[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND
RELATED AGENCIES APPROPRIATIONS FOR 2019
_______________________________________________________________________
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
_____
SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG
ADMINISTRATION, AND RELATED AGENCIES
ROBERT B. ADERHOLT, Alabama, Chairman
KEVIN YODER, Kansas SANFORD D. BISHOP, Jr., Georgia
THOMAS J. ROONEY, Florida ROSA L. DeLAURO, Connecticut
DAVID G. VALADAO, California CHELLIE PINGREE, Maine
ANDY HARRIS, Maryland MARK POCAN, Wisconsin
DAVID YOUNG, Iowa
STEVEN M. PALAZZO, Mississippi
NOTE: Under committee rules, Mr. Frelinghuysen, as chairman of the
full committee, and Mrs. Lowey, as ranking minority member of the full
committee, are authorized to sit as members of all subcommittees.
Tom O'Brien, Pam Miller, Andrew Cooper,
Justin Masucci, and Sarah Doese
Subcommittee Staff
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PART 2
Page
Commodity Futures Trading Commission.......................... 1
USDA Office of the Inspector General.......................... 89
Food and Drug Administration.................................. 199
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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Printed for the use of the Committee on Appropriations
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U.S. GOVERNMENT PUBLISHING OFFICE
32-263 WASHINGTON : 2018
COMMITTEE ON APPROPRIATIONS
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RODNEY P. FRELINGHUYSEN, New Jersey, Chairman
HAROLD ROGERS, Kentucky \1\ NITA M. LOWEY, New York
ROBERT B. ADERHOLT, Alabama MARCY KAPTUR, Ohio
KAY GRANGER, Texas PETER J. VISCLOSKY, Indiana
MICHAEL K. SIMPSON, Idaho JOSE E. SERRANO, New York
JOHN ABNEY CULBERSON, Texas ROSA L. DeLAURO, Connecticut
JOHN R. CARTER, Texas DAVID E. PRICE, North Carolina
KEN CALVERT, California LUCILLE ROYBAL-ALLARD, California
TOM COLE, Oklahoma SANFORD D. BISHOP, Jr., Georgia
MARIO DIAZ-BALART, Florida BARBARA LEE, California
CHARLES W. DENT, Pennsylvania BETTY McCOLLUM, Minnesota
TOM GRAVES, Georgia TIM RYAN, Ohio
KEVIN YODER, Kansas C. A. DUTCH RUPPERSBERGER, Maryland
STEVE WOMACK, Arkansas DEBBIE WASSERMAN SCHULTZ, Florida
JEFF FORTENBERRY, Nebraska HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida CHELLIE PINGREE, Maine
CHARLES J. FLEISCHMANN, Tennessee MIKE QUIGLEY, Illinois
JAIME HERRERA BEUTLER, Washington DEREK KILMER, Washington
DAVID P. JOYCE, Ohio MATT CARTWRIGHT, Pennsylvania
DAVID G. VALADAO, California GRACE MENG, New York
ANDY HARRIS, Maryland MARK POCAN, Wisconsin
MARTHA ROBY, Alabama KATHERINE M. CLARK, Massachusetts
MARK E. AMODEI, Nevada PETE AGUILAR, California
CHRIS STEWART, Utah
DAVID YOUNG, Iowa
EVAN H. JENKINS, West Virginia
STEVEN M. PALAZZO, Mississippi
DAN NEWHOUSE, Washington
JOHN R. MOOLENAAR, Michigan
SCOTT TAYLOR, Virginia
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\1\}Chairman Emeritus
Nancy Fox, Clerk and Staff Director
(ii)
AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND
RELATED AGENCIES APPROPRIATIONS FOR 2019
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Wednesday, March 7, 2018.
COMMODITY FUTURES TRADING COMMISSION
WITNESS
J. CHRISTOPHER GIANCARLO, CHAIRMAN, U.S. COMMODITY FUTURES TRADING
COMMISSION
Mr. Aderholt. Good morning, and the subcommittee will come
to order. And this is our first hearing for 2018 for the Ag
Subcommittee where we will be looking at the 2019 budget
request for the Commodities Future Trading Commission.
So, while it has been an interesting and we have had a busy
year so far with ongoing discussions and negotiations revolving
around funding levels for the current fiscal year, our full
committee chairman, Mr. Frelinghuysen, has requested that we
begin our work and start reviewing the President's budget
request for 2019. And during this extremely busy time for my
colleagues, I appreciate my colleagues for taking time to be
here, of course, and certainly our ranking member, Mr. Bishop.
This is my sixth year to chair the Ag Subcommittee of
Appropriations, and as I have done in past years, we are
establishing goals for the subcommittee as we make our way
through the fiscal year 2019 appropriations process: The first
goal is to bolster prosperity and economic wellbeing in rural
America and the farm economy; the second goal, conduct fair and
transparent oversight to agencies' activities and public
resources; third, promote economic growth through effective and
efficient regulation and minimization of regulatory overreach;
and, last, and certainly not least, to protect the health and
safety of people, plants and animals.
The Commodity Futures Trading Commission continues to face
new challenges as an ever-shifting swaps, futures, and option
markets adapt to evolutions in technology and to the new actors
which enter and operate within these markets. Meanwhile, we so
often hear the phrase in my home State of Alabama that the
agency must maintain its roots that grew out of the agriculture
sector.
We will discussion the President's fiscal year 2019 budget
request of $281.5 million and other matters related to the
Commission. The President's request, budget request, is in line
with the Commission's own request and includes the repeated
proposal many prior administrations have made to fund a portion
of the Commission with user fees, an issue that we think should
be left up to the authorizing committee to debate that.
