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Daily Rules, Proposed Rules, and Notices of the Federal Government

DEPARTMENT OF HEALTH AND HUMAN SERVICES

5 CFR Parts 5501 and 5502

RIN 3209-AA15

Supplemental Standards of Ethical Conduct and Financial DisclosureRequirements for Employees of the Department of Health and Human Services

AGENCY: Department of Health and Human Services (HHS).
ACTION: Interim final rule with request for comments.
SUMMARY: The Department of Health and Human Services, with the concurrence of the Office of Government Ethics (OGE), is amending the HHS regulation that supplements the OGE Standards of Ethical Conduct. This interim final rule specifies additional procedural and substantive requirements that are necessary to address ethical issues at the National Institutes of Health (NIH) and updates nomenclature, definitions, and procedures applicable to other components of the Department. The rule: Revises the definition of a significantly regulated organization for the Food and Drug Administration (FDA); Updates the organization titles of designated separate agencies; Amends the gift exception for native artwork and craft items received from Indian tribes or Alaska Native organizations; Aligns the FDA prohibited holdings limit with thede minimisholdings exemption in OGE regulations; Revises prior approval procedures for outside activities; and, subject to certain exceptions: Prohibits NIH employees from engaging in certain outside activities with supported research institutions, health care providers or insurers, health-related trade or professional associations, and biotechnology, pharmaceutical, medical device, and other companies substantially affected by the programs, policies, or operations of the NIH; Bars NIH employees who file a public or confidential financial disclosure report from holding financial interests in substantially affected organizations; Subjects NIH non-filer employees to a monetary cap on holdings in such organizations; Specifies for NIH employees prior approval procedures for and limitations on the receipt of certain awards from outside sources; and Imposes a one-year disqualification period during which NIH employees are precluded from official actions involving an award donor. In addition, the Department is adding a new supplemental part to expand financial disclosure reporting requirements for certain outside activities and to ensure that prohibited financial interests are identified.
DATES: This interim rule is effective February 3, 2005. Comments received by April 4, 2005, will be considered prior to issuance of a final rule.
ADDRESSES: Send comments in writing to the Office of the General Counsel, Ethics Division, Department of Health and Human Services, Room 700-E, Hubert H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201, Attention: Linda L. Conte. Comments also may be sent electronically to the following e-mail address:ethics@hhs.gov. For e-mail messages, the subject line should include the following reference: "Comments on Interim Final HHS Supplemental Ethics Rule."
FOR FURTHER INFORMATION CONTACT: Edgar M. Swindell, Associate General Counsel, Office of the General Counsel, Ethics Division, Department of Health and Human Services, telephone (202) 690-7258, fax (202) 205-9752.
SUPPLEMENTARY INFORMATION: I. Background

The Standards of Ethical Conduct for Employees of the Executive Branch, 5 CFR part 2635, establish uniform rules of ethical conduct applicable to all executive branch personnel. Pursuant to 5 CFR 2635.105, an agency may, with the approval of the Office of Government Ethics, supplement those standards with additional rules that the agency determines are necessary and appropriate, in view of its programs and operations, to fulfill the purposes of part 2635. On July 30, 1996, with the concurrence and co-signature of the OGE Director, HHS published at 61 FR 39755 a final rule establishing supplemental standards of ethical conduct for its employees. This interim final rule amends that final rule codified at 5 CFR part 5501.

In addition to several changes with respect to rules applicable to employees of the National Institutes of Health related to outside activities, financial holdings, and awards, this interim final rule makes several changes to the HHS Supplemental Standards of Ethical Conduct applicable to all Department employees. These changes are based on the experience that has been garnered by the Department in implementing the regulation since it was issued in 1996. The interim final rule establishes more specific requirements with respect to requests for approval of outside activities and imposes an annual reauthorization process.

Although immediately effective, this is as an interim rule. HHS intends to evaluate certain provisions in the rule, particularly on outside activities and financial holdings, within the next year. During this time, HHS also will: (1) Complete a review of existing outside activities that is presently ongoing; (2) evaluate possible effects on hiring and retention that may result from the imposition of outside activity and financial holdings prohibitions; and (3) develop a comprehensive oversight system to address concerns raised about the NIH ethics program.

In addition, the Executive Branch Financial Disclosure Regulation, 5 CFR part 2634, specifies uniform rules governing the public and confidential financial disclosure systems established under the Ethics in Government Act. Pursuant to 5 CFR 2634.103, an agency may, subject to the prior written approval of the Office of Government Ethics, issue supplemental financial disclosure regulations that are necessary to address special or unique circumstances. This interim final rule amends chapter XLV of title 5 by adding new part 5502 to provide for an annual reporting by all employees of financial and other information concerning outside activities and a supplemental disclosure by all FDA and NIH employees with respect to prohibited financial interests.

Post-promulgation comments on this interim final rule are requested. Those comments and experience under theinterim rule will inform the development of a final permanent rule, in consultation with OGE.

II. Analysis of the Amendments A. Supplemental Standards of Ethical Conduct Section 5501.101General

The definition of a “significantly regulated organization” found at § 5501.101(c)(2) is amended to make clear that for entities that do not have a record of sales of FDA-regulated products, and which have not yet commenced operations in a field regulated by FDA, an entity will nonetheless be deemed significantly regulated if its research, development, or other business activities are reasonably expected to result in the development of products that are regulated by FDA.

Since the issuance of the HHS Supplement, the existing language of the regulation has suggested to some employees that until a company submits an investigational new drug application and begins conducting clinical trials, the company is not significantly regulated (assuming there is no record of prior sales of FDA-regulated products). Because FDA does not have a generalized authority to regulate the “field” of scientific research, some employees have interpreted the existing regulation as permitting employment with a company that is thus far only conducting preliminary research, even when it is reasonable to conclude that the research is conducted with the aim of developing FDA-regulated products.

Accordingly, this amendment ensures that newly-formed business entities that do not yet have products that are approved for sale, and which have not yet undertaken operations that bring them within FDA's regulatory jurisdiction, will be understood to fall within the definition of significantly regulated if their research, development, or other business activities are reasonably expected to result in the development of products that are regulated by FDA. It also makes clear that where a company's operations are regulated by FDA, to fall within the definition, the operations need not be entirely in areas regulated by FDA as long as they are primarily in such areas.

