? Response. In FY 1996, the average FDA review time for PMA approvals was 289 days, as calculated under the PMA regulations at 21 CFR part 814. In accordance with these regulations, the review clock is ``reset'' when FDA receives a major amendment from the manufacturer, and prior review times are excluded from this calculation. FDA also reassures and reports the average total elapsed time from filing to approval, which was 786 days for FY 1996. The average total elapsed time is all increments of time a PMA was under review, including all time increments while under review by FDA and all time increments while on hold and under further development by the manufacturer. FDA approved 43 PMAs in FY 1996, which is the highest number of PMA approvals in the last five years. Of the 43 PMAs, 24 were for significant medical device breakthroughs. Five of the 43 PMAs approved were received in FY 1996. The average FDA review time for these five approvals was 199 days. These PMAs required only one review cycle by FDA. This is an example of the kind of collaboration FDA and industry need to continue where a safe and effective device, supported by sound data, is made available to the public promptly. Mr. Walsh. Again, why does it take so long? Why you are not doing what the law requires? Response. PMA review is a multi-step process that may start with consultation before an application is submitted and ends when the application is approved, disapproved or withdrawn by the sponsor. This review can be completed in one cycle if the device has a clear benefit and the data supporting the application are sound. However, the PMA review process can take multiple reviews when the benefits of the device are questionable, and/or the data supporting the application are unclear. In addition, sometimes the design or other features of the device are improved as a result of findings during FDA's review, and the sponsor needs time to incorporate these improvements. Accordingly, the average total elapsed time includes not only FDA reviews, but also the time FDA is awaiting a response from the submitter of the PMA. You also asked why FDA was not doing what the law requires for PMA reviews. The statute and implementing regulations require FDA to take action on a PMA within 180 days. The complexity of data reviewed and the incomplete or changing nature of many applications, make it difficult for FDA to approve applications within the statutory time frame. Because the bulk of the review process and initial determinations orginarily are completed during the first review cycle, the agency has set PMA performance goals based upon the percent of first cycle reviews completed within 180 days. CDRH completed 53 percent of the first cycle reviews within 180 days based upon the 15 applications that were received during the first six months of FY 1996, and filed by September 30, 1996. This represents a considerable improvement over the 30 percent of the first cycle reviews completed within 180 days by June 30, 1996 for the 30 filed PMAs received in FY 1995. As the budget justification indicates, and as FDA has reported to Congress in quarterly performance reports, with workload increases from pre-amendment PMAs combined with reduced resources, FDA projects a nine percent increase in the number of pending PMAs from FY 1997 to FY 1998. In FY 1998, CDRH estimates completing only 35 percent of first actions within 180 days on standard PMA originals with base resources. However, with the additional resources of $5.2 million requested in the budget to improve PMA review performance, CDRH estimates being able to continue completing the current performance level of approximately 50 percent of the first actions within 180 days in FY 1998, despite the increased pre- amendment PMA workload. Review Time--510(K)s Mr. Walsh. Could you explain to me what is a 510(k)? What sorts of products fall into that category, and how important are they to delivering quality health care to patients? Response. Devices are classified into three classes depending on the level of risks associated with the device. Class III devices are the highest risk devices, and with limited exceptions, require premarket approval under section 515(a). Premarket approval requirements under section 515 of the Act are rigorous, and require the manufacturer to submit data demonstrating that there is a reasonable assurance of safety and effectiveness for the device's intended uses. Under the statute, all new devices are class III requiring premarket approval under section 515, unless they are reclassified into class I or II by FDA, or unless they are determined, pursuant to sections 510(k) and 513(I), to be ``substantially equivalent'' to a predicate device that does not require premarket approval. In order to obtain a marketing clearance order finding a device is ``substantially equivalent'' to a legally marketed predicate device, the manufacturer must demonstrate that the new device is ``as safe and effective'' as the predicate device, section 513(I). This marketing clearance standard under the 510(k) route of ``as safe and effective'' as a predicate device, is different than the reasonable assurance of safety and effectiveness standard for premarket approval under section 515. Some examples of devices that were cleared in FY 1996 through the 510(k) process were: the first ceramic hemi-endo modular head hip prosthesis; the first type of device designed to serve as an access port to the abdominal cavity during laproscopic procedures; the first centra-line grappling hook design for a posterior spinal fixation; the first total temporomandibular joint prosthesis replacement device; and a device intended for the sealing of air leaks after lung surgery. Devices that fall into the 510(k) category are individually described in 21 CFR Parts 862 through 892. The devices are important in delivering quality health care to patients. Mr. Walsh. The Food, Drug and Cosmetic Act advises the FDA to approve or deny 510(k)s within 90 days. On average, how long did it take the FDA to review 510(k) applications last year? Response. The average FDA review time for 510(k)s in fiscal year 1996 was 110 days which includes the sum of all increments of time FDA reviewed a particular 510(k), but excludes time the application is back with the manufacturer. Average total time, or total FDA time and total industry time, from the time of the original receipt to a final decision which includes time a submission is on hold pending receipt of additional information from the manufacturer, was 145 days. Mr. Walsh. The Food, Drug and Cosmetic Act is your agency's Charter--why are you not doing what your Charter advises? Response. FDA set performance goals for the percentage of first actions completed within 90 days. FDA completed first actions on 510(k) applications within 90 days on 94 percent of the applications received in FY 1996, as of December 31, 1996. For the last two quarters of FY 1996, first actions were completed on 98 percent of the applications received. FDA completed final 510(k) actions within 90 days on 61 percent of the applications received in FY 1996, as of December 31, 1996. Applications with incomplete or less clear data may require more than one review cycle. At the end of FY 1995, FDA virtually eliminated the backlog of 510(k) applications under review for over 90 FDA days--only nine were overdue--and has maintained that success with zero overdue applications at the end of FY 1996. This is a vast improvement over the 1,894 applications overdue at the end of FY 1993. On August 1, 1996, FDA commenced a two-year voluntary pilot program to test the feasibility of using third-party reviews to improve the efficiency of FDA's review of 510(k)s for selected low and moderate risk devices. In addition, FDA is undertaking management change to improve the 510(k) review process and enable staff to devote more time supporting the review of higher risk devices and taking a less direct role with lower risk devices. Review Time--General Mr. Walsh. The Food, Drug and Cosmetic Act requires the FDA to approve or deny various applications within certain time frames. From what you have told this Committee, the FDA is still not meeting its statutory deadlines for the review of New Drug Applications (NDAs), Abbreviated New Drug Applications (ANDAs), Premarket Approval Applications (PMAs), New Animal Drug Applications (NADAs), Abbreviated New Animal Drug Applications (ANADAs), and numerous others. Based on what the Food, Drug and Cosmetic Act requires in terms of deadlines for the FDA's review of product applications, would it be fair to say that the FDA is not doing its job? Response. FDA has been constantly improving its review processes over the last few years. FDA approved 53 new ``breakthrough'' drugs and biologics in calendar year 1996, double the rate of years past. With new resources from the Prescription Drug User Fee Act, the Agency has met all of its performance goals for both drugs and biologics, and reviewed 98% of last year's applications on time. In the area of medical devices, FDA approved 43 premarket applications in FY 1996, the largest number in recent times. FDA has also eliminated the backlog of overdue 510(k) applications, and over 90 percent of 510(k) applications are now being acted on within 90 days of receipt. In foods, FDA is reforming the food additive petition review process by committing additional agency and contract resources, establishing performance goals, and instituting a ``threshold of regulation'' approach for very low risk non- carcinogenic indirect food additives. This is an abbreviated process that avoids the extensive review and formal issuance of a regulation normally required for food additives. While we recognize that we can always improve, there have been many ways that FDA has improved its product approval record over the past few years. PDUFA Mr. Walsh. I'm holding in my hand a press account of how the FDA has had to ``Raid the Drug Center's Budgets for Generic and Over-The-Counter (OTC) Drugs, Compliance and Post-Marketing Surveillance in Order to Meet the Prescription Drug User Fee Act Goals for New Drug Approvals'' (FDA Week, 11-15-96). This account--which came from an official--contradicts what we've been told about PDUFA. We've been told that PDUFA has been an enormous success. But instead, it seems the FDA wants to make it look like PDUFA has been a success and you've been willing to raid other programs in order to make it look like PDUFA is working. How can you claim that PDUFA has been a success when you have raided the budgets of non-PDUFA Centers in order to meet PDUFA goals? Response. We have not raided the budgets of non-PDUFA programs for the sake of PDUFA programs. However, activities eligible to receive user fees are protected by PDUFA. Fees can only be collected and made available to cover increases in the costs for the process to review human drug applications, as provided in the Federal Food, Drug and Cosmetic Act (FD&C Act), in section 736(g)(2)(B). This provision of the PDUFA legislation along with the requirement to apply an adjustment factor calculation (defined in section 735(8) of the FD&C Act) to the FY 1992 funding for the process, was enacted to assure that user fees collected under PDUFA are indeed additive resources for the review of new drug applications. Mr. Walsh. When PDUFA was enacted, the FDA received a brand new source of revenue. It's a source of revenue outside the traditional appropriations process. And it's a source of revenue that many on this Committee find troublesome, because it brings up problems of accountability. If you have your own special source of revenue, that might make it more difficult for us to hold you accountable. Now, that's human nature, but it is a serious consideration. Why should this Committee support user fees if doing so will make it more difficult for us to do our job and hold the FDA accountable for the power it has been given by the people? Response. Passage of the Prescription Drug User Fee Act-- PDUFA--did provide FDA with a new source of revenue outside of the traditional appropriations process. This source of revenue comes from collection of user fees from industry. These fees are used to finance a portion of the costs associated with the premarket review of drug applications. However, these fees can only be collected if certain statutory requirements, including 29 performance measures, are met. For example, under PDUFA, fees may only be collected in each year in an amount equal to the amount specified in appropriation Acts for such fiscal year. Because of these financial restrictions, FDA is committed to tracking PDUFA funding and application information to an extent well beyond what was done prior to PDUFA. The Administration's FY 1998 budget request does include new user fees to partially cover the cost of FDA activities that Congress has traditionally funded through appropriations. However, FDA is not being singled out for these new fees. The President's FY 1998 budget proposes new and expanded fees across many Federal programs, which serve as an integral part of the President's overall plan to balance the budget by FY 2002. FDA provides a public service by protecting consumers from unsafe and impure foods and ensuring that drugs, medical devices, and biological products are safe and effective. Industries with products under the regulatory jurisdiction of FDA benefit from increased consumer confidence in their products, and from a strong and efficient agency capable of conducting product reviews in a timely manner. We are prepared to work with the Congress and our many constituencies, including FDA regulated industries, to develop these proposals for actual implementation. We plan to make every attempt to structure the new fees in such a way as to minimize any additional burdens on industry. Mr. Walsh. In 1992, the FDA said they would be able to get drugs to patients faster with user fees. Now we find out that despite this new revenue source, patients are waiting longer for new drugs. We've also discovered the FDA has raided non- PDUFA budgets in order to meet the goals laid out in PDUFA. Now that these goals have been met, you've asked for user fees for medical devices, biologics and other types of drugs. So you notice two things: 1. User fees haven't solved the problem of delays at the FDA. In fact they've made them worse. 2. There seems to be an attitude at the Agency that ignores this. Instead of recognizing this, the FDA insists, ``We can get rid of delays if only you'll give us more money.'' It seems to me that where the FDA derives its revenue is less important than what it does with that revenue. My question is this: shouldn't the FDA's first priority be to revamp its approval process and enact major reforms rather than come up here and scramble for more funding? Response. The purpose of PDUFA was to change, fundamentally, FDA's drug review process so that it would be an efficient, accountable process, and so that, as a result, review times would be predictable and within mutually agreed- upon time frames. That goal has been not only met, but exceeded. Furthermore, this fundamental change in the review process has not resulted in patients having to wait longer for new drugs, according to good scientific data. Under PDUFA, review times and total times to approval have been substantially reduced. FDA's evaluation of the most recent data, collected on the group of new molecular entities (NMEs) approved in 1996, does not show any increase in clinical development times compared to previous data. Development time is mostly under the control of the sponsoring companies. In fact, data on drug development times from the Centre for Medicines Research in the United Kingdom shows that average clinical development time for drugs has been fairly stable, approximately, six years, for the greater part of the past two decades. We acknowledge, however, that there are things that we can do during the development phase to get safe and effective drugs to patients more quickly. For this reason, as we have minimized review times under PDUFA, we have also begun to turn our attention to the pre-submission segment of drug development. The pre-submission segment of drug development is the time prior to the filing of a new drug application, when the new drug application does not yet exist and is not yet at the FDA. We have acted to streamline the IND process (see Guidance to Industry on Content and Format of IND Applications for Phase I Studies of Drugs, released November 20, 1995). We have found that increased interaction at a much earlier stage in the development process results in the submission of new drug applications that are more complete and are thus reviewable more quickly, and we strongly encourage (but do not require) such early meetings. We have reason to suspect that some material is submitted to the NDA in the mistaken belief that it is required, when it is in fact not needed. Clearly our increased interactions with the sponsor at an earlier stage in drug development can help to avoid such unnecessary submissions. The New Use document, which has been mentioned in several other responses and is attached, represents an attempt to clarify many of these questions about the standards of evidence necessary to support an approval. Mr. Walsh. Tufts University has shown that patients are waiting longer for new drugs now than before PDUFA was enacted five years ago. When PDUFA was enacted, patients had to wait an average of 15 years for a new drug to be approved. Now it seems patients may be waiting an additional year. Bearing that in mind, it seems the same problems exist in the approval process for new drugs and that with user fees, we have just thrown more money at the problem. What have user fees done to change the way the FDA does business? Response. Under the Prescription Drug User Fee Act of 1992, or PDUFA, the Agency received additional resources in exchange for our commitment to meet demanding review performance goals without sacrificing high public health standards. The cumulative effects of additional human and financial resources; the use of project management methodology to guide the review process and monitor the increasing workload; the elimination of the application backlogs; and the increased emphasis on timeliness as a performance measure, are resulting in significantly improved Agency and industry performance, predictability and accountability. After more than four years of experience with the user fee program there is no doubt that the user fee approach works. The Agency has consistently succeeded in meeting its annual performance goals. In fact, the Agency has exceeded the performance goals in almost every goal category. When combined with the Agency's internal management initiatives, the additional resources provided by PDUFA bring important products to patients more quickly, without sacrificing quality. Another positive result of user fees is the improved relationship between the pharmaceutical industry and the FDA. Since the enactment of PDUFA, the Agency and the industry have forged a working relationship based on a commitment to excellence which is producing measurable benefits for the American consumer. Mr. Walsh. Can you explain to this Committee precisely how your agency receives user fees? By that I mean are the funds made available to the FDA or to the Treasury who then makes them available to FDA? Furthermore, is the revenue a regular stream or is it erratic? Response. FDA deposits PDUFA collections into the FDA account at Treasury, and these resources are available to the Agency when apportioned by OMB. About two-thirds of the annual revenues come in January and February in response to product and establishment fee bills which are sent out in December of each year. The remaining one-third of the annual revenues is generated through application fees which come in on an irregular basis, one-half at the time of filing, and the remainder at the time of first action. Mr. Walsh. It has been reported in some trade publications that the user fee account is one that is periodically borrowed against and then reimbursed. Is this an accurate report? Response. No. This is not an accurate report. PDUFA collections received from industry are deposited into a specific FDA account. The collections in this account are transferred to FDA's annual Salaries and Expenses operating account on a quarterly basis to cover the costs of appropriate PDUFA activities. Authority for New User Fees Mr. Walsh. Under what statute is the FDA claiming authority to collect the new user fees proposed in the areas of food additives petitions, generic drugs, over-the-counter drugs, animal drugs, medical devices, import inspection, post-market surveillance activities? Response. The Administration's FY 1998 budget request makes no claim as to a specific statute. Rather, the Administration is in the process of developing legislation to implement user fees proposed in the budget. It is our understanding that the proposed legislation is nearing completion and will be submitted soon. Upon enactment of user fee authorizations, a budget amendment to the current appropriations language may be proposed to make the fees available for expenditure. Expanding FDA's Resources Through Outside Expertise Mr. Walsh. The rationale behind the PDUFA user fees was that with more money--with greater resources, the Agency would be able to get its job done faster. Now, last year, a lot of us tried to do just that. We tried to expand the resources available for the review of medical devices and other products by allowing applicants to take their applications to the FDA or other organizations--medical schools, for example--that the FDA certifies have the expertise to conduct these reviews. You know and I know there is a lot of expertise out there and a lot of people who could be helping the FDA do its job. With the FDA still at the helm these folks could lighten the FDA's load and help bring new treatments to patients faster. The FDA has opposed this idea in the past. But now that you have asked us to expand the Agency's resources through user fees, can we work with you to expand the Agency's resources through outside expert reviewers? Response. We believe that contracting out product review to third parties should be done only if there is evidence that it can be done without compromising the standards of safety and effectiveness in the Federal Food, Drug and Cosmetic Act. The FDA is currently looking into several areas where outside review may be possible, including our device pilot program. However, the issue of third party review raises several questions. First, FDA's scientific and clinical experts are charged with exercising independent and unbiased judgement. They comply with stringent financial disclosure and conflict- of-interest requirements designed to protect the decision- making process against bias. It is not clear whether this independence can be maintained with the private sector, particularly since the sponsor gets to choose and pay the private party and repeat business may depend on the sponsor's satisfaction with the private party's decision. Second, FDA reviewers have extensive knowledge about all of the similar products that are made by different companies around the country. When a reviewer looks at all of the drugs for arthritis and other inflammatory diseases, or all of the heart valves, what that reviewer learns from each review increases his/her understanding of that group of drugs or devices and their effect on the body. As a result, FDA reviewers see problems that reviewers with less information may not see. The third problem with privatization is the lack of continuity. For example, FDA's reviewers are able to work with the same drug over time--first reviewing the IND, then reviewing the NDA. By staying involved in the drug's development, reviewers can build on what they already know. Third party reviewers may have little knowledge of the specific development process for the product and/or of the development agreements made during the process. Report Language Mr. Walsh. In last year's Senate Report Language the FDA was expected to adhere to the delineation of the costs of center and related field activities, central offices, administrative management and central services, and rental and housing related expenses in the presentation of the FY 1998 Budget. Why was this not done? Response. FDA made every effort to adhere to the Committee's wishes as explained in the FY 1997 Senate Committee Report with regard to the changes in the projections and display of FDA resources. FDA established a separate line item for ``Other Activities'', to more fully set out costs for the Office of the Commissioner, Office of Policy, Office of External Affairs, Office of Management and Systems, and Central Services. We thus eliminated the traditional line item ``Program Management''. These changes allowed us to include only Center, field and Central services costs in each of program line items--Foods, Human Drugs, Biologics, Animal Drugs and Feeds, Medical Devices, and the National Center for Toxicological Research. We also provided a separate line item for tobacco activities. Further, the numbers as presented in the Senate Committee Report for FY 1997 were based only on FY 1996 estimated obligations at the time the data was provided to the Committee. For development of the Congressional justification, FDA was able to reflect the most accurate and current estimate for each line item for FY 1997 by using FY 1996 actual obligations which were then available. We remain open and prepared to continue working with the Congress to present our budget in the most useful manner possible. Mr. Walsh. Last year was not the first year that explicit report language governing the Agency's activities was added in both the House and Senate reports. In fact, for two years running report language governing everything from the review of medical devices to management of the Commissioner's office has been included, yet the Agency ignores this Subcommittee's authority. Why is that? Response. FDA has made every effort to adhere to the Committee's report language. Each year in preparation of the Congressional Justifications FDA prepares a section entitled ``Significant Items'' which lists the Committee Report language and an FDA response which describes what has been done to respond to the Report Language. Additionally, FDA