[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
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                       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..