Section 5501.102Designation of HHS Components as Separate Agencies

The changes to this section reflect the name change of two HHS agencies, the Agency for Healthcare Research and Quality, previously known as the Agency for Health Care Policy and Research, and the Centers for Medicare and Medicaid Services, previously known as the Health Care Financing Administration. The Office of Consumer Affairs was abolished in 1998 and is deleted from the list. In addition, the amendment specifies that the designation of separate agencies will apply in defining a prohibited source for purposes of the new awards rule in § 5501.111 for NIH employees.

Section 5501.103Gifts From Federally Recognized Indian tribes or Alaska Native Villages or Regional or Village Corporations

The change to this section clarifies that items representative of traditional native culture from federally recognized Indian tribes or Alaska Native villages, or regional or village corporations, fall within the previously established rule permitting HHS employees to accept gifts of native artwork and crafts, provided that the aggregate market value of individual gifts received from any one tribe or village does not exceed $200 per year and other criteria are satisfied. The amendment permits gifts that, while representative of traditional native culture, were not necessarily produced or manufactured by the donor entity.

Section 5501.104Prohibited Financial Interests Applicable to Employees of the Food and Drug Administration

The section heading and text have been revised to delete redundant references to the “FDA Office of the Chief Counsel.” Section 5501.102(b)(1) already specifies that any section in part 5501 that is made applicable to employees of an identified component that is designated as a separate agency is applicable, in addition to employees actually working within a component, to employees in a division or region of the Office of the General Counsel (OGC) that principally advises or represents that component.

Section 5501.104(a) prohibits FDA employees from holding financial interests in significantly regulated organizations, subject to certain exceptions in § 5501.104(b). The change in paragraph (b)(1) broadens the scope of the exception, which previously covered only pension interests, such as those arising from participation in defined benefit or defined contribution plans. Experience since the issuance of the supplemental regulation indicates that many incoming employees hold financial interests which, like a pension interest, were acquired as a form of compensation from a significantly regulated organization, but which do not qualify as a pension. For example, a recent report by the National Academy of Sciences found that stock and stock options are common employee benefits in small, private technology firms in the fields of engineering and health care, and the report recommended against forced divestiture of such employee benefits for scientists entering public service, as such requirements may unreasonably hamper the recruitment of talented and experienced scientific personnel. National Academy of Sciences,Science and Technology in the National Interest: Ensuring the Best Presidential and Federal Advisory Committee Science and Technology Appointments199-201 (2004). Therefore, the exception has been amended to include not only pensions but other employee benefits.

This exception is not intended to permit retention of financial interests merely because the interest was purchased by an employee contemporaneously with employment in private industry through a broker, financial advisor, or other source not acting as part of the private employer's compensation system.

In addition, like all the exceptions in this section, the provision merely permits retention of a financial interest notwithstanding the prohibited financial holdings provision of this section. The recusal requirements of 18 U.S.C. 208 apply to all financial interests, including those covered by the exceptions in this section. (References to § 208 within this regulation are descriptive and not intended to interpret or expand upon the text of the statute.) Moreover, all financial interests are subject to directed divestiture pursuant to 5 CFR 2635.403(b), when there has been a determination by the agency that holding the particular financial interest, or a class of financial interests, will require the employee's disqualification from matters so central or critical to the performance of his official duties that the employee's ability to perform the duties of his office would be materially impaired, or will adversely affect the efficient accomplishment of the agency's mission because another employee cannot readily be assigned to perform the work from which the employee is recused by reason of the financial interest.

Section 5501.104(b)(2) contains an exception to the prohibited holdings rule for employees who are not required to file a public or confidential financial disclosure report. Non-filers have been permitted to have a financial interest not exceeding $5,000 in significantly regulated organizations. The amendment raises the amount of the allowable holding to $15,000. The change parallels the increase from$5,000 to $15,000 in the OGE regulatory exemption for matters involving parties, found at 5 CFR 2640.202(a), that occurred after the original issuance of the HHS supplemental provision. The OGE exemption allows an employee to participate in any particular matter involving specific parties in which the disqualifying financial interest does not exceed $15,000 in publicly traded securities or long-term Federal Government or municipal securities. Because the allowable holding amount in the HHS Supplement corresponded to the OGEde minimisamount, an increase in the latter justifies an increase in the allowable holding limit in the HHS Supplement. Further, the section will track any future change in the OGEde minimisamount.

Although the dollar amounts are identical, the two provisions substantively are not coextensive. Not all financial interests that may be covered by the FDA exception will be covered by the OGE regulatory exemption. For example, the FDA exception permits a non-filer to hold a financial interest in a non-publicly traded company (assuming all the other criteria in the section are also satisfied), but the OGE regulatory exemption only applies when the corporate securities are publicly traded. Therefore, the financial interest may still be problematic under 18 U.S.C. 208 and require a recusal, a divestiture, or an individual waiver, even though § 5501.104(b)(2) excepts the holding from the FDA automatic divestiture requirement.

In applying the allowable holding amount, the existing section specifies that the asset value is to be measured “at the time of acquisition.” The amendment to this section now defines that phrase. This change is intended to obviate the possibility of unintended situations which, depending on the interpretation of that phrase, could lead to treatment for some employees that is inconsistent with treatment of similarly-situated employees, and lead to results that are inconsistent with the intent of the provision. Specifically, there could be scenarios in which an employee who recently joined the agency, and who had acquired an asset in the distant past, could be permitted to retain an asset, now valued well over $15,000, because it had been valued under $15,000 “at the time of acquisition,” while other new employees who acquired an asset more recently, but at a level above $15,000, are required to divest a much lower valued financial interest in the same or other significantly regulated organizations. Such inconsistent results in the implementation of the regulation could undermine the very purpose of the provision (i.e., that onlyde minimisholdings should be permitted) and undermine employee confidence that the regulation is being applied fairly and uniformly. Accordingly, this change is intended to make clear that for assets that were acquired prior to joining FDA, the “time of acquisition” will be deemed to be the date of the employee's entrance on duty at the agency. The change will prevent unfair and unwarranted inconsistencies in how the prohibited holding regulation is applied and will prevent situations in which employees are treated disparately, as a consequence of investment decisions made prior to their entrance on duty.