responds separately to the Committees' request for specific reports. We take each request made by the Committee seriously. If there is a specific report language for which we have not responded, we are sorry and will make every effort to respond in a timely manner. Sensor Pad Mr. Walsh. It is my understanding that within the past month the FDA has refused to grant over-the-counter clearance for the breast sensor pad. This was an issue near and dear to Congressman Myers' heart when he was a member of this Subcommittee. Can you explain why the FDA believes that women are incapable of properly dealing with the results of the breast sensor pad, yet you express no reservations about them dealing with the results of a home pregnancy test or a home HIV test, which are both sold over-the-counter? Response. FDA is currently reviewing the manufacturer's request that the sensor pad be cleared for OTC marketing. However, FDA has required that data be provided to demonstrate that the device can be used safely and effectively according to its labeling as an OTC device. FDA is currently working with the sponsor and helping to design the appropriate study to achieve OTC status. FDA does not believe that women are incapable of properly dealing with the results of the sensor pad breast self- examination. As part of the standard clearance process for an OTC device, sponsors are required to demonstrate that the labeling is adequate to permit satisfactory and safe use of the device for the purposes for which it is intended and without the involvement of a health care provider. Further, consumer testing is and always has been required for all home pregnancy tests and home HIV tests before marketing. Commissioner's Office Staff Mr. Walsh. As I read the tables in your budget justification, I find that there was an increase in the number of FTE's assigned to the Commissioner's Office last year from fiscal year 1996 (127 versus 141) and that you intend to maintain that increase. Recognizing that increasing the FTE's in the Commissioner's Office has been a concern of this Subcommittee for some time, I am curious what the rationale was for the increase. Response. The 127 FTE figure for FY 1996 is an actual based on utilization for the entire fiscal year. The 141 FTE figure for FY 1997 represents the ceiling for the various components under the Office of the Commissioner. This ceiling is estimated prior to the start of the fiscal year and reflects anticipated workload and subsequent FTE requirements. In order to properly compare these two numbers, we would have to wait until the FY 1997 actuals are known which will not occur until sometime after the fiscal year ends after September 30, 1997. Center for Food Safety and Nutrition Mr. Walsh. The President's budget has requested more than $12 million in user fees for the food additive approval process. a. How much does FDA currently spend on this approval process? b. How would this system be implemented? Response. FDA currently spends approximately $13 million for premarket review of food and color additives. This estimate includes all recurring personnel, operating, extramural and support costs associated with the premarket review of food and color additives. The estimated user fee levels in the budget are illustrative of the types and amounts being proposed by the Administration. User fees for food additive petitions are envisioned to fund the bulk of the program's annual costs. FDA is prepared to work with the Congress and our many constituencies to develop a user fee proposal that would allow us to continue our activities in this area. Mr. Walsh. Could you explain what the cost is for a typical direct food additive approval? Response. It is very difficult to identify the cost of processing and approving a food additive petition from the numerous activities related to the safety and regulation of food ingredients that are also carried out by the same employees that review the petitions, such as participating in international activities, providing assistance and education to industry and consumers, and consulting with developers of foods and food ingredients produced using new technologies. That said, in FY 1995, the Agency estimated costs at approximately $163,000 per petition. This estimate was calculated using the number of full-time equivalents working on food and color additive petitions and the number of petitions received per year. Thus, this value is an average. Certain complex petitions will cost many times more to process and a simple food additive petition may be much less than that amount. This figure does not specifically account for efficiencies gained in re-engineering of the program or costs of significantly improving timeliness and predictability of the process. Finally, the $163,000 per petition figure does not reflect the total cost of reviewing the petition because petitions may take longer than a year to process. The Agency has recently contracted with a group that is gathering data to better measure petition-related work effort; we believe this data will be very helpful in improving our estimates of cost, but at this time I cannot say when this data will be available. Mr. Walsh. The President's budget requests $19 million for post market surveillance. a. Is the FDA doing this type of work currently? b. How many additives typically fall under post market surveillance? c. How many additives have ever been under post market surveillance? d. How much is the FDA currently spending on surveillance? Response. Yes, postmarket surveillance is the monitoring and assessment of product performance after approval or marketing, and is a critical part of FDA's mission to enhance consumer protection against new and unforseen risks associated with marketed products. FDA's responsibilities do not end when a new product is marketed. FDA is charged with assuring that the product will be safe in actual use. All food additives are covered under the postmarket surveillance program. Typically, FDA does not issue routine sampling assignments to test for the presence of food additives. However, FDA does implement a postmarket surveillance program for foods to analyze adverse reaction reports associated with foods, food additives, and food ingredients. FDA also conducts postmarket surveillance activities and epidemiological studies that provide information about exposure and possible adverse reactions, including hypersensitivities to food components, contaminants, and nutrients. FDA currently spends approximately $94.9 million for postmarket surveillance of foods, through its activities of inspections and sample analyses of domestic and imported products, and compliance/regulation of products. Each of these is an ongoing activity within the Foods Program. Mr. Walsh. Food typically gets the shorter end of the budget. What are your plans if user fees are not included in the budget? Response. If the proposed user fees are not authorized and the base resources replaced by these user fees are not restored, the impact would be catastrophic. The Administration is proposing new user fees of $131,643,000, of which $9,207,000 is for fees additive to existing base resources. This equates to 1,120 FTE. Without new user fees or the restored base resources, the necessary reductions would be felt across each program area of FDA. At this point in time, I cannot say with any degree of certainty where specific cuts would be taken, but given the magnitude of the potential reduction, I can safely say that review times and backlogs for all FDA-regulated products would increase substantially. FDA's ability to fulfill its mission of protecting and promoting the health of the American public would be seriously undermined. As for the foods portion of our budget, that program would bear a proportional brunt of these cuts as would FDA's other program areas. The Administration's total budget request provides for user fees, but more importantly, requests $24 million for a food safety initiative which would address some of the serious emerging problems associated with food borne pathogens that we do not currently have resources for in our base budget to cover. Review of Generic Drugs Mr. Walsh. In the Conference Report that accompanied H.R. 3603 (Report 104-726), the Appropriations Committees directed FDA to ``use available funds to ensure compliance with its 180 day statutory review period for generic drug applications.'' What steps has FDA taken to respond to this request? Please list the dates on which any remedial action was taken. Response. FDA has taken a number of actions to ensure compliance with its 180 day statutory review period for generic drug applications. These actions have been taken to improve efficiencies in the application review process. At the end of FY 1996, there was a backlog of 46 overdue applications, meaning abbreviated new drug applications, or ANDAs, pending greater than 180 days. In addition, 71 chemistry supplements were overdue. As a reference, at the end of FY 1995, there were 58 ANDAs and 104 supplemental applications overdue. Thus, FDA has substantially reduced the backlog of overdue applications and supplements. Some of the major program changes that are intended to reduce overall time to approval follow. FDA has implemented new faxing and teleconference procedures, and has begun faxing the review/comments/ deficiencies to applicants during this fiscal year. Additionally, for most ``minor'' issues, applicants will be able to submit responses via facsimile. If the fax response is received from an applicant within 30 days, the reviewer will then complete review of the application. If it is not received within 30 days, then this would be classified as a minor amendment. Currently, responses to minor amendments are placed in a queue and reviewed within 60 days. In FY 1996, FDA also implemented a procedure for public release of bioequivalence protocols and protocol reviews. It is anticipated that by the providing access to this information, there will be fewer protocols submitted for review, thus decreasing the Division's protocol workload and allowing more time to be spent on application reviews. By releasing the first protocol for a drug, FDA no longer has to review duplicative protocols thereby freeing up more resources to conduct timely reviews. Also, FDA initiated a procedure to contact applicants that undergo two or more major deficiency cycles during the review process. Applicants are requested to contact FDA for discussion or clarification regarding the deficiencies. If FDA is not contacted, the Office will call the applicant within 30 days to see if any further discussion, or perhaps a meeting, is necesary. It is hoped that this interaction will prevent additional major deficiency cycles and shorten total time to approval. In 1996, FDA's Office of Generic Drugs, or OGD, hired a medical officer to facilitate timely review of ANDAs with bioequivalence studies with clinical endpoints. In the past, these complicated studies were consulted in the Office of Review Management for review, and then returned to the OGD for final processing after completion of the scientific review. The Office of Generic Drugs has implemented its program for electronic submission of bioequivalence data. The program was developed under contract with the University of Maryland. Under the program, applicants that choose to may prepare electronic submissions on diskette with the aid of a user-friendly program call Entry and Validation Program. The program is expected to have a very positive impact on the efficiency of reviews, ultimately reducing review times. Mr. Walsh. In your opinion, why is FDA exceeding the statutory requirement that Abbreviated New Drug Application (ANDA) be reviewed in 180 days? Response. Staffing reductions coupled with an increased number of submissions of original applications have had a significant impact on review times. The yearly number of original submissions from FY 1994 through FY 1996 increased from 332 to 378, based on the old counting system. Drug Review Times Mr. Walsh. Since 1990, what have been the mean and median review times for NDAs, ANDAs and ANDA supplements? [The information follows:] MEAN AND MEDIAN REVIEW TIMES ---------------------------------------------------------------------------------------------------------------- NDAs ANDAs ANDA supplements Fiscal year ------------------------------------------------------- Mean Median Mean Median Mean Median ---------------------------------------------------------------------------------------------------------------- 1990.................................................... 31.7 23.8 25.0 23.0 N/A N/A 1991.................................................... 29.2 24.2 36.3 32.7 N/A N/A 1992.................................................... 30.0 24.2 35.4 34.5 N/A N/A 1993.................................................... 34.3 26.8 40.4 39.7 N/A N/A 1994.................................................... 27.3 20.8 29.4 24.4 N/A N/A 1995.................................................... 25.7 18.7 35.3 28.2 N/A N/A 1996.................................................... 19.6 15.0 33.2 24.7 N/A N/A ---------------------------------------------------------------------------------------------------------------- Generic Applications Mr. Walsh. List the ANDAs that are currently being delayed because of an outstanding scientific or regulatory bioequivalence issue, and provide the mean time the application has been pending before FDA. Response. FDA is not permitted to specifically discuss pending applications. However, the types of drug products that may take longer to approve are nonsystemically absorbed drug products that require more extensive bioequivalence testing and others that raise especially complex scientific issues. Mr. Walsh. Since 1990, what has been the mean and median review cycle in months for ANDAs and ANDA supplements? [The information follows:] [Pages 445 - 447--The official Committee record contains additional material here.] Mr. Walsh. Since 1990, what have been the mean and median review times for consults sent from the Office of Generic Drugs (OGD) to the New Drug Division? Response. The Office of Generic Drugs--OGD--does not calculate the mean and median review times for consults sent to the Office of Review Management--ORM. However, it can be safely stated that many consults take months to well over a year to be returned to OGD. Upon return of the consults, OGD must still review ORM's comments and prepare a deficiency letter, if applicable, for the applicant. In the fall of 1996, OGD hired a medical officer to facilitate the timely review of abbreviated new drug applications that include bioequivalence studies with clinical endpoints. Mr. Walsh. How many ANDAs and ANDA supplements has FDA received each year since 1990? [The information follows:] ------------------------------------------------------------------------ ANDA Fiscal year ANDA/AADA supplements received received ------------------------------------------------------------------------ 1990.......................................... 352 3,946 1991.......................................... 300 2,632 1992.......................................... 339 3,117 1993.......................................... 308 3,506 1994.......................................... 332 2,528 1995.......................................... 404 2,694 1996.......................................... 378 2,521 ------------------------------------------------------------------------ Mr. Walsh. How many ANDAs and ANDA supplements has FDA approved each year since 1990? [The information follows:] ANDA AND ANDA SUPPLEMENTS APPROVED ------------------------------------------------------------------------ ANDA Fiscal year ANDA/AADA supplements approved approved ------------------------------------------------------------------------ 1990.......................................... 73 2,489 1991.......................................... \1\ 141 3,413 1992.......................................... 239 3,470 1993.......................................... 215 2,635 1994.......................................... 255 2,486 1995.......................................... 288 2,466 1996.......................................... 340 2,730 ------------------------------------------------------------------------ \1\ In 1991, there were 141 approvals and 4 tentative approvals. The tentative approvals were counted previously and should not have been included in the count. Mr. Walsh. Since 1990, what have been the annual FTE ceilings at OGD and the number of personnel on board? Please break out these figures by category, e.g., chemistry reviewers, bioequivalence reviewers, etc. [The information follows:] OFFICE OF GENERIC DRUGS ---------------------------------------------------------------------------------------------------------------- Program Chemistry Bioequivalence Labeling FTE Fiscal year FTE\1\ reviewers reviewers reviewers On board ceiling ---------------------------------------------------------------------------------------------------------------- 1990................................ 41 33 28 7 109 121 1991................................ 56 42 28 8 134 132 1992................................ 57 53 30 10 150 150 1993................................ 62 51 28 8 149 155 1994................................ 60 50 26 9 145 155 1995................................ 59 50 26 8 143 144 1996................................ 35 48 25 10 118 \2\125 ---------------------------------------------------------------------------------------------------------------- \1\ Program FTE include laboratory and management staff; part-time employees; summer students and non-reviewing supervisors and scientists. \2\ The reduction in OGD's FTE ceiling from 155 to 125 includes two components. Approximately 16 FTE do not represent true reductions in the core review functions of the office, as these positions were transferred to the Office of Testing and Research (OTR) and the immediate staff of the Office of Pharmaceutical Science. These transfers were part of an overall reorganization of the Center, intended to make the best possible use of limited resources. The FTE transferred to OTR are still devoted to product quality research and performing the same product quality testing function as when they were part of OGD. The additional cut of 14 FTE that existed in the OGD in 1994 represent one of many examples of the agency's efforts to comply with directives to reduce the number of federal employees. Mr. Walsh. Since 1990, what have been the annual salary outlays for program FTEs, primary reviewers, and total program outlays for OGD? [The information follows:] OFFICE OF GENERIC DRUGS ---------------------------------------------------------------------------------------------------------------- Total est. costs Fiscal year Program FTE Primary \1\ (salary/ reviewers outlays) ---------------------------------------------------------------------------------------------------------------- 1990.......................................................... $2,006,879 $3,286,598 $5,293,477 1991.......................................................... 3,394,704 4,595,226 7,989,930 1992.......................................................... 3,638,505 5,908,980 9,547,485 1993.......................................................... 4,090,543 5,688,643 9,779,186 1994.......................................................... 4,151,055 5,867,594 10,018,649 1995.......................................................... 4,187,318 5,953,800 10,141,118 1996.......................................................... 2,609,843 6,195,479 8,805,322 ---------------------------------------------------------------------------------------------------------------- \1\ Based on average salary data. Mr. Walsh. FDA has a number of responsibilities that the Food, Drug, and Cosmetic Act requires be completed within a specific time frame, including the obligation to review ANDAs within 180 days. Other FDA duties maybe important; however, they are not mandated by a statutory schedule. Administrative support office activities are less likely to be subject to a statutory schedule. There are a number of administrative offices at FDA including the Office of the Commissioner, the Office of Policy, the Office of External Affairs, and the Office of Management and Systems. The FY 1997 Program Level Appropriation for these offices was $89.63 million and 995 FTEs. FDA Has requested $13 million in user fees for generic drugs in FY 1998. These funds would be used to accelerate the approval of generic drugs and would permit the addition of 92 FTEs in OGD and related offices. Why couldn't FDA fully fund an effective ANDA review program by retaining the present level of funding in OGD and transferring approximately 14.5 percent of the resources from the above listed administrative offices, or $13 million, to OGD? Response In the FY 1998 budget request, the estimate for Generic Drug user fees was $13 million, and a separate $5 million user fee for Over-the-Counter (OTC) drugs was included. However, because fees are already charged for NDAs for OTC switches under PDUFA, this $5 million was moved to Generic Drugs in the Administration's proposed legislation for a new total of $18 million, to maintain the current resource level in the generic drug program. This $18 million in user fees does not reflect an increase in funding in this area, and should not be construed to be program enhancement funds. If the user fees requested in this and other critical program areas are not approved, and the existing base resources are not restored, the cuts will be felt across each program are of FDA. At this point in time, I cannot say with any degree of certainty where specific cuts would be taken, but given the magnitude of the potential reduction, I can safely say that review times and backlogs for all FDA-related products would increase substantially. FDA's ability to fulfill its mission of protecting and promotion the health of the American public would be seriously undermined. Decreasing the funding available for administrative functions would be expected to reduce the agency's operating efficiency, which would adversely affect a variety of programs, including ANDA review. Mr. Walsh. Describe in detail any additional funds you believe would be necessary to review 90% of ANDAs in 180 days. Please list the additional FTEs that you would add, break out these FTEs by category, and list where they would be assigned in the agency. Response. In a preliminary survey, it has been estimated that approximately 92 FTE at a cost of $8.2 million per year would be needed to enhance the current drug evaluation activities such as the review of original ANDAs/AADAs and chemistry supplements within 180 days; the reduction of overall approval times through a reduction in review cycles; the improvement of timeliness in responding to controlled correspondence; and increased participation in trade association conferences and training seminars. Initial, one-time start-up costs of furniture, computer and other equipment, and recruitment would be about $2.1 million, or $530,300 per year spread over four years. The annual increase in the operating costs of the generic drugs program, including research, operations, and infrastructure, would be about $4.1 million. Thus, the total annual costs to be covered by generic user fees, including the start-up costs for the first four years of $530,300, the annual increase in operating costs of $4.1 million, and increased salaries of $8.2 million would be approximately $12.8 million. [The information follows:] FTE for ANDA Review The increase of 92 FTE would be distributed as follows: OGD (70), other CDER offices (7), and the Agency (8). The distribution of the OGD FTE spread is shown below: 20......... Chemists.......................... Divs. of Chemistry I & II. 14......... Bioequivalence Reviewers.......... Div. Of Bioequivalence. 3.......... Labeling Reviewers................ Div. of Labeling & Program Suppt. 1.......... Microbiologist.................... Div. Of Chemistry I. 9.......... Consumer Safety Officers.......... Div. Of Labeling & Program Suppt. 6.......... Operations Research Anal./Computer Immediate Office/OGD. Specialists. 3.......... Attorneys......................... Immediate Office/OGD. 11......... Secretary/Administrative Officers. Various Divisions within OGD. 2.......... CSO Technicians................... Div. Labeling & Program Support. 