New § 5501.104(c) provides that, for purposes of determining the divestiture period specified in 5 CFR 2635.403(d), an employee is not considered to have been directed to divest a financial interest prohibited under paragraph (a) of this section until the due date for disclosure of such interests. For new entrant employees, this disclosure would be submitted on either a public or confidential financial disclosure report or the supplemental report required by new § 5502.106(c), depending upon their filing status. For incumbent employees, the due date of the report required by § 5502.106(c) would be determinative. This rule allows the agency to analyze an employee's holdings and make a determination as to whether a particular financial interest is covered by the prohibition before the requirement to divest becomes applicable. The text codifies existing agency practice and parallels a similar provision in the Department of Housing and Urban Development supplemental ethics regulations at 5 CFR 7501.104(c) which prescribes a divestiture period of 90 days from the date a prohibited financial interest is reported.

Section 5501.106Outside Employment and Other Outside Activities

The paragraph heading and introductory text of paragraph (c)(3) have been revised to delete redundant references to the FDA “Office of the Chief Counsel.” Section 5501.102(b)(1) already specifies that any section in part 5501 that is made applicable to employees of an identified component that is designated as a separate agency is applicable, in addition to employees actually working within a component, to employees in a division or region of the Office of the General Counsel that principally advises or represents that component.

The amended paragraph (c)(4) provides that the attorneys in the Office of the Counsel to the Inspector General are subject to the same outside activities restrictions as those in the Office of the General Counsel.

The amended paragraph (d)(2)(i) adds employees of the NIH to the prior approval requirement, currently applicable to employees of the FDA, for any outside employment, whether or not for compensation, or any self-employed business activity.

The amended paragraph (d)(3) requires an employee's supervisor to review the request for approval of an outside activity and provide a statement addressing the extent to which the employee's duties are related to the proposed outside activity. This information shall then be forwarded to an agency designee to make a final determination with respect to the request. The amendment also specifies that the following information be included with the request: the employee's step within a grade, appointment type, and financial disclosure filing status; a description of how the employee's official duties will affect the interests of the outside employer; whether stock or other remuneration in cash or in-kind will be received in connection with the activity; the amount of compensation to be received in connection with the activity; the amount and date of compensation received, or due for services performed, within the prior six years; a syllabus, outline, summary, synopsis, draft, or similar description of content and subject matter if the activity involves teaching, speaking, or writing; and other information as determined by the designated agency ethics official, or the HHS component with the concurrence of the designated agency ethics official, to be necessary or appropriate to evaluate whether the request is prohibited by statute or regulation. Should other types of information be routinely required of all employees, general notice of such requirements will be disseminated through instructions or manual issuances and revisions to the forms that are utilized for these purposes.

The amendment to paragraph (d)(4) clarifies that a request for approval of outside employment or other outside activity may not be granted unless there is an affirmative determination that the employment or other activity is not expected to involve conduct prohibited by statute or regulation.

Existing paragraph (d)(5) has been renumbered as paragraph (d)(6). New paragraph (d)(5) specifies that approval of an outside activity is effective for one year only. Employees must renew their request for approval annually if theydesire to continue any long term outside activity. In addition, employees must submit a revised request for approval if they change positions within the agency or if a significant change occurs in the nature of the outside activity or in the scope of the employees' duties.

Paragraph (e) incorporates a waiver provision to be used where, under the particular circumstances, application of the prohibited outside activity rules for FDA, OGC, or NIH employees is not necessary to ensure confidence in the impartiality and objectivity with which agency programs are administered. The waiver must not be inconsistent with part 2635 of this title or otherwise prohibited by law. This standard parallels the waiver provision at 5 CFR 3101.108(g) in the Department of the Treasury supplemental ethics regulation that imposes outside activity prohibitions applicable to employees of the Office of the Comptroller of the Currency. This provision could be applied to provide some relief, for example, where the prohibition unduly causes personal or family hardship or, prohibits an employee from completing a professional obligation entered into prior to Government service, or restricts the Department from securing necessary and uniquely specialized services.

Section 5501.109Prohibited Outside Activities Applicable to Employees of the National Institutes of Health

Prior to the publication of this interim final rule, the criteria for approving or disapproving requests for approval of outside activities of NIH employees were set forth in the OGE regulation at 5 CFR part 2635, subpart H, and the Supplemental Standards of Ethical Conduct for Employees of HHS at 5 CFR 5501.106. Both the OGE rules and the HHS provisions in § 5501.106 remain in effect for all NIH employees. This interim final rule imposes additional, more stringent requirements, similar to those in 5 CFR 5501.106(c)(3) for employees of the FDA.

Outside activities with entities substantially affected by NIH programs, policies, or operations must be further restricted in order to avoid the potential for real or apparent conflicts of interest that may threaten the integrity of the critically important research conducted and sponsored by the NIH. This assessment is informed by recommendations of the Advisory Committee to the NIH Director that were presented in the June 22, 2004, Report of the NIH Blue Ribbon Panel on Conflict of Interest Policies (Blue Ribbon Panel Report), available athttp://www.nih.gov/about/ethics_COI_panelreport.htm, but is predicated upon a consideration of various outside activities of NIH employees that have been subject to inquiry and the desire to advance sound public policy. Many of the panel recommendations and related issues were highlighted and discussed at Congressional hearings on outside consulting arrangements by NIH employees. Panel recommendations to liberalize certain current restrictions were not adopted in this rule. Additional restrictions are necessary because NIH operations increasingly require significant interaction with pharmaceutical, biotechnological, biostatistical, and medical device companies (referred to within the regulation as “substantially affected organizations”) and utilization of their products; the size and scope of NIH funding of biomedical and behavioral research, research training, and related activities have grown substantially; and NIH research findings are broad in range and influence within the health care sector. Moreover, in light of recent Congressional oversight and media reports, HHS has determined that the existing rules governing outside activities have not prevented reasonable public questioning of the integrity of NIH employees and the impartiality and objectivity with which agency programs are administered.

Through its approximately 17,500 full-time equivalent employees, NIH conducts biomedical and behavioral research, research training and related activities in its intramural program, and its extramural program funds those activities at universities, medical centers, research institutes and other nonprofit and for-profit organizations through grants, cooperative agreements, and contracts. Both the intramural and extramural programs interact with academic research institutions and substantially affected organizations in many ways, both formal (e.g., funding agreements, research agreements, intellectual property licenses, and research and development contracts) and informal (e.g., exchange of research materials and other research collaborations, public and private scientific discussions, and joint sponsorship of projects). The official actions of many NIH employees can affect the financial interests of a broad range of businesses and organizations, including health care providers and health insurers, often in subtle ways. Informed by recent experience, it is appropriate to limit broadly employees' outside activities with those entities to avoid any appearance that official actions may be potentially influenced by private financial interests or loyalty to an outside employer.

The current HHS supplemental regulation on outside employment and other outside activities, 5 CFR 5501.106, prohibits employees of the NIH and other employees of HHS from providing certain services, for compensation, in the preparation of grant applications, contract proposals or other documents to be submitted to HHS, and from compensated outside employment with respect to a particular activity funded by an HHS grant, contract, cooperative agreement, or other funding mechanism authorized by statute, or conducted under a cooperative research and development agreement (CRADA).

Under § 5501.109(c)(1) of this interim final rule, subject to certain exceptions, all NIH employees are also prohibited from engaging in employment (which includes serving as an officer, director, or other fiduciary board member, serving on a scientific advisory board or committee, and consulting or providing professional services) and compensated teaching, speaking, writing, or editing with a substantially affected organization; a hospital, clinic, health maintenance organization, or other health care provider (defined comprehensively to include the types of entities that are eligible to receive payments under the Medicare program for the provision of health care items or services); a health insurer; a health, science, or health research-related trade, professional, consumer, or advocacy association; or a supported research institution.

A “substantially affected organization” is defined in paragraph (b)(8) to include those entities, irrespective of corporate form, that are engaged in the research, development, or manufacture of biotechnological, biostatistical, pharmaceutical, or medical devices, equipment, preparations, treatments, or products. The term includes those organizations a majority of whose members are engaged in such activities.

Section 5501.109(b)(8)(iii) also permits the designated agency ethics official or, in consultation with the designated agency ethics official, the NIH Director or the NIH Director's designee to determine that other entities shall be classified as substantially affected organizations. These determinations will be based upon whether such entities are engaged in activities that are substantially affected by the programs, policies, or operations of the NIH and whether, in view of the ongoing research conducted or sponsored by the NIH, interests in these organizations are likely to pose ethicsconcerns for NIH employees similar to those presented by the entities specifically listed in paragraph (b)(8)(i). This authority might be used, for example, to cover a food, beverage, or tobacco manufacturer, if its products became a pervasive subject of NIH research activities into the health benefits or detriment associated with the product or its ingredients, and the research activities required a substantial coordinated effort across institutes and centers, such that it would be necessary or appropriate to apply a prophylactic rule applicable to all NIH employees. Lists of organizations designated as substantially affected organizations under paragraph (b)(8)(iii) will be maintained by the designated agency ethics official and the NIH deputy ethics counselor and disseminated to employees through appropriate means, including website posting.

A “supported research institution” is defined in paragraph (b)(9) as an educational institution or a non-profit independent research institute that within the last year or currently has applied for, proposed, or received an NIH grant, cooperative agreement, research and development contract, or CRADA.

Employees are also prohibited under paragraph (c)(1) from engaging in any self-employed business activity that involves the sale or promotion of products or services of a substantially affected organization or a health care provider or insurer. This section excepts the ownership of a patent or related commercialization activities conducted pursuant to Executive Order 10096, the Federal Technology Transfer Act of 1986 (FTTA), 15 U.S.C. 3710d, or implementing regulations at 37 CFR 404, as amended. Those activities will continue to be reviewed and approved on a case-by-case basis in accordance with existing conflict of interest and other applicable rules and policies. For example, under the FTTA the NIH might allow an employee inventor to obtain, or retain, title to an NIH invention, because the NIH has determined that it does not wish to file for a patent or otherwise commercialize the invention. The activities of owning that invention in a personal capacity, seeking and owning patent protection on that invention in a personal capacity, and engaging in commercialization activities related to that invention have been encouraged under the FTTA, and are not automatically prohibited by this regulation. Instead, these activities will continue to be scrutinized in accordance with the facts of each situation to determine whether they present a conflict or potential conflict and the situation should be managed to best serve the public interest.

These prohibited outside activities rules are applicable to all NIH employees, but are focused on those types of activities and external entities that may pose the most significant risk of potential conflicts. In addition, the need for prophylactic rules barring certain types of outside activities derives from the considerable complexity of the current regulatory scheme, the intractable difficulties encountered at NIH in differentiating scientific work performed as an official duty from that proposed as an outside activity, and the significant administrative burden inherent in case-by-case determinations.

The outside activity prior approval process is complicated. The following discourse describes the analysis required for each potential outside activity: Approval requires an assessment of whether the proposed outside activity violates any statute or regulation, including the OGE Standards of Ethical Conduct for Employees of the Executive Branch or the HHS Supplemental Ethics Regulation. Included in the OGE Standards is the requirement that the proposed outside activity cannot create an actual or apparent conflict that would result in recusals that would materially impair an employee's ability to do his job.

In evaluating outside activities for conflicts, the reviewer initially addresses two provisions that form the core of Federal ethics law. A criminal statute, 18 U.S.C. 208, deals with an “actual conflict” due to the employee's own or imputed financial interest in the resolution of a government matter. A regulatory provision in the OGE Standards, 5 CFR 2635.502, principally addresses disqualifications called for when an “appearance of a conflict” arises from a “covered relationship.”