1.......... Medical Officer................... Immediate Office/OGD. 70......... Total Mr. Walsh. The International Committee on Harmonization (ICH), which includes the U.S., European Union countries, and Japan, has been meeting to seek agreement on standards for clinical trials and other related issues. Please provide the employee title and days on travel for FDA employees who have attended ICH conferences since 1990. In addition, provide a dollar figure for out-of-pocket expenses and salary costs attributable to ICH since 1990. Response. As international trade negotiations intensify, FDA's involvement in promoting harmonization of standards, product review criteria, and enforcement procedures has taken on a new and more important status. The ICH is the basis for integrating international harmonization efforts more fully into FDA's program planning activities and for determining the appropriate level of organizational and resource support. Many of the records necessary to respond to the request have been archived. FDA is in the process of retrieving those records to respond as accurately as possible to the question. Medical Devices Mr. Walsh. I see that the President's Budget for FY 1998 would cut the budget authority for FDA, an important public health agency in your Department, by close to $70 million. And I notice that the medical device program is being cut by about $40 million (or 388 people). How can you justify these cuts? We need better performance at FDA--especially in the medical device area where review times for the most important, life saving products are far above the statutory requirement. Is the budget being balanced at the expense of public health? Response. FDA has a strong commitment to public health and safety. It is the Agency's mission to protect and promote the health of the American people. FDA's challenge in the coming year will be to meet its mission within the constraints of a balanced budget environment. The FY 1998 budget request for the medical device portion of the budget is actually an increase rather than a decrease from the previous year's funding levels. While the request for appropriated dollars is reduced, FDA is asking for a total of approximately $39 million in new user fees to replace appropriated base funding, $14.0 million for a reauthorization of the existing Mammography Quality Standards Act--MQSA--user fees, and $5.2 million in additive user fees to improve the premarket approval (PMA) process. The user fee and appropriated resources combined not only restore the program funding back to the FY 1997 level, they also increase the total program funding by $5.8 million which includes the $5.2 million in additive user fees and $0.6 million for inflation for MQSA. The FY 1998 budget request also maintains the same FTE level that was funded in 1997. Mr. Walsh. I see that the medical device user fee program you are requesting is for $45 million--$20 million more than the program you requested last year and the year before that--a program which would have ``supplemented'' a base level of performance in the medical device area. How did you arrive at this number? Isn't it simply a ``cost shift'' to industry--with no promise of better Agency performance? Response. The use of fees to substitute for congressional appropriations is based on a real budget need due to a strong emphasis to reduce discretionary funding throughout the Federal government. To allow FDA to meet its mission and provide the level of service the device industry and the American public has come to expect, FDA needs to at least maintain program funding at the FY 1997 level. Any less than that amount could result in longer review times which would adversely affect market competitiveness and delay the public's access to new products. Given the fact that appropriations will be reduced in the coming years, the assessment of user fees appears to be the fairest way to provide the medical device program with the funding that it needs to operate efficiently and effectively. This approach is a way to share the costs of doing business with the industry that profits from FDA's services. Within the FY 1998 budget is an increase of $5.2 million to be used specifically to improve the quality and timeliness of the premarket approval, PMA, process. This funding will allow FDA to focus more attention on reviewing new diagnostic and therapeutic devices without jeopardizing performance in other review areas. Although the industry will be paying for improved performance, it will also be one of the beneficiaries of the program as PMA and PMA supplement review times drop despite a 15 percent projected increase in workload due to requests for reclassifications and submissions of required preamendment PMAs. Mr. Walsh. As you are well aware, the FDA has been under much congressional scrutiny for delays in reviewing medical devices? How does this budget assure better performance from the Agency so that patients have timely access to the medical technology they need? Response. The FY 1998 budget proposal provides FDA with the level of resources needed to carry out its public health responsibilities. However, additive user fees are needed for performance to substantially improve. The $5.2 million additive user fee program for the PMA process is the one area in the medical device program where performance gains are expected. FDA knows that resources will be limited in this and future budgets, and is taking measures now to create a more effective, efficient, and responsive government agency. FDA is pursuing reinvention activities to accelerate device review and reduce unnecessary regulatory burdens on the medical device industry. These new ways of doing business benefit the industry, the American public, and the FDA--all without comprising the integrity of the processes involved. Field Lab Consolidation at NCTR Mr. Dickey. First I'd like to ask to place in the record a letter I received from your predecessor Dr. Kessler. This letter indicated Dr. Kessler's commitment to the construction of the field laboratory consolidation project at NCTR. I see that you have made a $14.55 million request for this project. So, is it fair to say that you share Dr. Kessler's view of the importance of the project? Response. Yes. The construction of the Arkansas Regional Laboratory, or ARL, at Jefferson, Arkansas, remains a cornerstone of the FDA field laboratory consolidation plan. FDA is depending on ARL to provide state of the art laboratory facilities replacing all or part of the analytical and lab programs now conducted at six existing facilities. NCTR Budget Mr. Dickey. The figures on p. 12 of last year's justification under ``FY 96 Appropriation'' is dramatically different from the one's you have provided this year. Also, there appears to be significant discrepancies between what Congress appropriated for and what you say were your actual obligations. For NCTR, for example, last year you requested about $38.069 million. The Senate Report 104-317 accompanying our appropriation bill, which was adopted by the conference, lists for NCTR the slightly lower number of $36.977 million. I understand that this number includes an amount, unspecified at the time, for ``central services'' that was never intended to be obligated at NCTR. That amount, was later specified to the committee as $5.670 million, which constitutes 15.33% of the appropriated figure for NCTR. However, it is not clear where these funds were to be obligated or how ``central services'' costs were to be allocated among the various line items in the report. Where was the $5.670 million spent? Response. The difference between the FY 1997 request of $38.069 million and the committee report estimate of $36.977 million was the estimate for NCTR's share of the agency overhead, now included in ``Other Activities''. The difference between the committee report estimate of $36.977 million and the FY 1998 justification estimate of $31.307 million is $5.670 million. This amount is attributable to one-time contract support to the NCTR in FY 1995 that should have been shown as funding for other program activities in FY 1997. The apparent dramatic differences in the NCTR program line are the result of fluctuation in the amount of one-time contract support made available to the NCTR and a general reduction in operating costs of all FDA programs. In fact, NCTR base resources have been fairly consistent for the past several years, both in dollar terms and as a percentage of the Agency's total Salaries and Expenses appropriation. Mr. Dickey. The conference adopted the Senate report language requiring that no more than 15% of each program's budget could be allocated to central services and that the committee receive advance written notice of any reprogramming of greater than 10% of a program budget. The conference also adopted the Senate report language indicating that Congress expects the FDA to ``provide greater detail'' on the amount of funding included in the budget request for its various offices. Did NCTR's allocation attributable to central services comply with the 15% threshold? Why or why not? Response. Yes, the NCTR's allocation to central services complied with the 15 percent threshold. The estimate for NCTR for central services is $557,000--about 1.8 percent--which is well under the 15 percent threshold. Mr. Dickey. Was advanced written notice required, and was it provided, before reprogramming NCTR's allocation to central services? Response. Since the amount attributable to central services did not exceed the 15 percent threshold, advance written notice for that was not required. With respect to the 10 percent requirement, however, because of the significant difference between the Committee Report and the amount actually planned for NCTR in FY 1997, a letter is being prepared to the Chairmen of the Appropriation Subcommittees providing notification that resources are being reallocated. Mr. Dickey. Was NCTR's allocation to central services in proportion with other programs? Why or why not? What specifically were the other allocation percentages? Response. Yes, the NCTR's allocation is in proportion to other programs. Due to the location of the Center away from FDA headquarters, the NCTR receives direct funding for many of the common services generally provided from FDA central services accounts to other programs. The Biologics is higher than other programs because of the location of the FDA Center for Biologics Evaluation and Research on the NIH campus and the services received by CBER from NIH are billed to FDA central services. The allocation of central service costs is based on either direct costs attributable to the individual center, or the center's portion of the agency population. A combination of these factors creates estimated percentages of programs and field activities, excluding rents, to be allocated to central services. These percentages are: Biologics 13.6 percent, Human Drugs 7.0 percent, Animal Drugs 6.8 percent, Medical Devices 5.9 percent, Foods 4.0 percent, and NCTR 1.8 percent. New Display of Budget Request Mr. Dickey. What constitutes the ``greater detail'' in the budget request that the committee clearly sought last year? Response. The greater detail is contained in the ``Other Activities'' and ``Other Rent and Rent Related Activities'' lines. There is a new chart in the FY 1998 Justification of Appropriation Estimates for Committee on Appropriations on page 14 showing a break-out of ``Other Activities''. For the first time, the Salaries and Expenses appropriation component for ``Other Rent and Rent Related Activities'' is shown separately so that when combined with the separate Rental Payments appropriation, the Committee can see the total rent and rent related costs of the agency. In addition, we have set out separately a new program activity for FDA's tobacco regulation effort. Mr. Dickey. The line labeled ``other activities'' in your request is $85 million! Is that the sort of detail you understood the committee to be requesting? I am not saying these funds are being wasted or spent unwisely. The funds may be used for wonderful and worthy purposes. My only concern is that this committee is not being adequately informed as to the details of where the money is going. Response. The ``Other activities'' line provided in the new chart in the FY 1998 justification on page 14 should be viewed in conjunction with the ``Other activities'' section on page 97 which provides a description for each of the separate offices within this section. [The information follows:] FOOD AND DRUG ADMINISTRATION: FY 1998 CONGRESSIONAL BUDGET REQUEST--BREAK-OUT OF ``OTHER ACTIVITES'' [Dollars in thousands] ---------------------------------------------------------------------------------------------------------------- Fiscal years-- ----------------------------------------------------------------------- 1996 actual 1997 1998 request Change from 1997 Project obligations appropriations ------------------ appropriation ------------------------------------ ----------------- FTE $ FTE $ FTE $ FTE $ ---------------------------------------------------------------------------------------------------------------- Other Activities........................ 966 $92,945 995 $89,333 995 $89,810 0 $177 ------------------------------------------------------ BA Only............................. 923 88,746 954 85,110 954 85,410 0 0 User Fees........................... 43 4,199 41 4,223 41 4,400 0 177 ====================================================== Office of the Commissioner.............. 127 12,477 141 11,417 141 11,508 0 4 ------------------------------------------------------ BA Only............................. 126 12,379 140 11,322 140 11,409 0 0 User Fees........................... 1 98 1 95 1 99 0 4 ====================================================== Office of Policy........................ 29 1,952 32 1,977 32 2,048 0 0 Office of External Affairs.............. 193 14,096 192 14,251 192 14,283 0 0 Office of Operations/Orphans............ 27 2,258 31 2,084 31 2,139 0 0 ====================================================== Office of Management & Systems.......... 590 51,112 599 49,057 599 49,285 0 173 ------------------------------------------------------ BA Only............................. 548 47,011 559 44,929 559 44,984 0 0 User Fees........................... 42 4,101 40 4,128 40 4,301 0 173 ====================================================== Central Services........................ 0 11,049 0 10,547 0 10,547 0 0 ---------------------------------------------------------------------------------------------------------------- Other Activities--Explanation of Program Funding for these activities was previously spread between the old ``Program Management'' activity line as well as among the different program areas (e.g., Foods, Human Drugs, etc.). Based on language in the FY 1997 Senate report, we are showing the total costs associated with these offices under a new program activity line, ``Other Activities''. The activity provides central program direction and administrative services for Agency programs to ensure that FDA's consumer protection efforts are effectively managed and that available resources are put to the most efficient use. Functions include providing agency-wide policy development in medical affairs, scientific coordination, regulatory requirements, legislation, planning and evaluation, consumer communications and public information, and management expertise and coordination in financial management, personnel, contracts and grants administration, procurement/property/space control, and communications systems. Other specific programs include Freedom of Information activities, administration of internal controls required under the Federal Managers' Financial Integrity Act, and the Small Business Program, to assist small businesses in carrying out regulatory requirements and in participating in FDA's regulatory decision-making process. Overall, the Commissioner and the Deputy Commissioners are responsible for the efficient and effective implementation of the Food and Drug Administration's (FDA) mission to protect the public health of the Nation as it may be impaired by foods, drugs, biological products, cosmetics, medical devices, ionizing and non-ionizing radiation-emitting products and substances, poisons, pesticides, and food additives. FDA's regulatory functions are geared to insure that: Foods are safe, pure, and wholesome; drugs, medical devices, and biological products are safe and effective; cosmetics are harmless; all of the above are honestly and informatively packaged; and that exposure to potentially injurious radiation is minimized. Descriptions for each separate office are provided: The Office of the Commissioner provides some of the critical leadership and expertise needed to secure and manage the entire Agency. This part of FDA provides: (1) a full range of legal services in the enforcement of the Federal Food, Drug and Cosmetic Act, and legal advice and policy guidance for all programs administered by FDA; (2) advice and assistance on equal employment opportunity and Civil Rights activities which impact on policy development and execution of program goals; and (3) advice on policy and other agency-level activities and decisions that affect FDA programs, projects, strategies, and initiatives including issues that are sensitive and controversial which impact Agency relations with other Federal agencies and foreign governments. The Office of Policy directs and coordinates the Agency's rulemaking activities and regulations development system, initiates new and more efficient systems and procedures to accomplish Agency goals in the rulemaking process, and plans ``regulatory reform'' steps. This office also: (1) coordinates rulemaking and regulations development activities; reviews proposed regulations, final regulations, and other Agency documents to be published in the Federal Register; assures regulations are necessary, consistent with established Agency policy, clearly written, enforceable, coordinated with other Agency components (the Office of the General Counsel, and Federal, State, and local government agencies), and are appropriately responsive to public participation requirements and applicable executive order, and any applicable requirements for assessment of economic and environmental effects; (2) advises and assists the Deputy Commissioner for Policy concerning information that may affect current or proposed FDA policies; (3) advises the Deputy Commissioner for Policy and other senior Agency officials on the formulation of broad Agency regulatory policy; (4) establishes procedures for Agency policy formulation and monitors policy formulation activities throughout the Agency; (5) proposes and researches policy alternatives; (7) identifies and researches the impact of FDA policies on national health issues and technological advances; and (8) identifies and researches the impact of external factors, including national health issues and technological advances. The Office of External Affairs provides a wide range of support. These support activities include working on issues with groups outside of FDA related to: (1) international affairs; (2) industry and small businesses; (3) health affairs; (4) legislative affairs; (5) consumer affairs; (6) public affairs; (7) freedom of information; (8) AIDS and other special health initiatives; and (9) women's health. The Office of Management and Systems (OMS) advises and assists the Commissioner in coordinating agency management and using agency resources. The OMS works to provide a comprehensive program of services concerning facilities and supplies, budget and finance, people and management, information resources, and planning and evaluation. The Central Services Account was established to provide cost-effective services common to all centers and offices. It is a combination of many subaccounts which support and enhance the Agency as a whole. The function of the Central Services Account can be described as ``one-stop'' shopping, wherein many charges are handled from one place and distributed back to each of the Centers and offices. Services include the Service and Supply Fund, established to provide common administrative services for the Parklawn complex such as procurement and contract administration; central management of telecommunications services which includes data purchase and voice service; voice lease and purchase and commercial telephones; agency supported training; mail delivery services; Working Capital Fund or centralized payroll and regional personnel services; Department of Labor work-related injury and death benefit compensation; and agency health units and employee assistance programs which provide clinical and counseling services. Services provided through the Central Services Account benefit the Agency through economies of scale, the avoidance of duplication of effort, and increased operational efficiency. The amount indicated for ``Other Activities'' represents the non-Center Headquarters share of the total central service account. Drug Approval of Contraceptives Mr. Dickey. Tuesday's Washington Post reported that the FDA ``took the unusual step'' of inviting drug companies that make ordinary oral contraceptives, not RU-486, to apply for permission to market the pills as ``morning after'' contraception. Exactly how unusual a step is this? Can you cite an example of the agency ever having done this before? What prompted the FDA to violate its own protocol and take this step? Response. The Agency has published FR notices similar to this in the past. For example, NDA submissions were invited for potassium iodide for blocking uptake of radioactive iodine by the thyroid in an FR notice of December 1978, and for acetazolamide for acute motion sickness in an FR notice of April 1985. These actions represent similar conclusions of safety and effectiveness for indications not sought by the pharmaceutical sponsor. FDA has used this mechanism when it was in the public interest to publish a safety and efficacy finding, and encourage the submission of NDA's. In November 1994, the Center for Reproductive Law and Policy petitioned the agency to direct sponsors of certain oral contraceptives to amend their labelings to include information on the use of these products for postcoital emergency contraception. Although FDA denied the petition, the Agency convened a public meeting of its Reproductive Health Drugs Advisory Committee to discuss the scientific issues raised in the request. At that meeting, held June 28, 1996, the committee unanimously concluded that four treatment regimens using specific dose of ethyl estradiol and norgestrel or levonorgestrel are safe and effective as postcoital emergency contraception. The Agency then issued the notice of its finding that oral contraceptives were safe and effective for this use. Mr. Dickey. Why should the FDA be spending its time and resources searching for new uses for existing drugs even when, as the Post reported, ``the largest manufacturers of contraceptives have told the FDA that they are not interested in repacking their products for morning-after use''? Response. FDA believes that information concerning safe and effective uses of approved products should be available to consumers and their health care providers in approved product labeling. For example, in December 1994, the Agency published an FR notice to provide for the inclusion in the labeling of drugs of more complete information about the use of the drugs in the pediatric population. Mr. Dickey. Last summer when FDA held hearings on this subject, one of the largest manufacturer of birth control pills, Wyeth-Ayerst, testified against the re-labeling didn't they? Why? Wasn't it because they thought it would invite litigation? Response. Wyeth-Ayerst indicated that they were not interested in pursuing the indication of emergency contraception. Wyeth-Ayerst should be contacted directly regarding their rationale for this decision. Mr. Dickey. Did your agency consider that because such large manufacturers are against this use of the pill, they will not market it that way? Did you consider that when a woman or minor without her parent's consent reads the article in the Post or hears about this use of the pill, she may self-medicate without a doctor's advice because ``the FDA said it is okay''? Did you consider that since the pills she overdoses on were not marketed or labeled for that purpose, she will not have recourse to sue the manufacturer to recover for her injuries? Response. FDA hopes to receive an application for this use. That application may come from one of the companies that now market oral contraceptive pills, or from a new company. Publishing FDA's conclusion that postcoital emergency contraception is safe and effective will make it easier for any company to prepare an application. Of course, emergency contraceptive pills are only available by prescription from a health care practitioner who can advise women about their use. Emergency contraceptive pills have been demonstrated to be safe. Their use in one of the four regimens described in the FR notice does not constitute an overdose, and is very unlikely to result in any injury. At the Advisory Committee's June 28, 1996, meeting, Dr. Elizabeth Barden presented information from the British Medicines Control Agency that only six serious adverse reactions associated with these products for this use were reported to it from 1984 to 1996. Of these, only one occurred close enough to the time of administration to indicate that the reaction might be drug related. Extensive marketing experience in Europe and New Zealand also supports the safety of contraceptive pills for this use. Mr. Dickey. Will the FDA require label changes to birth control pills, regardless of how they are marketed, to state the decreased rate of effectiveness when used as a morning after pill? Response. Only certain oral contraceptive pills are suitable for use as postcoital emergency contraception. Using these pills for postcoital emergency contraception requires different dosing regimens. If the agency approves an application to market emergency contraceptive pills, the labeling for that product will contain all the risks and benefits of this use, including the effectiveness rate. Mr. Dickey. Did you do clinical trials on the long-term effects of repeated use of the pill in this fashion? The rate of repeat abortion in the U.S. is higher than it is in other countries. What will happen to women who substitute repeated abortion with repeated use of the pill in this fashion? If you don't know, shouldn't you find out before taking an unprecedented, proactive step to encourage this new use of the pill? Response. Emergency contraceptive pills do not cause abortion, and, in fact, are not effective if the women is pregnant. They act by delaying or inhibiting ovulation, and/or altering tubal transport of sperm and/or ova, which inhibits fertilization, and/or altering the endomentrium, which inhibits implantation. The FDA doe not conduct clinical trials. However, we performed a complete review of information available in the published literature and information from foreign marketing experience. Some of the literature reviewed contained information on repeat use of emergency contraceptive pills. In addition, we have 35 years of data on their long-term use of oral contraceptives. By contrast, we normally have limited information on long-term use when new drugs are approved. RU-486 Mr. Dickey. Most drugs take quite a while to get FDA approval, I've heard 17 months on average. The FDA did not expedite the process for breast cancer treatments. But it did rush through RU-486, a drug whose sole purpose is to end the life of a child--after only 6 months of clinical trials. Why? Response. In accordance with CDER review policy, Mifepristone, or RU-486, was classified as a ``1P'' drug--a new molecular entity--that if approved, would be a significant improvement compared to marketed products, including non-drug products/therapies. The Agency reviewed the application commensurate with the review goals for priority drugs as mandated by the Prescription Drug User Fee Act of 1992, or PDUFA. Sixteen drugs subject to PDUFA and classified ``1P'' were approved in 1996. The mean time to ``first action'' on these drugs was 8.2 months; the median was 6.2 months and the range was between 1.4 and 15.0 