Under section 208 of the criminal code, to avoid a conflict of interest that results from outside employment, among other types of financial interests, a Federal employee must not participate personally and substantially in a particular matter that, to his knowledge, directly and predictably affects his own financial interest in the employment opportunity or the financial interests of his outside employer. To prevent an “appearance of a conflict” that results from serving in a role short of employment, for example, as an advisor, consultant, or other type of independent contractor compensated with fees and expenses, a different rule applies. Under section 502 of the regulations, if a reasonable person with knowledge of the relevant facts would question the Federal employee's impartiality, the employee must recuse, but only from “particular matters involving specific parties,” such as grants, contracts, applications, clinical trials, audits, investigations, or lawsuits that involve, as a party or representative of a party, the company to which the employee is providing consulting services.

Both sections are disqualification provisions in that they do not prohibit the acquisition of an employment or consulting relationship, rather they bar actual “participation” in a potentially conflicting matter, either personally or through the direct and active supervision of the participation of a subordinate. However, neither section is triggered by mere knowledge of, or official responsibility for, a particular matter. In short, if an employee can recuse appropriately and still be able to perform the duties of his position, then an outside activity may be approved, provided there are no other statutory or regulatory impediments.

A number of statutes and regulations preclude certain outside activities. For example, if an employee seeks approval to be a lobbyist before the Federal Government, the anti-representation statutes, 18 U.S.C. 203 and 205, would be implicated. If the activity is clearly one that should be done as an official duty, such as an official speech on agency programs, then approval would be denied, under 18 U.S.C. 209, as an improper salary supplementation.

If the circumstances would create an appearance of violating ethical standards, for example where the employee appears to have used his official position to obtain an outside compensated business opportunity or his actions reasonably create the impression of using his public office for the private gain of the outside company, then under the principles in the OGE Standards, 5 CFR 2635.101(b), and the rules governing misuse of position, 5 CFR 2635.702, the outside activity may be denied. An arrangement for compensation that far exceeds a market rate or that involves first class or foreign travel or extravagant accommodations, for example, may create the appearance that the offer was made or the remuneration was enhanced due to the employee's official position. Another situation cited in the OGE Standards in example 2 following 5 CFR 2635.802 would be where an employee was recently instrumental in formulating industry standards and will again be so involved. If an affected company offers a consulting contract to the employee to render advice to the company about how it can restructure its operations to comply with the very industrystandards that the employee has just drafted, the consulting arrangement should not be approved even though the employee lacks any current assignments affecting the industry, and even though the outside consulting can be finished before he again works on such matters.

Another regulation, 5 CFR 2635.807 precludes compensation, subject to certain exceptions, if an employee wants to teach a course, deliver a speech, or write a book that relates to his official duties. (Consulting, technically, is not covered by this section, but the analysis in section 807 does provide guidance in evaluating many outside activities.) The “relatedness” test evaluates, among other factors, the subject matter of the activity. For career employees, compensation is precluded if the teaching, speaking, or writing deals insignificantpart with any current assignment (or one completed within the last year) or any ongoing policy, program, or operation of the agency. However, in a note following the provision, OGE observes that a career employee may receive compensation for “teaching, speaking, or writing on a subject within the employee's discipline or inherent area of expertise based on his educational background or experience even though the [activity] deals generally with a subject within the agency's areas of responsibility.” But this textual note does not lessen the applicability of other requirements of section 807, notably that the invitation to engage in the activity must not have been extended to the employee primarily because of his official position or tendered, directly or indirectly, by a person or entity that has interests that may be affected substantially by the performance or nonperformance of the employee's official duties. The circumstances of the invitation and the identity of the inviter are as important as the subject matter of the activity.

Determining whether an invitation was prompted by official position requires an inquiry into whether the invitation to participate in the outside activity would not have been forthcoming had the employee not held the status, authority, or duties associated with the employee's Federal position. Resolving whether the inviter has interests that may be affected substantially by the performance or nonperformance of the employee's official duties depends upon whether it is reasonable to assume that the invitee may become involved in a matter substantially affecting the inviter, or whether the chance of such intervention is simply a remote and speculative possibility. These judgments are at times difficult and capable of reasonable debate.

Ascertaining whether the subject matter of the proposed activity deals significantly with a current or recent assignment often may be particularly difficult given the technical scientific nature of the research conducted or funded by the NIH. For example, only a trained expert could discern whether a scientist engaged in basic research on the molecular basis for the development of skin cancer could be approved to lecture for compensation on the etiology of acute lymphocytic leukemia. The analysis would focus on whether the presenter, in discussing the latter subject, would draw substantially on the knowledge gleaned from the former. Parsing through biomedical jargon to exclude the possibility of a significant overlap is not a task to which the current NIH ethics program is well-suited.

This analytical framework is comprised of requirements that apply across the executive branch. While the framework may be capable of being applied readily at other agencies, historically NIH has confronted unique challenges in implementing these executive branch-wide requirements. In its recent review of the NIH ethics program, OGE noted that, in examining outside activity requests, its reviewers generally were not in a position to identify potential conflict of interest situations because a lack of scientific expertise prevented them from determining how the employees' official duties may have related to their outside consulting activities. The Office of Government Ethics observed that a case-by-case approach utilizing the executive branch-wide standards has not been adequate to protect the reputation of the NIH and its employees. It strongly recommended that the Department develop supplemental regulations to address the kinds of consulting activities that have raised integrity concerns at the NIH.

This rule in fact expands upon that recommendation by addressing other activities that may pose similar concerns. Compensated teaching, speaking, and writing activities when performed by an NIH scientist for a substantially affected organization or a supported research institution can be no less troubling to the public than employment or consulting with these entities. Where biomedical research and publication activities are involved, any financial connection to affected industries may be perceived adversely. The British charitable trust, Sense About Science, in a recent working paper on scientific peer review observed this phenomenon in the context of sponsored research, stating that often “critical commentators simply emphasi[z]e the source of research funding in order to imply that the researcher's findings may be unreliable in some unspecified way.” Sense About Science,Peer Review and the Acceptance of New Scientific Ideas(2004), p. 18, available atwww.senseaboutscience.org.uk/.

For the NIH, section 807 does not adequately address this problem. Steps have been taken to incorporate review by a panel of technical advisors into the outside activity approval process in order to verify that the subject matter of a proposed activity is not related to official duties within the meaning of section 807. Efforts to augment training and guidance on the section have been initiated, and additional staff resources have been committed to its implementation. However, neither the addition of scientific expertise, nor training, nor improved administration can avoid the result that section 807 at times permits activities that members of the public might intuitively suppose are prohibited. For example, under current law, an NIH intramural researcher who proposes to deliver a paid lecture on general scientific topics within her inherent area of expertise for a drug company or a grantee university potentially may be allowed to do so if the various tests under section 807 and other applicable provisions are satisfied. Explanations—such as the lecture would not focus on any current or recent research; or the drug company did not have a product affected by her research; or although the university received a grant from her institute, she was not responsible for extramural funding decisions—may be perceived as legal technicalities.

Section 5501.109(c)(1)(ii) addresses this inherent perception problem and solves the difficulty of evaluating scientific content under the “relatedness” test by targeting the prohibition to those sources of compensation for teaching, speaking, and writing activities that are most directly connected to these identified problems, i.e., substantially affected organizations, supported research institutions, health care providers or insurers, or related trade, professional, or similar associations. These sources of compensation by definition have interests that are affected by NIH programs, policies, and operations and may be perceived as exerting influence on an employee's governmental actions whenever a financial relationship exists. Recent press accounts alleging NIH employee participation as compensatedindustry spokespersons or as authors of articles or other presentations that purport to endorse the benefits of specific products highlight this concern. Moreover, these entities, whether in industry or academia, are among those most likely to ask an NIH employee to speak or write on technical subjects related to their official duties, thus presenting the analytical quandary previously described when applying the “subject matter” part of the “relatedness” test in section 807.

Although stringent limitations on outside activities have been imposed, the Department is especially mindful of the need for substantive interaction within the scientific community. As the National Academy of Sciences has stated:

[S]cience is inherently a social enterprise—in sharp contrast to a popular stereotype of science as a lonely, isolated search for the truth. With few exceptions, scientific research cannot be done without drawing on the work of others or collaborating with others. ... The object of research is to extend human knowledge of the physical, biological, or social world beyond what is already known. But an individual's knowledge properly enters the domain of science only after it is presented to others in such a fashion that they can independently judge its validity. This process occurs in many different ways. Researchers talk to their colleagues and supervisors in laboratories, in hallways, and over the telephone. They trade data and speculations over computer networks. They give presentations at seminars and conferences. They write up their results and send them to scientific journals, which in turn send the papers to be scrutinized by reviewers. After a paper is published or a finding is presented, it is judged by other scientists in the context of what they already know from other sources. Throughout this continuum of discussion and deliberation the ideas of individuals are collectively judged, sorted, and selectively incorporated into the consensual but ever evolving scientific world view. In the process, individual knowledge is gradually converted into generally accepted knowledge. * * * The social mechanisms of science do more than validate what comes to be known as scientific knowledge. They also help generate and sustain the body of experimental techniques, social conventions, and other “methods” that scientists use in doing and reporting research. * * * Because they reflect socially accepted standards in science, their application is a key element of responsible scientific practice.

National Academy of Sciences,On Being a Scientist.(Washington, D.C.: National Academy Press, 1994). Therefore, it is important to observe that the impact of the regulatory ban on outside activities is mitigated in several significant respects, through a transition period, a waiver provision, textual exceptions, and future actions that the Department has committed to undertake.

First, the prohibition provides for a grace period to allow employees responsibly to conclude outstanding obligations. Employees may continue to engage in outside activities that would otherwise be prohibited for a period not to exceed 30 days from the effective date of the rule, and extensions of time for a maximum of 90 days from the effective date may be granted for good cause.

Second, a process exists under § 5501.106(e) for the designated agency ethics official to waive the application of the across-the-board rule in appropriate circumstances.

Third, as to the teaching, speaking, writing, and editing restrictions, it should be stressed that the ban reaches only compensated activities; travel reimbursement will be permitted.

Fourth, the NIH has determined that current policies and practices governing permissible official duty activities involving speaking or lecturing should be revised. Consequently, the NIH has decided to develop means to ensure that NIH scientists' knowledge continues to be conveyed to the scientific community at large. The NIH will act administratively to accommodate, as official duty activities, those speaking opportunities that might previously have been considered less directly connected to agency mission. The NIH will consider expanding the availability of scientists to appear before relevant audiences and organizations at government expense, when appropriate, or through agency acceptance of travel reimbursement from non-Federal sources under 31 U.S.C. 1353, where permitted.

Fifth, the regulations contain exceptions designed to facilitate professional obligations and certain academic endeavors. These exceptions partially lift the absolute bar on outside activities with supported research institutions and other organizations (except substantially affected organizations) described in § 5501.109(c)(1), but they do not affirmatively permit an activity that would otherwise violate Federal law or regulations, including 5 CFR parts 2635, 2636, and 5501. Specifically, exceptions are provided that will allow participation in pursuits that are critical to maintaining technical proficiency, professional licenses, and academic credentials and disseminating scientific information, such as teaching involving multiple presentations at academic institutions, providing individual patient care, moderating or presenting at continuing professional education programs, and writing or editing scientific articles, textbooks, and treatises that are subjected to scientific peer review or a substantially equivalent editorial review process. The rule also contains exceptions for employment with, providing professional or consultative services to, or teaching, speaking, writing, or editing for, a political, religious, social, fraternal, or recreational organization. The rule also recognizes that individuals may be employed in non-problematic roles with outside entities such as providing clerical assistance, janitorial services, or unskilled labor.

The exception for moderating or speaking at continuing professional education programs extends not only to sessions conducted for members of professions that impose licensure and program accreditation requirements, but includes events at which scientists, such as chemists or microbiologists, gather to share new insights and findings in their respective fields, provided that the educational events are substantially equivalent to those frequented by their professionally licensed colleagues.