months. The approvable action taken on mifepristone on September 18, 1996, was a first action. Mr. Dickey. RU-486 has a history of use in other countries, but isn't it FDA policy to rely more heavily on U.S. data because we adhere more strictly to sound clinical practice? Response. In accordance with 21 CFR 314.106 (b), FDA may rely solely on foreign clinical data for approval if the foreign data are applicable to the U.S. population and U.S. medical practice; the studies have been performed by clinical investigators of recognized competence; and the data may be considered valid without the need for an on-site inspection by FDA or, if FDA considers such an inspection to be necessary, FDA is able to validate the data through an on-site inspection or other appropriate means. The Agency often relies on foreign data in support of marketing applications as long as it is in accordance with this regulation. Mr. Dickey. Why was the Population Council allowed to present its findings before the FDA last July before the clinical trial data was fully compiled? Does the Population Council have any medical expertise? Is the Population Council interested in preserving human life to the maximum degree possible? Which is more important to the FDA, concerns about over-population or assuring that drugs are safe for all human life? Response. The Agency relied on data from two adequate and well-controlled trials conducted in France. The U.S. data were presented as supportive safety data. The European and the U.S. clinical trials were conducted by appropriate medical experts. Mr. Dickey. Why has the FDA refused to disclose the identify of the manufacturer of RU-486? Doesn't the public have a right to know whether it is a company in which they trust? Has the FDA refused to disclose the identify of any other manufacturer of any other drug? Why? Response. By regulation, the names of contractors and subcontractors provided in drug applications are considered to be confidential, commercial information unless they have been previously disclosed to the public. The applicant may name the manufacturer, if different from the applicant on the drug label, but is not required to do so. Mr. Dickey. Who is the manufacturer? Is it an American company? Do they have substantial assets so that women injured by RU-486 could recovery any civil judgement against them? Response. Again, FDA cannot disclose the manufacturer of a drug, absent prior public disclosure, as it is considered to be confidential information. Neither drug applicants nor drug manufacturers are required to submit information to FDA on their financial position. Mr. Dickey. Do you think it is an acceptable level of risk when of 2,100 women in the U.S. clinical trials, 21 required hospitalization, 4 lost so much blood that they required transfusions, and 5% required narcotics for the pain. Response. When reviewing an application for any new drug, FDA examines the benefits and risks of using the drug. The Agency, prior to its ``approvable'' action for mifepristone, determined that with appropriate labeling regarding safety and effectiveness, the risk/ benefit analysis was favorable. Tobacco Mr. Kingston. Under FDA's new regulation regarding tobacco, the FDA requires retailers, prior to selling cigarettes to an individual, to obtain a photograph identification of any individual younger than 27. What will happen to adults that do not have picture identification due to the fact that some states do not require a drivers license with a photo. Response. One of the reasons that FDA did not require a specific type of photographic identification, such as a driver's license with a photo, was that some states do not require drivers to have a photo on their licenses. The preamble to the final rule states that FDA, as a matter of policy, finds photo ID's that are distributed by state and federal governments to be more reliable and less easily forged than other forms of identification. However, under the rule, any form of identification that includes the bearer's picture and date of birth is acceptable. Mr. Kingston. Starting February 28, 1997, retailers will be in violation of the FDA regulations if they sell tobacco to an individual legally entitled to purchase tobacco if the retailer does not require that purchaser to produce photo identification. The regulations make no exception to this requirement even if the same individual repeatedly and regularly purchases tobacco from the same clerk. The FDA's interpretive comments state that after the first occasion, the clerk is not required to continually require the same customer to produce identification. How will FDA enforce this in a non-discriminatory manner? Is it sufficient defense for the clerk to state that he checked the identification last month? Response. FDA has stated in its outreach sessions and in answer to retailer questions over its toll-free hot line that a retailer only needs to ask a regular customer to show an identification on one occasion. From that time on, the retailer doesn't need to request identification. We have also been asked whether we will cite a retailer for failure to card a young adult between the ages of 18 and 26. We have answered that FDA will monitor compliance with its regulations in the near future, solely by sending an FDA commissioned official accompanied by an adolescent between the ages of 15 and 17 to attempt to purchase tobacco products. Only adolescents will attempt purchases. The only violation that our officials will be checking and that will form the basis for a civil money penalty is an illegal sale to a minor. If an investigator or a citizen observes what he/she believes is the failure of a clerk to ask for identification from a young adult, 18 or older, whether that customer was a frequent customer or not, he/she may report this to the FDA on its toll-free hot line. FDA's response will be to send an official accompanied by an adolescent between the ages of 15 and 17, to determine if the retailer will make an illegal sale. Only then will the retailer be cited. In this manner, FDA's goal of ensuring that illegal sales are not made, and the retailers ability to treat a repeat customer fairly, will not clash. Mr. Kingston. Can FDA explain in detail how the complaint process will work? Response. FDA has established a toll-free hotline, 1-999-FDA4KIDS to dispense information and to allow citizens to register complaints. The hot line asks each person to give the name and address of the retailer who was observed allegedly violating the law, to describe the event, and if possible, to provide the complainant's name. Each day, an FDA staffer transcribes the complaints received on the hotline and creates a list of stores. This information is fed into FDA's data base of retail outlets that sell tobacco with an indication that a complaint has been received about the store. The names of those locations will be provided to the state officials doing investigations in the area. When time permits, an unannounced visit will be scheduled. The complaint itself will not be treated as a proven violation, but treated instead as an indication that a store should be visited. Mr. Kingston. Will retailers be notified that a consumer has filed a complaint against them? If the answer to this question is yes, how will the retailer be notified? Response. The retailer will not be notified that a complaint has been filed against them. The complaint will only be used to create a list of stores to be visited. There is no immediate legal consequence that flows from the filing of a complaint. Mr. Kingston. In the scenario where a retailer cards an adult one day and then sells to that adult the next day without carding that individual because the retailer recognized the person as old enough to purchase, if a consumer complaint is filed because the retailer failed to card the adult, how will the FDA determine whether a follow-up sting is warranted? Response. It will not be possible for FDA to determine whether a complaint is valid based on a consumer's observation reported on the toll-free number. However, this should not be a matter of concern because the complaint itself is not sufficient for FDA to initiate a penalty proceeding. FDA will evaluate each complaint and make a determination if there is sufficient information to initiate a compliance check at a retail site. If so, FDA will request that this establishment be visited under the terms of the state contract. If the retailer does not sell to the minor during the compliance check, they are operating in compliance with the regulations. But, if the retailer does sell to the minor during the compliance check, FDA would notify the owner using the procedures established for notification of a violation. Mr. Kingston. If FDA will notify a retailer of a violation by mail, will such letters be made public? Response. The letter that FDA will send to the retailer after a compliance check has been conducted will be available under the Freedom of Information Act, or FOIA. We intend to recognize the retailers who refuse to sell tobacco products to minors during our compliance checks by sending a letter stating that they complied with the regulations. If a retailer is found to be in violation of the regulations, FDA will send a letter to the retail owner to explain the new rules, describe the violation, including the date and time it occurred, and advise him or her that another unannounced compliance check will be made. These letters will be available to the public under FOIA. After a second violation is found in the same establishment, FDA will notify the retailer in writing that civil money penalties are being sought and the amount. This is considered to be an ongoing investigation, and certain information will not be available to the public until the matter is settled. However, the civil penalties complaint and any accompanying letter will be publicly available. Import Inspection User Fees Mr. Kingston. FDA's FY1998 budget request includes $15 million in import inspection fees. Many argue that the instant assessment of an additional regulatory tax on any product entering the U.S. market discourages free trade and creates an additional hurdle in getting food products to market at a low cost to consumers. There also is a concern that imposing fees for import inspections invites the institution of retaliatory fees and regulation by other countries. Please describe your analysis of how these fees would affect international trade. Response. FDA does not expect any adverse impact on international trade based on the proposed import user fees totaling $15 million. FDA does anticipate that the proposed user fees will have a favorable impact on international trade by, among other things, allowing FDA to more rapidly develop planned enhancements to our automated system for imports--OASIS--and to support the continuing maintenance of the system. The fee is sufficiently small that it should not affect an importing firms decision to import a product. Further, both our Office of Chief Counsel and the Office of the U.S. Trade Representative have assured us that the proposed user fees are legal under GATT. Mr. Kingston. Although import inspection fees have been a part of FDA's budget proposal for the past several years, FDA has never submitted to Congress legislation authorizing such fees. Last year, FDA stated that the timetable for sending Congress proposed legislation authorizing such fees would ``depend upon consideration of relevant policy questions, consultation and dialogue with the affected industry communities, and appropriate review and approval within the Executive Branch.'' What policy questions were considered? What questions are left unconsidered? What affected industry communities has FDA consulted concerning this proposal? What steps has the Executive Branch taken in reviewing and approving this proposal? Response. The Agency considered a variety of policy questions, including how the fees would be structured, changes in the enforcement provisions related to imports, and changes that would enhance the Agency's productivity in dealing with imports. The Agency consulted with various organizations in the brokerage and import industry when funds were earmarked for development of FDA's automated import processing system. We have not consulted with industry as regards the use of user fees for general operations. The Agency submitted a legislative proposal for consideration in the Administration's policy review process. Such consideration was not concluded prior to the end of the 104th Congress. Postmarket Surveillance User Fees Mr. Kingston. Please list in detail the particular postmarket surveillance activities that will be funded by the $19 million in regulatory fees for food products and how FDA proposes to collect fees. Response. FDA is proposing to collect $51,000,000 in user fees on establishments that are listed on its Official Establishment Inventory, or OEI. These fees will partially fund postmarketing regulatory activities, including the $19 million proposed in the foods activities. Postmarketing regulatory activities include not only traditional domestic post marketing activities but also emerging strategies that partner with state, local, professional and industry, groups and individuals, to enhance the quality and safety of products, and reduce or control the public health risk by increasing information sharing and technical assistance so that establishments are operating with strong quality assurance systems and require less formal regulatory intervention. Response to consumer complaints and emergencies such as natural disasters and intentional tampering is also an important feature of post marketing responsibilities. Traditional domestic post marketing activities such as inspections, investigations, sample collections and analyses, regulatory analytical methods development, field exams, recall effectiveness checks, injunctions, and seizures will continue to play a role in postmarketing regulation. The effectiveness of these activities is enhanced by mission critical information systems, state of the art hardware, and staff training, quality assurance, and coordination activities. These funds will support activities consistent with the Government Performance and Results Act or GPRA, and other reinvention efforts such as grass roots meetings with industry. Mr. Kingston. Please list in detail the particular postmarket surveillance activities that will be funded by the $7.5 million in regulatory fees for drugs and how FDA proposes to collect the fees. Response. FDA is proposing to collect $51,000,000 in user fees. This includes $7.5 million in the human drugs activities, on establishments that are listed on its Official Establishment Inventory, OEI. These fees will partially fund post marketing regulatory activities. Post marketing regulatory activities include not only traditional domestic post marketing activities but also emerging strategies. Activities such as inspections, investigations, sample collections and analyses, regulatory analytical methods development, field exams, recall effectiveness checks, and injunctions and seizures will continue to play a role in postmarketing regulation. At this time, we have not fully developed the structure of the proposed fees or how they would be collected. However, we remain committed to work with the Congress and our many constituencies to develop user fee proposals that are productive and feasible. Radiopharmaceutical Drug Reviews Mr. Kingston. Why does the FDA on average take 29.8 months to review a radiopharmaceutical NDA submission, when the safety as measured by the incidence rate for adverse reactions for radiopharmaceutical is extremely low? Response. In the past, we had a backlog of applications for radiopharmaceutical drugs. For example, two applications in the FY 1994 submission cohort were overdue when acted upon, because we were working to reduce of a pre-existing backlog. The backlog has now been eliminated and we are now reviewing applications according to the PDUFA time frames. Regarding the effect of the safety record of radiopharmaceutical, a historically good safety record of a broad class of drugs does not eliminate the need to thoroughly review each member of the class and ensure it is safe and effective. As our current results demonstrate, we are able to provide a thorough and careful review and still meet our PDUFA goals. Mr. Kingston. Is there a reason why the review times for radiopharmaceuticals have improved under PDUFA, when FDA as a whole has shown improvement in the time it takes to review drugs in general? Response. Review times under PDUFA have improved quite dramatically for drugs in general and for radiopharmaceutical in particular. Because the FDA's focus was to eliminate the pre-PDUFA backlog before concentrating on applications filed more recently, the overdue rate for that division's 1994 submission cohort under PDUFA was 100 percent. For the 1995 submission cohort, the overdue rate for NDAs was zero--a substantial improvement which has continued in the 1996 submission cohort. The improvement is even more striking when looking at the raw numbers underlying the percentages. The 1994 cohort of new product applications consisted of two original submissions that were filed, each of which was reviewed in more time than allotted by the PDUFA goals, and one resubmission that was reviewed on time. The very next year, the 1995 cohort of applications filed included three original submissions and three resubmissions, all of which were reviewed on time or faster than the PDUFA goals. The 1996 cohort of applications that were filed is larger still. The reasons for this improvement are similar to the reasons for improvement for drugs in general: accountability, clear objectives, and concomitantly enhanced resources that were devoted to meeting those objectives. There is an additional factor contributing to improvement in approval times--the elimination of the pre-PDUFA backlog of NDAs. After completing that particular body of work, the FDA was able to turn its full attention to PDUFA applications and to meeting PDUFA goals, with the gratifying results I have just described. Mr. Kingston. Is there a reason why the Division of Medical Imaging and Radiopharmaceutical Drug Products has one of the highest mean drug review times? Is the PDUFA process working well for certain drugs? Response. Again, the Division of Medical Imaging and Radiopharmaceutical Drug Products had a backlog in the past, but this is no longer the case and the division is now meeting its PDUFA goals. Proposed User Fees Mr. Bonilla. My question is a concern of industries that would be subject to new user fees as well as user fees that have been authorized in the past. Can you give us some assurance that any user fee collected would be targeted to the specific FDA area of the industry from which it was collected? In other words can you assure us that user fees are not being used as a tool for non-specific deficit reduction? Response. FDA has experience under the Prescription Drug User Fee Act--PDUFA--of using any fees collected to fund specific activities. PDUFA required that any fees collected be used to expedite the review of human drug applications, so that prescription drug products reach the marketplace more quickly. FDA is committed to continuing this practice. Let me assure you that any fees collected under legislative authority that requires such fees to be used for specific programs or activities will be used for the program areas so designated. Mr. Bonilla. As a final question on this subject I would just say that the industries targeted for new user fees similar to the user fee paid by pharmaceutical companies are an entirely different breed of animal. For example, 88 percent of the medical device companies, an important industry in my state, have less than 100 employees. They are not mega-companies able to absorb the kind of costs and delays that would result from imposing user fees. In face, new user fees will likely stifle the kind of innovation and development of new products which typically takes place in smaller companies. In light of these differences, do we have any reason to believe that the authorizing committees will feel comfortable imposing $131 million in new user fees? Response. The Administration's proposal for new user fees is an important part of the President's overall plan to balance the budget by FY 2002. As we work with the Congress and our many constituencies, including FDA regulated industries, to develop these proposals for actual implementation, we will make every attempt to structure the new fees in such a way as to minimize any additional burdens on industry. By working with industry to develop the structure of these new fees, their concerns would certainly be considered. Youth Tobacco Prevention Initiative Mr. Bonilla. President Clinton approved the FDA's final rule on nicotine-containing products on August 23, 1996. FDA's budget request includes an increase of $29.4 million over the FY97 appropriations for this program. The total funding for the program is divided as follows: (1) $10 million for direct outreach to educate retailers and manufacturers on the details of the program, and (2) $24 million for enforcement and evaluation. I think we can all agree on the importance of preventing young people from having access to tobacco products. Kids should not be smoking--that's a given. My concern relates more to the method we have chosen to accomplish our goal. As a member of the Appropriations Subcommittee on Labor, Health and Human Services and Education--along with Ms. Delauro and Mr. Dickey--I have become familiar with an important piece of legislation known as the Synar Amendment. My first question is in regard to the relationship of FDA's federal tobacco initiative and the Synar Amendment--in looking at the requirements of each there seems to be substantial overlap. As I am sure everyone here is aware, the Synar amendment requires states to have in place and enforce laws prohibiting the sale of cigarettes to minors. It also requires states to inspect establishments that sell tobacco products to ensure that those stores are complying with the law before the state is eligible to receive federal substance abuse block grants. Congress approved the provisions of the Synar Amendment, and most of us think it is a good policy. My question is, don't many of the provisions of the FDA initiative, particularly the minimum age requirement, duplicate requirements enforced under the Synar Amendment by state officials? What does the FDA regulation add to state requirements? Response. FDA agrees that the Synar Amendment is a good policy that provides an important incentive encouraging States to reduce illegal sales of tobacco products to underage children. The minimum age requirement is the only provision that the regulations implementing the Synar Amendment and the FDA tobacco regulations have in common, however. Because of its authority under the Food, Drug, and Cosmetic Act, FDA was able to create a comprehensive set of regulations that will both reduce the easy access that young people have to tobacco, and significantly reduce the amount of imagery that makes these products so appealing to the young. In particular, FDA's advertising restrictions are an important addition to State tobacco control measures, and the agency believes they will help reduce young people's demand for these products. These restrictions could be adopted only by the federal government because States, unlike Federal agencies, are preempted by the Federal Cigarette Labeling and Advertising Act and the Comprehensive Smokeless Tobacco Health Education Act of 1986 from regulating tobacco advertising. Mr. Bonilla. I know that the substance abuse block grants are important to state level drug prevention programs. Is the FDA regulation an indication that states are not complying with Synar Amendment requirements? Does the FDA know of state which are not currently in compliance with Synar, because I think that would be valuable information for the committee to have? Response. FDA understands from SAMHSA that every state now has in place a law prohibiting the sale or distribution of tobacco products to minors. Mr. Bonilla. Can you comment on the roles and relationship of state versus federal employees under the FDA regulation in regard to enforcement efforts? How will funds and enforcement duties be allocated between the two? Response. The bulk of the day-to-day enforcement duties will fall on commissioned state employees who, acting as deputized FDA employees, will conduct the actual investigations within their states. FDA staff will oversee the contracting process, monitor the contract activities, and be responsible for informing retailers of the results of the compliance checks and for prosecuting any violations of the rule. As a result we anticipate that most of the personnel required to perform enforcement duties will be state officials acting as FDA employees. Mr. Bonilla. Can you be specific about what techniques will be employed by enforcement personnel to ensure that sellers are in compliance? Response. At the present, enforcement activities are directed only to the age and ID requirements of the rule. To enforce these provisions the state commissioned officers will conduct unannounced visits of retail stores accompanied by a minor. The minor will attempt to purchase a tobacco product. The results of that attempt will be recorded by the official on a form and sent to FDA for processing. In August, the second set of provisions will go into effect. Those provisions that concern the retail environment, such as no self service, no vending machines, advertising in black and white text only, can be monitored by the commissioned official when he/she is in the store on a routine enforcement visit. Because these provisions do not require that a minor attempt a purchase, the official will also be able to conduct these types of visits without using a minor during hours when children are in school. Mr. Bonilla. I would also like to address some of the issues which I'm sure have been addressed by FDA in the series of town hall meetings conducted around the country in preparation for the release of tobacco regulations. Can you clarify for the record the procedure store owners are required to go through in regard to verifying the age of every person under 27? Some store owner concerns: what about repeat