The licensing and program accreditation infrastructure established by certain learned professions generally has not been adopted by doctorates in scientific research. Most professional groups have promulgated standards for their educational programs that are designed to avoid conflicts, commercial promotion, and control by industry sponsors. See, for example, American College of Surgeons Guidelines for Collaboration of Industry and Surgical Organizations in Support of Research and Continuing Education, available atwww.facs.org/fellows_info/statements/st-36.html;American Society of Consultant Pharmacists Guidelines for Industry Support of ASCP Educational Activities, available atwww.ascp.com/public/pr/guidelines/indsupp.shtml;and the discussion generally in the Food and Drug Administration publication entitled “Final Guidance on Industry-Supported Scientific and Educational Activities; Notice” at 62 FR 64074, Dec. 3, 1997. These groups police educational activities at which NIH employees may be asked to speak through strict policies limiting industry support to unrestricted educational grants. To provide a similar assurance in all contexts, including at gatherings convened by scientists and researchers from various academic disciplines, the regulations explicitly negate the exception if a substantially affected organization plays a role other than that of a donor of an unrestricted educational grant.

In addition, in order to ensure that the exception is limited to continuing professional education or similar programs, as intended, and not interpreted to encompass every speaking occasion that has some educational content or instructional benefit, the regulation confines the exception to accredited programs or, in the case of a profession or academic discipline whose members are not subject to licensure and which does not have program accreditation requirements, an education program determined by the designated agency ethics official or his designee or, in consultation with the designated agency ethics official or his designee, the NIH Director or the NIH Director's designee to be substantially equivalent to an accredited continuing professional education program.

In determining substantial equivalency for these purposes, a number of factors may be considered. Among them would be whether the education program is sponsored by a regional, national, or international organization that serves the interests of scientists or researchers in a specific discipline (e.g., neuroscientists or experimental biologists). Another attribute would be whether, as part of its mission, the program sponsor has a stated goal of ensuring that audience members remain current with respect to the latest scientific developments in their field of interest. Also important is the extent to which the sponsor regularly holds meetings that attract presenters and panel participants who are renowned for their expertise in the topics covered. Similarly critical is whether the education program is characterized by sufficient academic rigor and known within the scientific community as a venue that enables scientists to disseminate and exchange the latest information, particularly, among different sub-disciplines (e.g., inorganic chemistry as opposed to organic chemistry). An education program conducted by a well established sponsor that has a longstanding reputation for presenting refereed papers and other scientific discourse of high caliber and which attracts, from around the globe, attendees of diverse viewpoints within the relevant discipline would be the paradigm.

The regulation includes an exception for writing activities subjected to scientific peer review or substantially equivalent editorial processes. Scientific peer review is commonly understood in principle, with the primary purposes being to “evaluate scientific and technical merit,” “screen for obvious errors in methodology and reasoning,” and “ensure that the research is novel and “important”' within the relevant discipline. Effie J. Chan, Note, The “Brave New World” of Daubert: True Peer Review, Editorial Peer Review, and Scientific Validity, 70N.Y.U. L. Rev.100, 119 n.121 (1995). The concept of scientific peer review also generally involves the application of standards governing scientific misconduct and research integrity.E.g.,International Committee of Medical Journal Editors,Uniform Requirements for Manuscripts Submitted to Biomedical Journals: Writing and Editing for Biomedical Publication(2004), available athttp://www.icmje.org.HHS recognizes that actual editorial processes may vary in practice, for example, in terms of number of levels of review and the extent to which the publisher or journal relies on outside reviewers. Therefore, the exception is intended to cover writings subjected to any scientific peer review or substantially equivalent processes that are designed to ensure that the material disseminated is scientifically accurate, has technical merit, demonstrates originality, evinces an important contribution to the body of knowledge, and adheres to research and scientific conduct standards generally accepted within the relevant discipline.

Section 5501.110Prohibited Financial Interests Applicable to Employees of the National Institutes of Health

New § 5501.110 creates, for employees of the NIH who file either a public or confidential financial disclosure report, a prohibited financial holdings regulation that bars owning a financial interest, such as stock, in substantially affected organizations. In accordance with 5 CFR 2635.403(a), the Department has determined that the acquisition or holding of these financial interests would cause a reasonable person to question the impartiality or objectivity with which NIH programs are administered.

Public and confidential filers by definition are senior officials or other employees whose duties involve the exercise of significant discretion in certain critical areas of agency operations. Section 5501.110 is similar to an existing financial holdings restriction applied to FDA employees that dates back to 1972. The current version of the restriction applicable to FDA employees was part of the HHS Supplemental Ethics Regulation as it was first issued in 1996, and is found at § 5501.104. Since the enactment of the HHS Supplement, the work of the NIH has been determined to pose similar unique challenges for the agency ethics program. NIH employees, like FDA employees, participate in particular matters that substantially affect significant sectors of the United States economy, in particular, the pharmaceutical, medical device, and biotechnology industries. Even the food and beverage sector that is more associated with the FDA has begun to come within the NIH sphere through research on obesity and other diet-related conditions. Many NIH employees have access to confidential commercial information and trade secrets, the misuse of which can have serious financial consequences. Unethical conduct in this context, including misuse of information, could have serious public health consequences. In sum, the NIH has a compelling need to monitor, and impose reasonable prophylactic restrictions on, the financial ties between NIH employees and the vast number of entities that are substantially affected by NIH programs.

Therefore, § 5501.110 creates a prohibited financial holdings rule that serves the above-described interests and relieves the NIH of the significant administrative burden of resolving many conflict of interest problems on a case-by-case basis. However, § 5501.110 is narrowly tailored in three important respects. First, § 5501.110 distinguishes between interests in organizations that are substantially affected by NIH programs, policies, or operations,i.e., those organizations principally involved in the pharmaceutical and biotechnology industries, and those interests that are not in such organizations. Second, § 5501.110 imposes the strictest limitations on employees whose duties carry the greatest potential for conflict of interest,i.e., those employees who are required to file either a public financial disclosure statement or a confidential financial disclosure statement, pursuant to 5 CFR part 2634. Third, § 5501.110 incorporates a mechanism to exclude certain confidential filers or classes of confidential filers from the prohibited holdings requirement if the across-the-board prohibition is deemed unnecessary to ensure public confidence in the integrity of agency operations and their positions do not fall in certain enumerated categories nor entail responsibilities that are likely to pose conflicts related to financial holdings.