customers? Does this requirement really mean that I have to check everyone to be sure? What are the potential penalties? Response. A retailer has an obligation to check a photo identification, with a birth date on it, of every customer who is under 27 years of age. FDA set the maximum age for identification checks higher than 18 in order to increase the likelihood that older-looking minors will be carded and prevented from purchasing tobacco. If a retailer has a customer who is 18 years of age or older,the retailer need only ask once to see the customer's ID. He need not card the customer every time the customer requests tobacco. As for penalties, FDA does not intend to seek monetary penalties for a retailer's first infraction but will send a letter informing the retailer of the violation, explaining the regulations, and indicating that there will be another unannounced visit in the near future. If the retailer makes an illegal sale on this reinspection, FDA will inform the retailer of its intent to seek civil money penalties. FDA will seek to impose a civil money penalty of $250 the first time it seeks civil money penalties. The amount it seeks for subsequent violations will be larger. In calculating the amount for subsequent violations, the Agency, pursuant to the Federal Food, Drug, and Cosmetic Act, section 303(f)(2)(B), may take into account may factors including the nature, extent, and gravity of the violation, the violator's ability to pay, and the history of past violations. Funding Priorities Mr. Bonilla. Dr. Friedman, let me ask you a tougher question now. The FDA budget request includes $58 million in new budget initiatives-- $24 million for the ``Food Safety Initiative'' and $34 million for implementation of FDA regulations on tobacco. In addition, the budget requests new user fees totaling $131 million to fund the traditional areas of FDA concern. There is a substantial amount of concern with the fact that FDA, on average, does not meet the statutory deadlines for review of food, drug, and medical devices. In your budget your agency requested $131 million in user fees to do a better job in these areas. My question is this, in the event that new user fees are not authorized and this committee is faced with a serious budget crunch, in your opinion should a funding preference be placed on existing FDA programs or should existing programs be cut to fund new initiatives? Response. FDA has made strides in improving performance its many programs. For human drugs and biologics, we have consistently succeeded in meeting and even exceeding all performance measures established in the Prescription Drug User Fee Act, or PDUFA. All drugs approved by FDA are important, but none are as meaningful in bringing new hope to patients as new molecular entities, or NMEs. These are products that include active ingredients never before marketed in this country. The number of NMEs approved each year is regarded as an indication of real and meaningful medical progress. In calendar year 1996, we approved 53 NMEs, nearly twice as many as the year before. These approvals were also done much more quickly. The median time to approve of these 53 was only 14.3 months, less than half the time it took as recently as the late 1980s. Further, several of the NMEs approved last year, including two drugs for cancer and three for HIV, were approved in six months or less. Finally, the total number of new drugs and biological products approved in the last calendar year was 139--a 63 percent increase over the previous year. New Drug Applications accounted for 131 of these products, and their median time to approval was 15.4 months, seven percent faster than the 16.5 months the year before. We continue working to improve in other areas as well. In medical devices we have improved premarket approval reviews, or PMAs, while maintaining review times for abbreviated applications--the 510(k)s. This latter category of applications--which accounts for the vast majority of all device submissions--covers devices that are substantially equivalent to devices already on the market. In FY 1996, we approved 43 PMAs, a 6-year high, and 24 major new products, an all- time high. Further, eight of the 15 PMAs submitted to FDA in the first half of FY 1996, received a first action within the 180-day deadline-- significantly better than in either 1994 or 1995. Even though we are approving more PMAs fro increasingly complex devices, and we have improved the time to first action, the PMA approval time is coming down only slowly. It takes too long--more than two years--to get a device through the process. We continue to focus on bringing down PMA review times, just as we have done in the human drug area. FDA has also successfully managed the review times for 510(k) applications. In FY 1996, the median review time for these devices that received a finding of substantial equivalence was 85 days. The reviews were almost 70 percent longer--144 days--at their peak in 1993. Even accounting for applications that had to be returned to the manufacturer for more information, the average 510(k) review time in FY 1996 was 110 days, down from the peak of 184 days in FY 1994. Even with our best efforts, there is still room for improvement, particularly in the area of food additive petitions. In the past, we have fallen short of meeting statutory deadlines on average. However, in the past few years, we have made a concerted effort to improve in this area by speeding up the review process and reducing the inventory of pending petitions. Scientists from other program areas were shifted to petition review, the existing electronic information processing infrastructure was modernized, technical services were contracted out to third parties, and we provided guidance to petitioners on how to improve the quality of their submissions to the Agency. These efforts have paid off. In June 1995, there were 295 petitions in the inventory. By the end of FY 1996, we had received an additional 82 petitions, yet the inventory was 60 below the total in June 1995. We approved the highest number of petitions in a decade--54--during calendar year 1996. Further, the median time from receipt to approval of food and color additive petitions decreased from 37 months in FY 1993 to 27 months in FY 1996. While we are still not where we want to be, we clearly are continuing to make progress. The new user fees proposed in the budget would allow us to continue our current level of activity in each of these areas. However, the majority of these user fees are not for enhanced performance, as is the case with, say, user fees under PDUFA. The Administration's budget for FDA should be viewed in total, keeping in mind that it fits in with the President's overall balanced budget plan by FY 2002. I am unable, at this time, to prioritize among the new funding included in the budget versus our traditional areas of concern. Improving the safety of the food supply and keeping tobacco out of the hands of children are both initiatives that have the utmost importance. However, FDA's traditional activities of promoting and protecting the public health through premarket review and postmarket assurance are also of vital importance. Tobacco Funding Mr. Bonilla. Your budget request indicates that you plan to spend $5 million dollars on tobacco regulation. Since no money was appropriated for tobacco regulation in FY 97 FDA budget, where is the money coming from? Response. The Agency will spend $4.9 million in FY 1997 to implement the final tobacco regulation. These financial resources were obtained from funds within the Office of the Commissioner that were set aside to address priority projects. Budget Levels Mr. Latham. The Food and Drug Administration is proposing a cut in its appropriation of approximately $68 million. If the new user fees proposed in the President's budget are not implemented will it be the FDA's position to maintain the cut in appropriation? Response. When looking at the bottom line, in terms of total program level, FDA's budget request is actually $68,500,000 higher than FY 1997. This total program level includes, not only new proposed user fees, but funding for two areas critical to improving public health-- food safety and tobacco regulation. The FY 1998 request does, in fact, show a $68 million reduction, but in appropriated budget authority only, which covers direct costs and excludes user fees. The Administration's proposal calls for new user fees in the amount of $131,643,000. Most of this funding--namely $122,436,000--would replace existing base resources. If these new user fees are not implemented and the base resources are not restored, FDA's ability to perform its core missions of premarket approval and postmarket assurance would be adversely affected to such an extent that the American consumer would suffer. Reauthorization of PDUFA Mr. Latham. What discussions have you been having with Chairman Bliley of the Commerce Committee regarding the reauthorization of PDUFA? Does the Administration have a position on a clean reauthorization versus one that incorporates fundamental reform of the FDA? Response. The Agency has had general discussions with Commerce Committee staff regarding PDUFA reauthorization and the discussions that the Agency had with industry regarding that reauthorization. Given the critical public health importance of the PDUFA program and the very short time frame for reauthorization, the Agency's position has been that PDUFA reauthorization should proceed independently of FDA reform. The Agency established a separate process, independent of the PDUFA discussions, for consultation with the Agency's various stakeholders and the Congress on questions related to FDA reform. Raw Shellfish Mr. Latham. Has the $100,000 appropriated for raw shellfish awareness and research been effective in reducing foodborne illness? Response. During FY 1996, FDA originally allocated $250,000 for cooperative agreements with the Interstate Shellfish Sanitation Commission, or ISSC, on education and research related to shellfish safety. In a letter dated June 17, 1996, Congressman Robert Livingston asked FDA to redirect the $250,000 appropriated by Congress to specific research efforts on molluscan shellfish. Based on this request, the Agency devoted the entire amount to shellfish safety research projects. A supplemental grant of $85,000 was provided to the ISSC for the purpose of conducting an assessment of the Interim Time-to-temperature Control Program. The remaining $165,000 was made available to state agencies, academic institutions and private and public organizations for Vibro vulnificus research priorities. As part of the FY 1997 appropriations, $100,000 will be devoted to a cooperative research program related to molluscan shellfish and the continuation of education programs to inform consumers of hazards associated with consuming raw shellfish. The cooperative research efforts will complement FDA's existing seafood safety research activities and enhance efforts to develop a better understanding of and better control measures for V. vulnificus and other pathogens in seafood. The education projects will also complement the Agency's educational efforts which are designed to assure that consumers-- especially those at-risk populations--and health professionals are fully aware of health hazards posed by the consumption of raw shellfish. FDA's ongoing educational efforts include the Seafood Hotline and the FDA Home page on the World Wide Web which provide consumers instant access to the most up-to-date information on seafood safety. In addition, FDA will participate in and provide support for key scientific and public health conferences on molluscan shellfish safety. Since the research efforts funded in FY 1996 will not be completed until some time this fiscal year, the Agency is unable at this point to provide an assessment of their impact. In fact, clear assessments of impact will probably not be possible until several years after the research projects have been completed. Even then, thorough assessments of impact will depend heavily on whether Federal and state disease surveillance systems will provide much more comprehensive information on the occurrence of foodborne infections than is currently available. Tobacco Outreach Mr. Latham. Does the FDA request specific funding to do outreach for each of the regulations that it implements? What is so complex about the new tobacco regulations that requires $34 million in funding to explain them to State and local officials? Response. Outreach can be a critical element in the implementation of new regulatory initiatives. The Agency's food labeling initiative several years ago is a good example of how outreach activities, such as public service announcements and consumer education materials, played a key role in informing all affected groups about the new regulation. Only $10 million of the requested $34 million is intended for outreach activities. The bulk of the request is to fund contracts with state and local officials who will participate in the enforcement of the final tobacco rule. Mr. Latham. Is it the FDA's position that State and local officials are incapable of enforcing current regulation against the scale of tobacco products to minors? Response. No, but the adequacy and success of those efforts vary from state to state. Enforcement of FDA's final tobacco regulation will complement all ongoing efforts at the state and local level to prevent the sale of tobacco products to minors. Tobacco Jurisdiction Mr. Latham. What is the statutory basis for the FDA's jurisdiction to regulate the sale of tobacco products? Response. FDA is asserting jurisdiction over cigarettes and smokeless tobacco under the drug and device provisions of the Federal Food, Drug and Cosmetic Act, or FD&C Act. Under the FD&C Act, a product is a drug if its in an article, other than food, ``intended to affect the structure or any function of the body.'' Similarly, a product is a device if it is ``intended to affect the structure or any function of the body'' and does not achieve its primary intended purposes through chemical action within the body. After intensive investigation and careful consideration of the public comments, FDA concluded that cigarettes and smokeless tobacco meet the statutory definition of a drug and device.This conclusion is based on two determinations: that nicotine in cigarettes and smokeless tobacco does ``affect the structure or any function of the body,'' and that these effects on the structure and function of the body are ``intended'' by the manufacturers. Specifically, FDA has concluded that cigarettes and smokeless tobacco are combination products consisting of nicotine, a drug that causes addiction and other significant pharmacological effects on the human body, and device components that deliver nicotine to the body. Tobacco Regulation Mr. Latham. Does the FDA intend to ban the sale and use of tobacco products? Is the FDA exploring further regulation of tobacco products? Response. FDA has said repeatedly that it does not intend to ban the sale and use of tobacco products. The focus of the Agency's regulatory efforts is to reduce the number of young people that use tobacco products. Cigarettes and smokeless tobacco products remain legal products for adults to purchase. FDA stated in the final rule that it would consider additional regulatory measures aimed at reducing young people's use of tobacco, if, seven years after the rule has been in effect, there had not been a 50 percent reduction in the smoking rate of underage smokers. Mr. Latham. For the record are you prepared now to provide or will you submit for the record in a timely manner the estimate of the out- year funding for implementation of the tobacco regulations? Response. We are not prepared at this time to submit specific out- year estimates for this initiative. We will, however, work very closely with the subcommittee and keep its members fully apprised of the Agency's future plans in this area. Synar Amendment Mr. Latham. Does the FDA know of any States that are currently not in compliance with the Synar Amendment requirements? Response. FDA does not have any information concerning States' compliance with the Synar Amendment requirements. Mr. Latham. Does the FDA have any information different from what SAMHSA has that States are not complying with the present SAMHSA regulations? If so, please provide this information to the Subcommittee in a timely manner. Response. Again, FDA does not have any information concerning State's compliance with present SAMHSA regulations. Mr. Latham. Current regulations implemented by HHS state that States may use certain federal block grant funding for enforcement activities related to the Synar Amendment. Why does FDA feel it is necessary to request an additional $24 million when these funds have already been made available to States? Response. As stated in the final rule entitled ``Tobacco Regulation for Substance Abuse Prevention and Treatment Block Grants,'' States are entitled to use funds from the Centers for Disease Control and Prevention's Preventive Health and Health Service Block Grant for sample design, inspection, and other enforcement purposes, because funds from this program are available to assist States in carrying out activities that help achieve the goals established by the Secretary for the health status of the Nation's population for the year 2000. Under 45 CFR 96.124(b)(1), States may also use funds from the primary prevention setaside of their SAPT Block Grant allotment to fund their sample design and inspection costs. FDA does not know any of the actual amounts available to States under these programs. There is a substantial difference between the provisions of the Synar program and the FDA tobacco regulations. The Synar Amendment created an incentive--the reduction of substance abuse block grants-- for States to reduce the number of illegal sales of tobacco products to underage adolescents and children. Because it is an incentive program, States are not required to participate in the Synar program or comply with its requirements. In contrast, FDA's regulations establish mandatory conditions on the sale, distribution, and promotion of tobacco products and apply to manufacturers, distributors, and retailers of tobacco products. The FDA regulations are enforceable through fines and other legal means for non-compliance. The funds FDA has requested are for enforcement activities to achieve compliance with the requirements of its regulations. Thus, the funds requested by FDA are to be used for a different purpose than the CDC block grant or SAPT Block Grant funds to be used by States for purposes related to the Synar program. FDA believes that enforcement of its regulations is essential if there is to be a reduction in the premature death and disease that result from the use of cigarettes and smokeless tobacco. The problems associated with nicotine addiction are so substantial, in fact, that it will take the concerted efforts of everyone interested in improving and protecting the health of children and adolescents to achieve the Administration's goal of reducing the number of young people who use cigarettes and smokeless tobacco by 50 percent over the next seven years. Mr. Latham. Would FDA's efforts to develop a national youth survey in cooperation with the CDC duplicate several existing efforts in the States and academia? Response. FDA has needs for survey data in several areas, for example, to measure rates of youth tobacco use and to measure compliance with the various provisions of the rule, such as whether self service displays and vending machines have been removed from point of purchase. It now appears that FDA may be able to procure proper measurement without commissioning any new surveys. FDA has had discussions with the Office on Smoking and Health of the CDC to determine how best to accomplish FDA's survey needs and discovered that existing surveys do contain appropriate questions, or are able to accommodate new questions to provide proper data. Therefore, at this time, FDA has no plans to commission or conduct additional new surveys. Mr. Latham. If the District Court were to rule that the FDA lacks the authority to regulate tobacco products and the tobacco industry, would the FDA request for implementation and enforcement funding be necessary? Response. None of the plaintiffs in the lawsuit have sought to prevent the February 28 access provisions from going into effect and in fact, the provisions have gone into effect. The bulk of the money requested for FY 1998 is for state contracts to enforce the February 28 provisions. While one cannot predict how the court will rule, there is a plausible scenario under which the access provisions remain in effect, and in need of funding, even if the court rules against FDA on other issues. At oral argument in February, the court stated that it intended to rule by late April. Food Additive Petitions Mr. Latham. How much does it cost the FDA to process and approve a food additive petition? Response. It is very difficult to identify the cost of processing and approving a food additive petition from the numerous activities related to the safety and regulation of food ingredients that are also carried out by the same employees that review the petitions, such as participating in international activities, providing assistance and education to industry and consumers, and consulting with developers of foods and food ingredients produced using new technologies. That said, in FY 1995, the Agency estimated costs of approximately $163,000 per petition. This estimate measures the total time to approval--FDA review time plus industry time to respond to data requests to remedy deficiencies in the petition--on the number of full- time equivalents working on food and color additive petitions. Thus, this value is an average. Certain complex petitions will cost many times more to process and a simple food additive petition may be much less than the amount. This figure does not specifically account for efficiencies gained in re-engineering of the program or costs of significantly improving timeliness and predictability of the process. Finally, the $163,000 per petition per year figure does not reflect the total cost of reviewing the petition because petitions may take longer than a year to process. The Agency has recently contracted with a group that is gathering data to better measure petition-related work effort; we believe this data will be very helpful in improving our estimates of cost, but at this time I cannot say when this data will be available. Mr. Latham. Does the FDA anticipate an increase in food additive petitions? Response. It is difficult to estimate the number of food additive petitions that will be received in a given year. FDA has undergone significant re-engineering in the past year and the timeliness of petition review has begun to improve. To the extent that improved performance impacts on the number of petitions submitted, an increase may be seen in the future. On the other hand, a ``Threshold of Regulation'' policy has been adopted, by which exemptions from the need for a regulation for certain very low-risk materials that contact food may be granted by letter. The operation of this policy has resulted in a reduction in the numbers of petitions submitted for food contact materials. Given these potentially competing factors, FDA cannot predict what the impact of these improvements to the program will be on the number of new food additive petitions. Mr. Latham. FDA can be commended for processing 88 food additive petitions last year. Why does the agency need $12.5 million more in funding when it is doing such a good job with available resources?