While the new rule prohibits public and confidential filers at the NIH from holding or acquiring any interest in a substantially affected organization, all other NIH employees (as well as those confidential filers excluded fromcoverage by the rule) will be subject to a $15,000 limit on the holding or acquisition of such interests and certain other restrictions. Currently, in order to avoid a conflict of interest, these employees must monitor their work activities and know the identity and value of their holdings at any given moment. A regulatory exemption at 5 CFR 2640.202 allows employees to work on specific party matters, such as contracts, grants, investigations, or clinical trials, as long as the value of the affected stocks does not exceed $15,000, and on a general matter, such as rulemaking or policy determination, if the value of any one affected holding does not exceed $25,000, subject to a $50,000 cap when cumulating all affected interests. However, if the asset value exceeds these thresholds, employees must recuse from official participation in particular matters that would have a direct and predictable effect on the financial interests of the companies in which they are invested. These monitoring and recusal responsibilities are exacerbated by the increasing number of mergers, acquisitions, joint ventures, partnerships, intellectual property licensing agreements, and even name changes, particularly within the biotechnology and pharmaceutical industries that, on any given day, may make it difficult to know whether one has a conflict to avoid. By imposing a $15,000 cap on such holdings, the employee, the NIH, and the public can be better assured that the participation by NIH employees in their respective work assignments, whether specific or general in scope, does not pose a conflict created by stock holdings. The $15,000 cap will adjust automatically to any change in thede minimisexemption limit for matters involving parties at 5 CFR 2640.202(a).

Although the dollar amounts in the two provisions are linked, substantively they differ in an important respect. Not all financial interests valued at $15,000 or less will be covered by the OGE regulatory exemption. For example, although the NIH exception permits a non-filer to hold a financial interest in a non-publicly traded company (assuming all the other criteria in the section are also satisfied), the OGE regulatory exemption only applies to securities in publicly traded companies or long-term Federal Government or municipal securities. Accordingly, NIH employees are reminded that even though § 5501.110 may allow retention of certain assets that would otherwise be prohibited, the financial interest may nevertheless be problematic under 18 U.S.C. 208. Absent a regulatory exemption that specifically addresses the financial interest, a recusal, a divestiture, or an individual waiver may be required.

The prohibitions relating to financial interests will apply to the spouses and minor children of NIH employees. Inasmuch as the financial interests of these relatives are imputed to employees and pose identical conflicts concerns, the Department has made the determination, pursuant to 5 CFR 2635.403(a), that there is a direct and appropriate nexus between this prohibition as applied to spouses and minor children and the efficiency of the service. It should be noted, however, that § 5501.110 is not intended to prohibit employment by spouses and minor children in the affected industry sectors, although any actual or apparent conflicts of interests created as to NIH employees by such employment must be resolved under other applicable provisions of 5 CFR part 2635.

Section 5501.110(e)(1) permits the holding of financial interests acquired through employment with a substantially affected organization. This exception is intended to parallel the FDA provision at amended § 5501.104(b)(1) that excepts pensions or other employee benefits derived from employment with a significantly regulated organization. This exception is necessary to facilitate recruitment of qualified scientific and professional personnel, many of whom may have begun their careers in industry. Because NIH employees, as opposed to spouses and minor children of employees, are generally prohibited under § 5501.109 from engaging in current employment with a substantially affected organization, the provision will primarily apply to financial interests acquired through employment prior to joining the agency. However, it may apply in the limited number of instances in which NIH employees are permitted to have a concurrent employment relationship with a substantially affected organization, such as a clerical position excepted by § 5501.109(c)(3)(iii), that may provide a pension or other employee benefits.

Section 5501.110(e)(2) excepts financial interests in substantially affected organizations that result from holding an interest in certain publicly traded or publicly available investment funds or a widely held pension or similar fund. To qualify for this exception, the fund must not be self-directed and must not have an express policy or practice of concentrating its investments in substantially affected organizations. For example, a widely diversified mutual fund generally would be a permissible holding, even though the fund holds some stocks of substantially affected organizations whereas a sector fund that focuses on the pharmaceutical industry would not.

Furthermore, § 5501.110(e)(3) provides NIH employees with the opportunity to request an individual exception for certain financial interests. Where the employee can demonstrate exceptional circumstances, the NIH may allow an individual to hold a financial interest in a substantially affected organization, provided that the application of the financial interest prohibition is not necessary to ensure public confidence in the impartiality or objectivity with which NIH programs are administered or to avoid a violation of 5 CFR part 2635.

Pursuant to 5 CFR 2635.403(d), an employee shall be given a reasonable period of time, considering the nature of the employee's particular duties and the nature and marketability of the interest, to divest a financial interest prohibited by paragraphs (c) and (d) of this section. Except in cases of unusual hardship, as determined by the NIH deputy ethics counselor in consultation with the designated agency ethics official or his designee, a reasonable period shall not exceed 90 days from the date divestiture is first required. For those current employees who will be affected immediately by the promulgation of this rule, it is anticipated that individual requests for divestiture periods of up to 180 days will be granted upon an adequate showing of good cause, such as difficulties in disposing of non-publicly traded assets or a significant adverse financial impact on the employee, the company, or the securities market. During any period in which the employee continues to hold the prohibited financial interest, the employee remains subject to the restrictions imposed by subpart D of 5 CFR part 2635.

As specified in 5 CFR 2635.403(e), an employee who is required to sell or otherwise divest a financial interest and thereby incurs a capital gain may be eligible to defer the tax consequences of divestiture under subpart J of 5 CFR part 2634. This special tax treatment is unavailable if the employee fails to comply with the requisite procedures and disposes of the financial interest prior to receiving a certificate of divestiture from the Director of the Office of Government Ethics.

Section 5501.110(g), for the reasons discussed previously in connection with the FDA provision at § 5501.104(c), specifies that the requirement to divest a financial interest prohibited byparagraphs (c) and (d) of this section is not triggered until the due date for reporting prohibited financial interests under the applicable fi