-- especially in light of Dr. Friedman's testimony that he is reluctant to say that extra money would increase efficiency. Response. FDA is not requesting $12.5 million in additional funds for processing food additive petitions. The new user fees proposed in the Administration's budget request, which replace existing base resources, would not provide for program enhancements or increased efficiency, as with PDUFA, but would allow FDA to maintain its current level of activities. Tobacco Funding Mr. Latham. Dr. Friedman testified that $4.5-$4.6 million would be spent this year (FY 97) to implement the tobacco regulations. Specifically, which accounts will be reduced to make this money available? Response. The Agency's current plan is to spend $4.9 million in FY 1997 to implement the final tobacco regulation. This is an increase of $300 thousand in addition to the $4.6 million included in our Congressional Justification. Funding for this effort in FY 1998 will come from general reductions in funding for ``Other activities.'' Application Process Mr. Fazio. It has been reported that you have promised changes in the supplemental application process, by which currently marketed products are approved from diseases other than that for which the original FDA approval was granted. Has the agency issued regulations or guidance documents on the supplemental applications process? If not, what is the cause for the delay? When will these documents be issued? Response. FDA believes it can improve the supplemental applications process by clarifying what evidence should be provided to demonstrate effectiveness of supplemental indications, and working with industry to reduce barriers to submitting supplemental applications for new uses for their products. FDA has issued two draft guidances which address elements of an ongoing ``New Use Initiative'' and are intended, in part, to clarify the amount and nature of evidence necessary to demonstrate effectiveness for new uses of approved products. The FDA continues to explore other means to reduce barriers to submission of supplemental applications and otherwise facilitate the supplemental application process. The draft guidances have been provided in response to the previous question. Inspecting Mammography Facilities Mr. Fazio. In your written testimony, you cite FDA's success in certifying and inspecting 10,000 mammography facilities throughout the United States. I wish to commend the agency for its efforts in this important area. I believe that appropriate funding and attention should be given to breast cancer because it is a serious women's health issue in our nation today. I have worked on finding alternative ways to fund breast cancer research by introducing legislation that would direct the Postal Service to issue a voluntary $.33 cent, with the extra penny going towards breast cancer research. Mammography is an important component in our fight against breast cancer, and I hope that the agency will continue with its efforts to implement the Mammography Quality Standards Act to contribute to the overall fight to prevent and cure the disease. However, a GAO report did note some possible problem areas, such as differences in how inspectors conducted inspections, and testing and correction problems during the first 18 months of the inspection program. What steps is FDA taking to respond to GAO's recommendations? Response. The Agency is in the process of preparing a document that addresses the GAO recommendations. The Agency will respond to the GAO report through the normal channels. We would be happy to provide the Subcommittee a copy of the final response after its completion. Proposed User Fees Mr. Fazio. I understand that under current law the FDA has 180 days to review a food additive petition before the additive can be marketed. I am concerned that it has taken FDA at times up to 5 years to take action on a food additive petition. Can you elaborate on how this system will be improved by the implementation of user fees? Would the FDA then be able to devote more significant resources to review new ingredients? Response. FDA is not requesting $12.5 million in additional funds for processing food additive petitions. The new user fees proposed in the Administration's budget request, which replace existing base resources, would not provide for program enhancements or increased efficiency, as with PDUFA, but would allow FDA to maintain its current level of activities. FDA will continue its efforts to reform premarket approval review activities for food ingredients. It is important to note that the time to approval includes FDA review time plus industry time to respond to data requests to remedy deficiencies in the petition. Because a food additive is approved only when an order specifying the conditions of use is published in the Federal Register, the time to approval includes time to review the data in the petition, draft an order that lays out the regulation and a preamble that explains the Agency's rationale for its decision, obtain appropriate administrative concurrence with the document, have the document signed by the appropriate agency official, and publish the document in the Federal Register. Mr. Fazio. The $12 million in user fees for the food additive approval process that the FDA has requested--how much does the agency currently spend on this process and how was this particular figure derived? Response. FDA currently spends approximately $13 million for premarket review of food and color additives. This estimate includes all recurring personnel, operating, extramural and support costs associated with the premarket review of food and color additives. The estimated user fee levels in the budget are illustrative of the types and amounts being proposed by the Administration. User fees for food and color additive petitions are envisioned to fund the bulk of the program's annual costs. Mr. Fazio. The President's budget requests $19 million for post market surveillance for food: Is this an entirely new program or is the FDA currently engaged in this type of work? If so, how much is FDA currently spending? Response. Postmarket surveillance is the monitoring and assessment of product performance after approval or marketing and is a critical part of FDA's mission to enhance consumer protection against new and unforeseen risks associated with marketed products. FDA currently spends approximately $94.9 million for postmarket surveillance of foods, through its activities of inspections and sample analyses of domestic and imported products, and compliance/regulation of products. Each of these is an ongoing activity within the Foods Program. The requested user fees will permit FDA to continue its current level of activity in these areas. Mr. Fazio. How many additives will typically fall under postmarket surveillance? Response. Postmarket surveillance is the monitoring and assessment of product performance after approval and is a critical part of FDA's mission to enhance consumer protection against new and unforeseen risks with marketed products. FDA's responsibilities do not end when a new product is marketed. FDA is charged with assuring that the product will be safe in actual use. Typically, FDA does not issue routine sampling assignments to test for the presence of food additives. However, FDA does implement a postmarket surveillance program for foods to analyze adverse reaction reports associated with foods, food additives, and food ingredients. FDA also conducts postmarket surveillance activities and epidemiological studies that provide information about exposure and possible adverse reactions, including hypersensitivities to food components, contaminants, and nutrients. Mr. Fazio. Since the advent of the first Prescription Drug User Fee Act in 1992, there has been much progress in reducing the time between the submission of new drug applications and their approval. I believe that these gains were attributed in large part to user fees that added resources to the baseline appropriation. There is some concern that lacking baseline appropriations, the drug approval process will not be able to sustain its current pace even if the user fees are reauthorized. If the user fees are not adopted, will FDA's current drug review and approval process be jeopardized in the absence of a level funding base? Response. Yes. If user fees are not adopted, FDA's progress in reducing human drug application review and approval times will be negatively impacted. Mr. Fazio. I commend FDA on its success in reducing the review times for 510 (k) applications, and I was glad that you mentioned in your statement that the FDA will continue to increase its performance in this important area. In looking at FDA's budget justification, it appears that FDA's budget for medical devices is nearly a $6 million increase. But when you look at the proposed user fee program for medical devices to generate about $45 million--which I believe includes $25 million for medical device user fees approximately $20 million for postmarket surveillance of medical devices--in reality, it appears the baseline funding has been cut by about $40 million. I know that in the past, user fees have been proposed to strengthen the efficacy of the FDA approval and review process, and that user fees were intended to be resources above and beyond level baseline funding. This year, however, I am concerned that the user fees are being proposed as a way to offset a reduction in medical device appropriations. In particular, if the user fee proposal is not adopted--as traditionally been the case--this cut in funding could undermine the Agency's capability and commitment to protect public health and safety. How will FDA ensure that its commitment to public health and safety will not be jeopardized if the user fee proposal is not adopted? Response. FDA has a strong commitment to public health and safety. It is the Agency's mission to protect and promote the health of the American people. FDA's challenge in the coming year will be to meet its mission within the constraints of a balanced budget environment. For the medical device portion of the FY 1998 budget, FDA is asking for a total of $44.7 million in proposed user fees and $14.0 million for a reauthorization of the existing Mammography Quality Standards Act--MQSA--user fees. Of the non- MQSA user fees, approximately $39 million will be generated to replace appropriated base program funding. The remaining $5.2 million will be additive to the base program funding which will allow FDA to make improvements to the premarket approval review process. Without the $39 million in user fees to replace the appropriated base funding, FDA will not be able to carry out its public health responsibilities within the legally mandated time frames. These delays will adversely affect market competitiveness, and will prevent new products from reaching the American public in a timely manner. If the $14.0 million of MQSA user fees is not reauthorized, FDA will not be able to meet the annual inspection requirements mandated by the Act. This would compromise the integrity of mammography facilities throughout the U.S., potentially affecting the health of millions of women nationwide. Without the additive user fees for the premarket review program, FDA will not be able to speed up the process for getting valuable lifesaving and technologically superior products to the American public. FDA will continue to meet its mission to the best of its abilities, and will look for new ways to get things done with reduced resources. Because FDA knows that resources will be limited in the FY 1998 budget, it is taking measures now to create a more effective, efficient, and responsive government agency. FDA is pursuing reinvention activities to accelerate device review and reduce unnecessary regulatory burdens on the medical device industry. These new ways of doing business benefit both the industry and the FDA--all without compromising the integrity of the processes involved. Policy on Software Mr. Fazio. In 1991, FDA issued a draft software reviewers guidance, which was recognized by manufacturers of software driven medical devices. In 1995, FDA's Office of Science and Technology (OST) issued a proposed guidance for scientific review of medical device software pre- market notification submittals. OST then began a dialogue with the medical devices industry to develop a software regulatory policy. and I understand that in September of last year, there was a public workshop held at the National Institutes of Health campus in collaboration with the Laboratory of Medicine. However, that same month, a different office within FDA--the Office of Device Evaluation, ODE,--issued a draft software guidance document which imposed a new regulatory requirements on the industry. My concern is that FDA's Office of Device Evaluation appeared unaware of efforts already initiated by the Office of Science and Technology, OST, to develop an agency-wide software policy. Can you explain the apparent lack of coordination between OST and ODE with respect to the software policy? Response. The Center for Devices and Radiological Health--CDRH--is engaged in several concurrent efforts to reevaluate, revise, and develop policy and guidance documents in the software area. Staff from the Center's Office of Device Evaluation, Office of Science and Technology, and other Center components are involved in these efforts. Coordination among Center components is being accomplished through three primary mechanisms--the assignments of staff from all major Center components to each of the software-related working groups, the review of software activities by an FDA Software Taskforce, and the recent establishment of a CDRH Software Coordinator. Mr. Fazio. Why does the original software reviewers guidance need revision? Response. FDA implemented the current draft guidance in August 1991. Since that time, medical device software has undergone continuous and rapid evolution, thus making the current guidance outdated. The Agency decided to revise the guidance document to reflect these rapid advances in software engineering and development methodology. The revised guidance with apply to all medical device software, which includes embedded software, operator assisted software, and a software accessories to medical devices. In addition, the revised guidance will be more compatible with recently developed international standards for devices containing software. Mr. Fazio. Will FDA's Office of Device Evaluation wait to implement new software guidance document until after the agency/industry dialogue that was initiated by FDA's Office of Science and Technology in September is completed? Response. Since the guidance document does not change current practice but only clarifies it, the guidance may be issued before the conclusion of the Agency and industry dialogue. New concepts arising from the dialogue may be incorporated at any stage in the continued evolution of this guidance document. Mr. Fazio. Absent any increase in funding or the addition of any FTEs, where would FDA find the staffing resources to implement the guidance document? Response. Implementation of the new guidance document will not impose additional requirements on the medical device industry or require the submission of an increase volume of material that would strain the Center's software review resources. This guidance relates only to areas currently regulated and seeks to clarify the current guidance and improve the quality of submissions. In addition, the revised guidance will help device reviewers in carrying out the review process. Globalization of Device Review Process Mr. Fazio. I applaud FDA for the work you have done at the Center for Devices and Radiological Health to bring down review times for pre- market notifications. The companies that I talk to on a regular basis have said that their average 510(k) times are down in most instances to their lowest point in several years and to that end I comment Dr. Burlington and Dr. Alpert for their efforts. However, I still support bipartisan FDA reform efforts that will allow the agency to develop an approval process that is more efficient and expeditious in getting new medical products to patients. As the U.S. medical device industry innovates and becomes more global, the agency ought to coordinate its efforts with international standards. Recently, the center, in an effort to revise its software policy, looked at international standards developed by the International Electrotechnical Commission, IEC. I am told that it is referenced as the 601-1-4 standard. With respect to the software section, I understand that the FDA has attempted to build its own model by using the 601-1-4 standard with some modifications. Why not simply reference the IEC standard in your reviewers guidance document and allow manufacturers to certify that their software products meet that standard? Response. The Agency is actively considering the use of international standards in its review of 510(k)s. In particular, the Agency has been examining the IEC 601 family of standards for this purpose. Unfortunately, the current standard does not sufficiently address either computer software used in medical devices or the concerns that are unique to software. The Agency is working actively with the standards community to develop a standard for software that it can use when reviewing 510(k)s. Mr. Fazio. Are there compelling reasons for creating uniquely American standards that may complicate the process for American medical device companies that operate globally? Response. FDA is working diligently to simplify the review process and harmonize it with the global community. To fully achieve this will require the existence of applicable standards that are not yet available in the medical device software area. Mr. Fazio. As the agency looks at revising its software policy, I've heard from companies that believe the draft released in December will add additional information burdens on the 510(k) submission process. Do you agree with this assessment? If so, what resources will you need to continue to make progress on 510(k) review times? If not, how does the December draft make life easier for companies, and why don't they share your view? Response. The purpose of the revised guidance document is to ease the regulatory burden imposed by software review through simplifying and clarifying the Agency's requirements and coordinating our expectations with those of the IEC/ISO. In particular, increased clarity shouldresult in fewer requests by the Agency for additional information from manufacturers and a further decrease in 510(k) review times. The Agency accepts responsibility for much of the confusion and anxiety that occurred in the manufacturer community by public release of the new draft guidance document. The preamble to the document does not sufficiently describe the purpose of the guideline or allay concerns that new or additional requirements will be imposed. In fact, many sections of the document are tutorial and do not specifically address how software manufacturers can comply with statutory and regulatory requirements for premarket submissions. The Agency believes that these concerns and others will be resolved in the current cycle of revisions. Classification of Applications Mr. Fazio. A company named ImaRX in Sacramento is one of five companies that have pending applications with the FDA for approval of similar ultrasound contrast agents, which are part of a wider category of medical imaging products. These contrast agents are taken intravenously to improve the quality of diagnostic ultrasound examinations. I understand that the products of each of the five companies are very similar in their indications, modes of action and ingredients. They are all administered intravenously, operate in similar manners in the body and provide similar enhancements to the diagnostic process. However, of the five applications for approval of the contrasting agents, four of the applications are being treated by the FDA as a ``drug,'' and one application--that of Molecular Biosystems, Inc.--is being treated as a ``device.'' I understand that FDA policy is to regulate medical imaging products--including contrast agents--as drugs, not devices, so there is some confusion as to why the FDA is reviewing the application of Molecular Biosystems, Inc. in a way that does not seem consistent with existing regulations. Please explain why the FDA is treating the contrast agent application of Molecular Biosystems, Inc. as a device, while treating ImaRX's application and the applications of other companies as drugs? Please explain the applicable policies in this area and provide other examples, if any, that can clarify this situation. Response. FDA has recently received several petitions concerning the appropriate regulation of ultrasound contrast agents. These petitions, which are public documents, request that all ultrasound agents be assigned to the Center for Drug Evaluation and Research to be regulated as drug products. FDA is currently examining the wide range of legal, regulatory, administrative, and equitable factors that have been raised. The Agency appreciates the importance of these issues, and plans to clarify its position in the near future. User Fees and Small Companies Mr. Fazio. A constituent of mine has a very rare disease. At present, there are only 80 people who have been diagnosed with the disease in the United States. She participates in a drug research program through a university doctor. A small pharmaceutical company makes the drug available to her at no cost. Without the experimental drug, my constituent is unable to get out of bed. With the drug she can engage in normal every day activity, including going to her job. The drug is on the market in Europe and sells for $20 per gram. The pharmaceutical company has not submitted an application to the FDA to market the drug in the U.S., in part, because of the application fee required. It is my understanding that small companies with less than 500 employees can apply for a fee waiver for the FDA's application and review process. However, if that company has other prescription drug products on the market, they are unable to apply for this waiver. Please explain the applicable FDA policies in this area. Response. The Prescription Drug User Fee Act of 1992, or PDUFA, provides a Small Business Exception to any business with fewer than 500 employees--including employees of affiliates--that does not have a prescription drug product introduced or delivered for introduction into interstate commerce in the United States. Under the statute, a firm that qualifies for this exemption is granted a deferral of payment of the application fee for its first human drug application for one year from the date of submission of its application and the fee is reduced by one-half. In addition to the Small Business Exemption, there are waiver provisions on the PDUFA under section 736(d). Although the small business exemption is not available to a firm with a marketed prescription drug product and applies only to the first application submitted, the waiver provisions include no such restrictions. In the case of a small firm planning to apply for approval of a human drug application for a product for a rare disease, two provisions most likely to apply. The first is 736(d)(1) which provides a waiver or reduction necessary to protect the public health; the second is 736(d)(2) which provides a waiver if the assessment of the fee would present a significant barrier to innovation because of the limited resources available to such person or other circumstances. Firms are eligible for waivers under these provisions regardless of whether they are marketing other products. These are statutory provisions intended to prevent user fees from becoming an obstacle to the development of new drug products. Mr. Fazio. In considering reauthorization of the Prescription Drug User Fee Act, will FDA and the Administration propose exemption orphan drugs from application and user fees? If not, why not? Response. FDA is seriously considering proposing to exempt all orphan drugs from application fees. TPA Mr. Fazio. Mercy General Hospital in Sacramento has been testing some of the first generation of drugs to treat stroke victims. Stroke is the leading cause of disability, and its economic toll is estimated at $30 billion annually. Last year, FDA approved the drug TPA, the first emergency drug treatment of stroke. Yet restricted its use to the first three hours after a stroke. Yet it is estimated that only one in 20 stroke victims actually gets to a hospital within that time frame. Another drug called Ancrod is made from refined snake venom and is currently under experiment at Mercy. While Ancrod is available to treat stroke victims in Europe, it is only available to patients in the U.S. who are patients at hospitals taking part in the study. I understand that a study to conclude whether TPA can be used more than three hours after a stroke will be completed next year. What is the status of the review for TPA and for Ancrod? Response. Alteplase is a genetically engineered version of tissue plasminogen activator, or TPA, which was previously approved as a blood clot dissolver to treat heart attacks and to dissolve blood clots in the artery going to the lungs. On June 18, 1996, FDA approved TPA as the first therapy shown to improve neurological recovery and decrease disability in adults following acute ischemic stroke. TPA is a thrombolytic, which is a clot dissolution agent and is manufactured by Genentech in the United States. The National Institute of Neurological Disorders and Stroke, or NINDS, conducted a large trial of TPA treatment within three hours of onset of an acute stroke, which was completed in 1995. This multi-center, placebo-controlled trial involved 624 patients who received either intravenous Alteplase or a placebo within three hours of the initial symptoms of a stroke. The study showed that 11 percent more of the patients who received Alteplase had few or no signs of disability compared to the placebo group. However, certain patients' conditions were made worse by Alteplase. In the trials, intracranial hemorrhage within 36 hours of treatment worsened to 6.4 percent of the patients who received Alteplase compared to 0.6 percent of those who received the placebo. Because of the known risks of bleeding with Alteplase and other thrombolytic therapies, selecting stroke patients who are most likely to benefit from treatment is critical. Genentech has TPA in a follow-on trial in acute stroke for treatment at more than three, but less than five hours from stroke onset. If positive results are seen, then this study could form the basis to extend the treatment time out to five hours from onset. ANCROD is a complex agent, generally thought of as an anticoagulant or clot preventing product. Thus it is quite different than TPA in its mode of action. It is commercially marketed in Europe and Canada. Its approved indications in those countries do not include stroke treatment, although it may have some off-label stroke use since it is available commercially. ANCROD is under development in the United States by Knoll, Incorporated. They are pursuing several indications, one of which is acute stroke. Knoll is conducting a pivotal trial in stroke treatment within three hours of stroke onset. If the results of the study demonstrate that ANCROD is safe and efficacious, Knoll could file a product license application, or PLA, for approval for that indication. FDA approval would be based on a determination that the product is safe and effective. Substantial Evidence Requirement Mr. Fazio. It has been reported that you have promised a review and revision of the definition of substantial evidence, the standard by which FDA applications prove safety and efficacy. Has the agency issued regulations or guidance documents on the issue? If not, what is delaying the issuance of these documents? When will the relevant documents be issued? Response. FDA has very recently released for public comment a draft guidance document entitled, ``Guidance for Industry: Providing Clinical Evidence of Effectiveness for Human Drug and Biological Products,'' that seeks to clarify the quantity and quality of clinical evidence needed to provide substantial evidence of effectiveness for drugs and biologics. At the same time, FDA released for public comment a draft guidance that specifically addresses the quantity and quality of clinical evidence necessary for approval of new uses of already approved cancer treatments entitled ``Guidance for Industry: FDA Approval of New Cancer Treatment Uses for Marketed Drug and Biological Products.'' It would not be accurate to characterize the guidance contained in these documents as a revision to, or in any way a retreat from, the existing substantial evidence requirement. The sciences of medicine and clinical drug development have evolved significantly since the passage of the substantial evidence requirement. These guidances reflect the agency's interpretation of the existing substantial evidence requirement in light of scientific advances in those areas. I would be happy to provide these two documents for the record. [Clerk's note:--The two documents provided were too lengthy to reprint and have been retained in Committee files.] Joint Institute for Food Safety Mr. Barcia. The Food and Drug Administration has established a Joint Institute for Food Safety and Applied Nutrition with the University of Maryland at College Park. Can you tell the committee to what extent you may have consulted with and involved the Agricultural Research Service of USDA? I believe there is a long-standing tradition that USDA is the lead department for human nutrition matters. Response. FDA and the U.S. Department of Agriculture--USDA--both have a long history of consulting and conducting complementary research on human nutrition. The USDA's Agricultural Research Service--ARS-- conducts research to solve technical agricultural problems and to ensure adequate availability of high quality, safe food to meet the nutritional needs of the U.S. ARS also supports research to sustain a viable and competitive food and agricultural economy and to enhance the quality of life and economic opportunity for rural citizens. FDA carries out complementary activities directed towards protecting and promoting the health of the nation against impure and unsafe foods and to ensure that foods are honestly and accurately labeled. The Nutrition Labeling and Education Act of 1990, or NLEA, for example, requires nutrition labeling on virtually all packaged foods and gives FDA enhanced authority to define and regulate nutrient content claims and health claims on labels. Research is conducted to provide better technical and scientific support for NLEA policy and compliance decision-making. Analytical capability for food labeling compliance and NLEA policy is maintained to provide analyses of nutrients such as total fat, minerals, fiber, sugars, vitamins, protein and other nutrients in foods, feeds, infant formulas, and medical foods. The development of analytical methods is another important area of human nutrition research required to fulfill the regulatory surveillance and compliance activities of the Agency. Activities include the development of methods for nutrients when no official methods exist, and methods modifications to resolve analytical problems. Research is also conducted to support implementation of NLEA to determine the effects of food matrices, such as processing and storage, on the bioavailability of nutrients in foods. In the area of infant formulas and medical foods, research is conducted to provide information as well as develop methods to obtain information about the dietary components of these products. FDA participates in interagency efforts, which include USDA, to implement requirements of the ``National Nutrition Monitoring and Related Research Act of 1990.'' FDA also participates in other interagency efforts with USDA to define national nutrition policies, and to assess directions and progress for national nutrition objectives. A listing of Federal nutrition research and training expenditures are published in reports on the Human Nutrition Research Information Management (HNRIM) system, which resides on the National Institutes of Health mainframe computer and is updated yearly. The database contains information on approximately 4,000 Federally sponsored human nutrition research projects. The Joint Institute for Food Safety and Applied Nutrition--JIFSAN-- was established between the FDA and the University of Maryland in April 1996 through a Memorandum of Understanding. The Institute will promote food safety and applied nutrition and will include nutrition and clinical studies related to nutrient quality, safety, and labeling-- areas of research that the Agency has conducted for many years. Research at JIFSAN will allow FDA to strengthen its scientific and professional base and leverage limited resources by sharing expensive specialized equipment. The two agencies as well as other organizations will continue to consult through the auspices of JIFSAN to improve human nutrition. Tobacco--Regulations Mr. Rogers. Requiring retailers to verify by photo ID the age of any customer that appears to be 26 years old or younger will be effective February 28, 1997. If you are appropriated $34 million for enforcement and outreach, is it safe to assume that states are required to come up with the resources to enforce the Rule until October 1, 1997? How do you expect enforcement and training to be conducted in the meantime? Response. The Agency will spend $4.9 million in FY 1997 to implement the final tobacco regulation. These financial resources were obtained from funds within the Office of the Commissioner that were set aside to address priority projects. FDA will contract with state and local officials for the enforcement of the final tobacco regulation. States will not be required to come up with any resources on their own to enforce the rule. Mr. Rogers. Have you identified all the retail outlets to which you will be sending briefing materials you describe in your budget request? If not, how will the Agency obtain that information? If this data base does not exist, what will the Agency do to ensure all retailers affected by the new Rule will be adequately informed about the implications of that Rule by February 28, 1997? Response. There are an estimated 400,000 to 500,000 retailers in the United States who sell tobacco products. The Agency has made a concerted effort to reach these retailers to provide them with information about the new regulation. Last month, the Commissioner sent a letter with attachments to retailers directly informing them about the specific provisions of the rule and addressing how FDA would enforce the rule. To develop the list of retailers, we initially held a series of discussions with representatives for the National Association of Convenience Stores--NACS--who indicated that they had a comprehensive list of tobacco retailers and that they would consider either mailing FDA's letter to retailers or providing a mailing list to FDA for use in undertaking its own mailing. When NACS then decided against assisting the Agency in reaching retailers, FDA worked to develop the most comprehensive list of tobacco retailers it could. The list was based on using the SIC codes, or standard industry codes for business classifications, to identify the retailers who are most likely to sell tobacco. These included supermarkets, grocery stores, convenience stores, gas stations and mini-marts, pharmacies, tobacco stores, drinking places, and general merchandise stores. FDA then used a yellow pages data base spanning the United States to develop a list of approximately 350,000 retailers. In addition to this massive mailing, FDA provided information to 400 state and local retailer organizations and to the heads of the largest retailer stores and urged these individuals to help disseminate the information to their members and employees. Further, to ensure that retailers affected by the new rule would be informed, FDA conducted a series of regional briefings in which senior FDA staff introduced the rule and responded to questions. These briefings were attended by a cross-section of retailers, state and local officials, and community organizations. FDA also held a national video conference with down-link sites in 25 cities in order to brief retailers and others about the rule. The satellite transmittal locations were provided so that anyone with downlink capabilities could view the video conference in their own locations. Also, on FDA's website, all information relevant to retailers is posted and regularly updated, and a toll-free hotline has been established to provide retailers a means of calling and requesting information. Among the materials that retailers can request is a small entities compliance manual, a retailer brochure, a copy of the letter sent by the Commissioner, and responses to the most frequently asked questions. The Agency printed 50,000 of the retailer brochures and is making it possible for retailers to request copies of the brochure or, if they wish to reproduce large quantities with their own logos, FDA is providing the brochure on CD so that it can be printed. Mr. Rogers. Effective August 28, 1997, self service displays, vending machines, free samples, and mail order sales will be prohibited. In addition, there will be numerous restrictions on advertising and marketing. How much are you planning to spend on enforcement and education for these upcoming regulations? Response. The final tobacco regulation does permit mail order sales of tobacco products. The provisions that go into effect on August 28, 1997, will be implemented principally from FY 1998 funds. The Agency has requested $24 million for enforcement and $10 million for outreach. Mr. Rogers. The Synar Amendment, which directed states to adopt and enforce laws to reduce youth access to tobacco products, was enacted by Congress in 1992. If states fail to enact a minimum age and regulate the sale of tobacco, they lose federal substance abuse grants. With theenactment of the FDA Rule, are states still in danger of losing federal money for substance abuse grants, or does the FDA rule override the Synar Amendment? Response. The FDA regulations do not override the Synar Amendment, which will continue to be implemented by SAMHSA. The FDA regulations complement the Synar program and together they will help reduce the number of young people who use, and become addicted to, nicotine- containing cigarettes and smokeless tobacco. In addition, complying with FDA's regulations should help States reduce the number of illegal sales of tobacco products to underage children and thus reach the targets established under the Synar program. Mr. Rogers. Does the Rule supersede existing enforcement policies that were enacted as a result of the Synar Amendment? Will you prevent duplicity of existing efforts by streamlining the federal agenda with currently functioning state and local initiatives? Response. No, the FDA tobacco rule does not supersede existing state enforcement policies. FDA took action pursuant to jurisdiction under their Federal Food, Drug, and Cosmetic Act regarding tobacco products because there is an alarming increase in the number of young people using cigarettes and smokeless tobacco. For example, there has been a 50 percent increase in the number of eighth graders who smoke since 1991. With regard to streamlining federal and State efforts, FDA intends to work closely with States in enforcing the Agency's tobacco regulations and thereby helping to reduce the number of young people who become addicted to these products. Mr. Rogers. In the budget justification, ``indirect outreach'' is said to include ``community organizations, parent groups, voluntary groups, and others who can help raise awareness of the Rule and encourage compliance.'' Would groups, such as Campaign for Tobacco Free Kids and Action on Smoking and Health, be involved in raising awareness and encouraging compliance? Please specify what ``encourage compliance'' would entail. Response. Public health organizations as well as groups representing industries affected by the provisions in the final rule could be involved. We plan to make available to interested outside groups, all of our educational materials. These groups would then be free to distribute them. Mr. Rogers. The justifications state that the FDA will identify which retail chains are best at complying and which have the highest violations. Punishing retail chains with frequent violations is also mentioned. What type of punishment would the FDA inflict on retail chain headquarters? Response. In the future, the Agency intends to develop an enforcement strategy for national chains, such as convenience stores, grocery stores, and gasoline stations. FDA will identify the largest chains and conduct compliance checks at multiple outlets in several states. If a sufficient number of outlets are found to be in violation of the sales restrictions, FDA will seek civil money penalties from the corporate national entity. The amount of the penalty will reflect the number of violations found, whether the corporate entity tried to educate its store managers or whether it was indiffent to the requirements of the law or other considerations. Mr. Rogers. FDA imposes heavy penalties on companies that sell products that are not approved. Some penalties include seizure of products, revocation of licenses, and hefty monetary penalties. Will retailers now be subject to those penalties if they violate the Rule? Response. Following a second violation of the provision that prohibits the sale of tobacco products to minors, FDA will seek a monetary penalty starting at $250. Fines will escalate for subsequent offenses. The maximum penalty for a single offense is $15,000. Mr. Rogers. I am very concerned about the toll-free number you plan to establish for purposes of reporting violations of this FDA Rule. What other federal agencies currently provide toll-free numbers to report on retailers which carry products whose sale to minors is restricted? Should the federal government considered establishing a toll-free number to assist the enforcement of every new law or regulation it establishes? Does the Agency believe the activities of retailers warrant this method of enforcement? If so, why? Response. We are not aware of other federal agencies that currently provide toll-free number of report retailers for illegally selling products to minors. We do know that the state of California has a toll- free reporting system for reporting retailers who are illegally selling tobacco to minors. In addition, the state of Virginia has a toll-free number for reporting illegal sales of alcohol. Further, there are organizations, with and without federal funding, that have toll-free numbers for helping to report sightings of missing children or instances of child abuse. We do not have a position on whether the federal government should consider establishing a toll-free number to help enforce all new laws or regulations. However, the Agency believes that providing a means for the public to report retailers who are selling cigarettes or smokeless tobacco is very appropriate for several reasons. First, the issue of preventing illegal sales to minors is of tremendous public health importance. Each and every day another 3,000 young people become regular smokers and 1,000 of them will die before their time because of their smoking. Second, illegal sales to minors is a serious part of the problem of children and adolescents becoming regular smokers--studies show that about 70 percent of the time minors try to buy cigarettes from retailers they succeed in doing so. Third, there are an estimated 400,000 to 500,000 retailers in this country who sell tobacco. FDA alone could not possibly conduct compliance checks in all of these locations on a regular basis. Even working with commissioned state and local officials, the Agency will not be able to observe all violations. Illegal sales to minors is something that the community, working with FDA, can help to prevent, and it is something that parents, teachers, community leaders have expressed a strong interest in trying to prevent. The hotline provides an excellent vehicle for the community to be part of the solution. Mr. Rogers. Precisley what action will the FDA take when it receives a call reporting a retailer violation? Response. FDA has established a toll-free hotline 1-888-FDA4KIDS to dispense information and to allow citizens to register complaints. The hotline asks each person to give the name and address of the retailer who was observed allegedly violating the law, to describe the event, and if possible to provide the complainant's name. Each day, a FDA staffer transcribes the complaints received on the hotline and creates a list of stores. This information is fed into FDA's data base of retail outlets that sell tobacco with an indication that a complaint has been received about the store. The names of these locations will be provided to the state officials doing investigations in the area. When time permits an unannounced visit will be scheduled. The complaint itself will not be treated as a proven violation, but treated instead as an indication that a store should be visited. Mr. Rogers. What safeguards have you drafted to protect retailers from fraudulent reports from the toll-free number? Response. The compliant will be used only to create a list of stores to be visited. There is no immediate legal consequence that flows from the filing of a complaint. Mr. Rogers. Please inform the Committee which qualified ``headquarters staff'' will train FDA inspectors? What will be the goal of this training session? Response. An advisory group was formed to develop a trainer course on the implementation of the tobacco regulations. This course will be presented to FDA field investigators and public affairs specialists who in turn will present it to officials commissioned in their district office to conduct the compliance checks at retail establishments. The advisory group consists of staff in the Offices of Policy, Regulatory Affairs, and Chief Counsel, and represents a combination of experience in conducting investigations, training, and working with state and local officials. The goals of the training sessions are to provide state and local officials with an overview of the tobacco regulations and explain how to conduct compliance checks using minors to assess compliance with the requirements of not selling cigarettes or smokeless tobacco to persons under the age of 18, and requiring photographic identification of persons under the age of 27. Mr. Rogers. Which state agencies will enforce this regulation to date? If the enforcing agency varies from state to state, please provide them for every state. Precisely what is required of each state to comply with the new rule? Response. The FDA has not contacted with any state agencies yet. We are just beginning the process of identifying states to contact with and to send requests to them for proposals. Only after a period of negotiations will states, and state agencies, be selected. We have ascertained the names or names of agencies within most of the States who may be interested in partnering with us. Some states have given authority over tobacco regulation to their Health Departments, or to their state police; some states have special departments created to monitor alcohol and tobacco laws; and others have vested that authority in the Office of the Attorney General. Some states have more than one agency which arguably can claim appropriate jurisdiction and will not know which agency to contract with until the state resolves the conflict in jurisdiction. States have no new obligations under the new rule. FDA's rule is a federal rule only. Violation of the rule is a federal violation. States that want to partner with FDA can apply to have officials commissioned as FDA employees. Mr. Rogers. What action will the Agency take if every component of the rule is not enforced by a state? Response. The Agency will not take action against a state that chooses not to enforce all or part of these rules. Rather, FDA field agents will inspect establishments and conduct compliance checks in those states. Tobacco--Budget Request Mr. Rogers. Please display your request for $34 million by object classification. [The information follows:] Youth tobacco prevention initiative [In thousands of dollars] 1998 estimate Personnel Compensation and Benefits........................... 1,801 Travel........................................................ 50 Rent and Utilities............................................ 40 Printing...................................................... 500 Other Services (Contracts).................................... 31,569 Supplies and Materials........................................ 30 Equipment..................................................... 10 -------------------------------------------------------------- ____________________________________________________ Total..................................................... 34,000 Tobacco--Direction Outreach Mr. Rogers. You indicate that $10 million is designated for direct outreach activities. Please inform the Committee how this level of funding was determined. Response. Research indicates that the coordination of enforcement and outreach is the most effective way to boost retailer compliance with measures prohibiting sales to minors. FDA has determined that approximately two-thirds of the budget would be used for enforcement activities and one-third for outreach. This level for outreach is necessary to effectively communicate the access and advertising provisions to the 400,000 to 500,000 retailers in the country and others affected or interested in the rule. This money would be used to develop, distribute and update materials about the regulation; produce exhibits for conferences held by retailers, state and local health officials, voluntary health organizations, and others; promote the hotline; sponsor regional briefings and video conferences to give retailers and others an opportunity to directly discuss issues and ask questions with FDA officials; and help provide retailers with materials for them to use in their own stores. Mr. Rogers. Do you expect to spend the entire $10 million in FY 1998? If not, how much do you anticipate to carryover into the next fiscal year? Response. We expect to spend the entire $10 million in FY 1998, with no carryover into future fiscal years. Mr. Rogers. How much will be allocated to states, local governments, or private concerns now? Has an allocation method been established? Response. We do not anticipate allocating outreach dollars to the state. Instead, we will continue to make all materials produced by FDA available for states in turn to disseminate if they wish in their own states. Mr. Rogers. Will state agencies be required to match federal funding for outreach initiatives? If so, at what level? Response. States will not be required to match federal funding for outreach. Mr. Rogers. Please provide a detailed breakout of the specific activities and types of costs which states are expected to incur for outreach, e.g., material design, material production, mail costs, personnel, administration. Response. States are not expected to incur outreach costs. Mr. Rogers. You indicate that ``similar efforts will be undertaken as appropriate for tobacco manufacturers, distributors, and other affected parties.'' Please define ``appropriate''. Additionally, please provide a separate, detailed breakout of the costs and activities you anticipate funding for each of those affected parties (design, production, mailing costs). Response. FDA indicated that it will work with retailers to brief them on the regulation and that additional efforts would be undertaken ``as appropriate'' for tobacco manufacturers, distributors, and other affected parties. That statement was intended to mean that distributors or advertisers or other affected parties might be interested in information on specific aspects of the regulation but not in others and that the Agency would tailor information appropriately. We intend to meet with these parties and discuss their needs and interests prior to preparing a detailed breakout of these costs and activities. Tobacco--Indirect Outreach Mr. Rogers. How much are you proposing to spend on Indirect Outreach efforts? Are these efforts to be funded out of the $10 million requested for Direct Outreach? Response. At this juncture, we have not specified exactly how much we will spend on indirect outreach efforts. However, we would fund any efforts out of the $10 million requested for direct outreach. Mr. Rogers. Will the Agency fully fund every function of those conferences, or do you expect the community groups, parent groups, etc., to fund part of the conferences? If the latter, have you identified non-federal sources? Response. There are two types of events in which FDA would be involved. First, FDA-sponsored regional briefings in which FDA assumes the costs; second, events sponsored by others in which FDA is asked to speak. In the former, FDA envisions covering all costs; in the latter, FDA envisions the sponsor of the event covering all costs. Mr. Rogers. Please identify, from the justifications, which ``variety of exhibits'' will be produced for the Indirect Outreach efforts. How much funding does the Agency anticipate spending on these exhibits? Response. Each year organizations ranging from the American Public Health Association, the American Medical Association, the American Heart Association, to the National Association of Chain Drug Stores, Association of State, Territorial, Health Officials and the National Parents Teachers Association hold national meetings in which outside organizations can show exhibits. FDA intends to produce full-size and counter-size exhibits to show at these types of meetings. Typically these exhibits would list the provisions of the regulation, provide the hotline and website numbers, and cite statistics on the problem of children and adolescents. We intend to produce one-to-two counter-size exhibits for each of our regional and field offices around the country to use and to make available to interested local organizations. We anticipate spending about $50,000 for these types of exhibits which would cover designing, producing, disseminating, paying for exhibit space, when necessary, and covering travel costs and other related expenses. Tobacco--Funding Mr. Rogers. You are requesting $24 million to be provided for Enforcement and Evaluation. Please inform the Committee how the Agency arrived at that figure. Response. The $24 million requested is sufficient to adequately enforce the various provisions of the final tobacco rule in a way that will help the Agency meet its stated objective of reducing young people's use of tobacco by 50 percent within seven years of this rule going into effect. Mr. Rogers. How much of that funding do you expect to be matched by non-federal sources? Response. None of the funds are expected to be matched by non- federal sources. Mr. Rogers. Have you yet identified those non-federal sources? Response. None of the funds are expected to be matched by non- federal sources. Non-federal funding sources have not and will not be identified. Mr. Rogers. Are the non-federal matches anticipated to be required by the Agency or will they be agreed to by the non-federal source? Response. Non-federal funding matches will not be required by the Agency nor does the Agency have any expectation that they will be agreed to by the non-federal source. Mr. Rogers. How will the $24 million be used? Does the Agency anticipate the entire amount will be used in FY 1998? Please provide the Committee with a detailed breakout of anticipated funding, i.e., (training, travel, equipment, etc.) Response. The bulk of the $24 million will be spent on contracts with state and local officials for the enforcement of the final tobacco regulation. The Agency anticipates that the entire amount will be used in FY 1998. Mr. Rogers. Regarding evaluation, what criteria will the Agency use to determine future year's increases or decreases in funding levels. Please indicate, in detail, how you will measure success in enforcement. Response. FDA's ultimate goal is to reduce tobacco use by young people by 50 percent in seven years. This is ultimately the criteria which we will use to assess the success of the regulation. Funding requests will be based upon each year's experiences with what worked and what didn't. FDA Authority to Regulate Tobacco Mr. Rogers. In a case pending before the U.S. District Court in Greensboro, North Carolina, parties are challenging to the FDA's authority to regulate tobacco. Summarize the plaintiff's case and provide the status of the case. Response. Four lawsuits were filed in the Middle District of North Carolina--Greensboro Division--related to FDA's initiative concerning cigarette and smokeless tobacco. Coyne Beahm v. FDA, American Advertising Federation v. Kessler, United States Tobacco Company v. FDA, National Association of Convenience Stores v. Kessler. Plaintiffs assert that FDA jurisdiction over cigarettes and smokeless tobacco has been precluded by Congress, that FDA lacks authority under the FFDC Act to regulate cigarettes and smokeless tobacco as drugs or devices, that the marketing and advertising restrictions violate the First Amendment, and that other specific regulations are unconstitutional, in excess of FDA's authority, or not supported by the record. In October 1996, plaintiffs moved for summary judgment on the grounds that Congress has precluded FDA's jurisdiction over cigarettes and smokeless tobacco; that cigarettes and smokeless tobacco cannot be regulated as drugs and devices under the FFDC Act; and that the First Amendment prohibits FDA's advertising restrictions. Those motions have been fully briefed and argued, and are ripe for disposition. At oral argument, the court announced that it would issue its decision on these summary judgement motions between March 17 and April 21, 1997. Mr. Rogers. What FDA resources have been allocated to defend the regulations (by dollar and FTE). Response. The United States Department of Justice is the federal agency taking the lead in the defense of the government's tobacco regulations. FDA has not tracked resources used to directly defend these regulations. Mr. Rogers. What other federal agencies are involved or assisting in the defense of the government's regulations? Response. Again, the United States Department of Justice is the other federal agency involved in the defense of the government's regulations. Mr. Lewis. The Food, Drug and Cosmetic Act requires that a drug be shown to be safe and effective to receive FDA marketing approval. For life threatening and severely debilitating diseases like AIDS and cancer, the FDA has established special programs to expedite drug development and review (e.g. Subpart E, Subpart H). However, these and other regulations are not applied equally to drugs for all life threatening diseases. For instance, last year's announced policy establishing surrogate endpoints for cancer drugs applied only to cancer. Moreover, some drugs are approved by FDA on the basis of a single pivotal study while other drugs require two pivotal studies for approval. It depends, in large part, on what disease is being treated and what center, office, or division is conducting the review. Why do the standards for demonstrating safety and efficacy for new drug applications vary across centers, offices and divisions? For example, why do some drugs under review at CDER receive marketing approval on the basis of one study when other drug applications under review at CDER require two studies? Response. Subparts E (21 CFR Section 312.80-88) and H (21 CFR 314.500-560) of the Agency's regulations apply equally to drugs for all life-threatening disease. These include, but are not limited to, drugs for AIDS and cancer. All Offices and Divisions rely on surrogate endpoints when appropriate. This issue is not whether one or two trials are required, but rather the need for independent corroboration of a scientific finding. The Agency recently released a draft document on ``evidence'' that fully addresses this issue. [Clerk's note.--The FDA submitted for the record a copy of its regulations on ``evidence.'' The information provided was too lengthy to reprint and will be retained in Committee files.] Mr. Lewis. What actions is the agency taking to encourage and expedite the development and approval of drugs for life threatening and severely debilitating diseases other than AIDS and cancer? Response. The Agency has taken several steps to encourage and expedite the development and approval of drugs for life- threatening and severely debilitating diseases. For example, under Subpart E of the Agency's regulations, the Agency encourages meetings between the Agency and the sponsor at the earliest possible time. These meetings can even be held before clinical trials begin. The Agency also allows early access to such drugs under the treatment IND program. In addition, the Agency will generally give these drugs a priority designation, which means that it should be reviewed in six months or less under the Prescription Drug User Fee Act of 1992. Under these programs, Americans have the earliest access possible to these drugs. In the specific case of AIDS drugs, the great majority of AIDS drugs were approved first in the U.S. Mr. Lewis. Was the special policy establishing surrogate endpoints for cancer the first step in an initiative to develop new rules and policies for other life threatening illnesses? Response. Again, Subparts E and H apply equally to all life-threatening diseases. The announcement concerning surrogate endpoints for cancer was a clarification and further application of Subpart H. [Pages 480 - 685--The official Committee record contains additional material here.] W I T N E S S E S __________ Page Born, Brooksley.................................................. 91 Byrd, R. J....................................................... 309 Cook, Doyle...................................................... 1 Friedman, M. A................................................... 309 Martin, Marsha................................................... 1 Pendergast, M. K................................................. 309 Porter, M. J..................................................... 309 Schultz, W. B.................................................... 309 Williams, Dennis................................................. 309 I N D E X ---------- Farm Credit Administration Page Arkansas PCAs' Supreme Court Case................................ 6 Audit............................................................ 12 Biographies: Marsha Pyle Martin........................................... 48 Doyle L. Cook................................................ 49 Budget Justification............................................. 50 Budget Supplement................................................ 70 Budget Trends.................................................... 64 Capital Adequacy and Customer Eligibility Regulation............. 4 Compensation Program............................................. 88 Condition of the Farm Credit System...........................3, 45, 80 Condition of the Federal Agricultural Mortgage Corporation....... 87 Contracts........................................................ 87 Cost Trends...................................................... 53 Current Activities and Issues.................................... 2, 41 Customer Eligibility Regulation.................................. 38 Examination Issues............................................... 13 FCA Background................................................... 37 FCA Board Vacancy................................................ 4 FCA Operations................................................... 9 FCA Regulatory Burden Project.................................... 14 FCA Staff Reductions............................................. 8 FCA Staffing..................................................... 8 Farm Credit Banks Joint Management Agreement..................... 5 FCS Building Association......................................... 19 Farm Credit System Insurance Corporation......................... 6, 32 Farm Credit System Loan Volume................................... 17 Farm Credit System Market Share.................................. 5 Farm Credit System Senior Officer Compensation................... 17 Farm Credit System Structure..................................... 16 Federal Agricultural Mortgage Corporation (Farmer Mac)...........16, 46 Fiscal Year 1998 Budget Request...............................3, 47, 54 FY 1998 Budget Summary........................................... 55 FY 1998 Budget Highlights........................................ 55 FTE Staffing Levels.............................................. 9 Government Performance and Results Act (GPRA).................... 34 Introduction and Purpose......................................... 52 Litigation Involving FCA......................................... 11 Loans to Cooperatives............................................ 7 Major Accomplishments and Projects During Fiscal Year 1996....... 72 Major Projects in Support of the Budget.......................... 58 Mission of the Farm Credit Administration........................ 2, 41 National Consumer Cooperative Bank............................... 33 Office of Inspector General...................................... 13 Opening Remarks.................................................. 1 Questions Submitted for the Record: Chairman Skeen............................................... 8 Mr. Dickey................................................... 37 Ratio of Managers to Other Personnel............................. 9 Risk Assessment Project.......................................... 15 Salary Ranges.................................................... 89 Sole Source Contracts and Consulting Services Contracts.......... 10 Strategic Planning............................................... 53 The Farm Credit Administration...................................52, 72 Written Prepared Statement of Marsha Martin...................... 40 Commodity Futures Trading Commission Advisory Committees.............................................. 157 Agricultural: Commodities.................................................. 116 Percentage of Resources Used for Agricultural Commodities.... 116 Trade Options................................................ 116 Arrangements: Information Sharing on Matters Related to Specific Programs.. 152 Multilateral................................................. 151 Related to the Issuance of No-Action Letters Concerning the Offer and Sale of Foreign Stock Index Futures Contracts in the U.S........................... 152 Audit............................................................ 120 Audit Trail Standards............................................ 180 Biography of Chairperson Brooksley Born.......................... 189 Born, Brooksley.................................................. 161 Budget: Appropriation and Authorized FTEs............................ 156 Carryover Funds.............................................. 113 Changes from OMB Request..................................... 113 Contracts.................................................... 158 Current Services Request..................................... 95 Explanatory Notes............................................ 190 FTEs by Division (1987-1997)................................. 157 Funding by Division (1987-1997).............................. 156 Funding Levels and Operational Effects....................... 164 Historical Funding and Staffing.............................. 156 Increase Requested........................................... 103 Rent and Systems Analysis.................................... 95 Rental Payments.............................................. 157 Resources.................................................... 168 Request...................................................... 163 Services..................................................... 157 Bucket Shops..................................................... 104 Chicago Board of Trade--March Wheat Futures Contract...........114, 182 Civil and Administrative Proceedings............................. 152 Civil Monetary Penalties.......................................122, 153 Crop Insurance: Companies.................................................... 98 Concerns of Farmers.......................................... 103 Crop Yield Contracts............................................. 97 Cross-Border: Stress Test.................................................. 110 Supervision of Managed Funds Activities...................... 151 Delivery Points: Chicago Board of Trade....................................... 182 Impact on Toledo and St. Louis............................... 104 Derivative Policy Group.......................................... 114 Designation Applications: Approved, Futures............................................ 154 Approved, Options............................................ 155 Exchange..................................................... 178 Pending...................................................... 153 Dual Trading..................................................... 121 Enforcement: Cooperative.................................................. 150 Increase..................................................... 103 Investigations............................................... 150 Exchanges Compliance with Regulations.................................. 120 Self-Policing Activities..................................... 122 Farmers and Ranchers............................................. 96 FCM Investigations............................................... 123 Fees: Foreign Transaction.......................................... 118 Service...................................................... 116 Transaction.................................................. 95 Financial Instruments: Effect on Agriculture........................................ 111 Share of Market.............................................. 111 Firm Failures.................................................... 122 Fraud: Dual Trading................................................. 121 Foreign Currency Futures and Options......................... 176 Potential for..............................................109, 161 Futures and Securities: Comparison of................................................ 112 Distinction between.......................................... 111 GPRA............................................................. 158 Hedge-to-Arrive Contracts........................................ 179 Inspector General: Report....................................................... 113 Workload..................................................... 115 Integrated Surveillance System................................... 94 International: Activities................................................... 184 Foreign Assistance........................................... 149 Globalization and Deregulation............................... 110 Introduction of Staff............................................ 91 Legislation: Pending...................................................... 186 Proposed.....................................................91, 94 Prospects.................................................... 110 Market Oversight................................................. 180 Memoranda of Understanding: Cooperation on Supervisory, Investigative and Enforcement Matters.................................................... 151 Financial Information Sharing................................ 151 Mutual Recognition........................................... 152 National Cheese Exchange......................................... 115 National Futures Association..................................... 116 NFA Disciplinary Actions......................................... 117 Opening Statement................................................ 92 President's Working Group........................................ 121 Producer Organizations........................................... 96 Professional Markets Exemption................................... 94 Questions Submitted for the Record: Chairman Skeen............................................... 113 Mr. Serrano.................................................. 161 Regional Offices................................................. 118 Registered Introducing Brokers................................... 158 Regulatory Coordination and Reform............................... 186 SEC and CFTC, Working Relationship............................... 119 Trade Practice Matters........................................... 150 Travel: Domestic..................................................... 149 Foreign...................................................... 123 Volume of Trading: Agricultural Commodities..................................... 116 Annual....................................................... 103 Domestic Agricultural Trading................................ 153 Futures vs. Equities......................................... 103 Written Prepared Statement of Brooksley Born..................... 163 Food and Drug Administration Animal Drugs and Feeds: BSE.......................................................... 433 Animal Drug Applications..................................... 389 Biographies...................................................... 480 Buildings and Facilities......................................... 410 Congressional Justification...................................... 519 Devices and Radiological Products: 510(k) Applications.......................................... 377 Classification of Applications............................... 470 Globalization of Device Review Process....................... 469 Home Testing................................................. 355 Inspecting Mammography Facilities............................ 467 Internet Surveillance........................................ 337 Mammography.................................................. 371 Mammography Quality Standards................................ 340 Medical Device User Fees..................................... 343 Medical Device Regulatory Actions............................ 409 Medical Devices.......................................375, 409, 450 Medical Device User Fees..................................... 348 Policy on Software........................................... 469 Relief Band.................................................. 336 Review Time--PMAs............................................ 436 Review Time--510(k)s......................................... 437 Sensor Pad................................................... 442 Dr. Friedman's Opening Remarks................................... 309 Foods: Center for Food Safety and Applied Nutrition................. 442 Fair Packaging and Labeling Act.............................. 413 Food and Drug Tampering Complaints........................... 410 Food Additive Petitions....................................434, 466 Food Safety................................................374, 429 Food Surveillance............................................ 408 Food Labeling................................................ 407 Food Sample Analysis......................................... 385 Foodborne Illness............................................ 386 Genetically Altered Food Products............................ 350 Imported Food................................................ 431 Joint Institute for Food Safety.............................. 472 Mexican Border Crossing...................................... 384 Nutrition Supplements........................................ 378 OASIS........................................................ 433 Pesticides................................................... 385 Raw Shellfish................................................ 463 Seafood...................................................... 397 User Fees for Food Additive Petitions........................ 342 Human Drugs and Biologics: AIDS......................................................... 398 Dr. Burzynski................................................ 357 Drug Approval of Contraceptives.............................. 454 Drug Review.................................................. 354 Drug Review Times............................................ 444 Drug Applications............................................ 403 Food and Drug Tampering Complaints........................... 410 Generic Applications......................................... 444 Generic Drug Applications.................................... 384 Health Fraud................................................. 414 Orphan Drugs................................................. 406 PDUFA Obligations............................................ 384 PDUFA......................................................367, 438 Pending Drug Applications.................................... 407 Prescription Drug Labeling................................... 352 Radiopharmaceutical Drug Review.............................. 459 Review of Generic Drugs...................................... 443 RU-486....................................................... 456 Substantial Evidence Requirement............................. 472 Taxol........................................................ 361 TPA.......................................................... 471 National Center for Toxicological Research: National Center for Toxicological Research (NCTR)............ 337 National Center for Toxicological Research................... 397 NCTR Budget.................................................. 451 Other Activities: Application Process.......................................... 466 Budget Levels................................................ 463 Civil Service Retirement Costs............................... 373 Commissioner's Office Staff.................................. 442 Emergency Fund............................................... 407 Expanding FDA's Resources Through Outside Expertise.......... 440 Export User Fees............................................. 373 FDA Reform................................................... 428 Federal Pay Raise Costs...................................... 371 Field Lab Consolidation at NCTR.............................. 451 Field Lab Consolidation...................................... 369 Authority for New User Fees.................................. 440 Foreign Inspection Programs.................................. 414 Freedom of Information Activities............................ 410 Funding Priorities........................................... 461 Government Performance and Results Act (GPRA)................ 424 Import Inspection User Fees.................................. 458 New Display of Budget Request................................ 452 OASIS........................................................ 375 Office of Criminal Investigations............................ 414 Office of the Commissioner Staffing.......................... 373 Orphan Drug Application User Fee............................. 334 Past User Fee Proposals...................................... 334 Pending FDA Legal Suits...................................... 428 Postmarket Surveillance User Fees............................ 458 Proposed User Fees.........................................460, 467 Reauthorization of PDUFA..................................... 463 Review Time--General......................................... 438 Report Language.............................................. 441 Resources.................................................... 379 SMART........................................................ 389 User Fee Proposal............................................ 340 User Fee Legislation......................................... 364 User Fees...................................332, 357, 363, 364, 428 User Fees and Small Companies................................ 471 Questions Submitted for the Record: Chairman Skeen............................................... 361 Ms. Kaptur................................................... 427 Mr. Walsh.................................................... 434 Mr. Dickey................................................... 451 Mr. Kingston................................................. 456 Mr. Bonilla.................................................. 460 Mr. Latham................................................... 463 Mr. Fazio.................................................... 466 Mr. Barcia................................................... 472 Mr. Rogers................................................... 473 Mr. Lewis.................................................... 479 Statement by Michael A. Friedman, Lead Deputy Commissioner....... 487 Tobacco: Mr. FDA Authority to Regulate Tobacco........................ 478 Synar Amendment.............................................. 465 Tobacco................................338, 349, 361, 415, 416, 456 Tobacco Regulation....................................346, 464, 473 Tobacco--Direction Outreach.................................. 477 Tobacco--Budget Request...................................... 476 Tobacco Funding.......................................463, 466, 478 Tobacco--Indirect Outreach................................... 477 Tobacco Jurisdiction......................................... 464 Tobacco Outreach............................................. 464 Youth Tobacco Prevention Initiative...................3, 359, 460..