The CFTC has been a popular topic of conversation over
years, and we will discuss some of the management and budget
issues that have arisen during and prior to your term as
Chairman and what you have done to address them. Additionally,
I am sure that some policy issues will arise, not the least of
which will be the topic of bitcoin futures and
cryptocurrencies.
Briefly, I would like to recognize one of your
accomplishments, Mr. Chairman, that I have brought up over the
years, and it is related to the topic of leasing costs and
related issues. Last year, you informed the committee that you
were able to actually save money on your Kansas City office
lease over its lifetime, and the committee wants to commend you
for this action, and it is one that I requested of your
predecessors on numerous occasions. And we will revisit this
matter to ensure that we actually see that it materializes in
savings.
With regard to new developments in the marketplace, I have
spoken before on the need for the Commission to invest in
technology, and that is why we have included a set-aside
specifically for this purpose each fiscal year of my
chairmanship. This is the best way for the Commission to
leverage its resources in terms of enforcement and allowing for
new innovation in the marketplace. Simply hiring more people
won't stop the advanced degrees to which algorithmic trading
and cryptocurrencies go to rip-off customers inside the
marketplace.
Over the past 8 years, we have had a healthy debate on this
subcommittee over the size of the swap markets. I was glad to
see the Commission weighing in on this matter and look forward
to exploring it further. I think most everyone on this
subcommittee was glad to see a single market could equate to
several times the size of the entire world's economy, and very
curious of how that happens.
But, Chairman Giancarlo, we look forward to discussing
these matters with you as we start our hearing today. There is
a lot of work before this Congress and this administration and
your agency in order that we keep moving in the right
direction.
Finding the right balance between over-regulation and a
safe and effective marketplace is essential, and it fits within
the main focus of this subcommittee, which is to find the right
size for your agency's budget. Again, thank you for being here,
and we look forward to the discussion today and as we go
through the members as they ask questions.
And before I do recognize the ranking member, Mr. Bishop,
for his opening statement, I would remind everyone that we will
try our best to strictly adhere by the 5-minute rule. And when
you are asked to speak, please push the talk button on your
microphone, and then you will be ready to go.
Mr. Bishop, thank you again for your presence and for your
work on subcommittee, and the floor is yours.
Mr. Bishop. Thank you very much, Mr. Chairman. And I
appreciate your cordiality and our working together.
I would like to again take this opportunity to welcome Mr.
Giancarlo, Chairman, to our subcommittee.
We find ourselves again in the uncomfortable position of
having a hearing on the agency's 2019 budget request when we
haven't finalized the 2018 appropriation.
Last year, the CFTC and OMB differed on the funding level,
but this year, it appears that the request is on the same page,
which makes our jobs a little easier. As I said last year, CFTC
is extremely relevant to our farmers, our ranchers, and persons
and other industries who use financial instruments to hedge
their risk. I don't want to be the prophet of doom and gloom,
but we need to understand the damage that our economy suffered
in the Great Recession. We lost about 8\1/2\ million jobs. The
unemployment rate increased from 4.7 to 10.1 percent in October
of 2009. Ten million families lost their homes, and nearly a
quarter of a million small businesses had to close their doors
for good. Many on Wall Street and elsewhere tell us that those
days will never come again, and we hope that that is true. We
don't know that, and the historical record may suggest
otherwise.
Dodd-Frank has been the biggest defense that we have had
against another catastrophe.
I know, Chairman Giancarlo, that you are not one who wants
to undo or unravel Dodd-Frank, and we thank you for that. You
have reached across the aisle to me and to my colleagues, and I
also thank you for that.
I look forward to working with you, and I look forward to
your testimony today. And I thank you for the opportunity to
welcome the Chairman, Mr. Chairman.
And at this time, I will yield back my time.
Mr. Aderholt. Thank you, Mr. Bishop.
Chairman Giancarlo, without objection, your entire written
testimony will be included in the record, and I recognize you
now for your statement, and then we will proceed with
questions.
Mr. Giancarlo. Thank you, Chairman Aderholt, and thank you,
Ranking Member Bishop and members of the subcommittee.
For over a century, U.S. business and farmers have relied
on commodity futures and derivative markets to hedge their cost
of production. These markets have allowed farmers and ranchers
to control production risk and commodity prices so that
Americans, ordinary Americans, can find plenty of food on
grocery store shelves.
These markets influence the price and availability of
everything from heating fuel in American homes, the energy used
in factories, the interest rates that borrowers pay on home
mortgages, and the returns that workers earn on their
retirement savings. Derivatives serve the need of society to
help moderate price, supply, and other commercial risks to free
up capital for economic growth, job creation, and overall
prosperity.
Our fiscal year 2019 budget reflects the true needs of a
policy setting and civil law enforcement agency to ensure that
our derivative markets operate effectively. At a time when
these markets are rapidly transforming with new digital
technologies, this budget will provide the resources we need to
oversee markets that are safe and competitive at home and
abroad.
In fiscal year 2019, we are requesting $281.5 million and
716 full-time equivalents. This is an increase of $31.5 million
and 46 FTEs in current resources. It is the same level of
funding that the Commission requested in fiscal year 2018. When
I appeared before this subcommittee last year, I spoke about
our approach to budgeting. The approach is based upon my
experience in the private sector, where each dollar budgeted
had to serve the core mission. It is not based on using a prior
year's budget and adding a percentage.
So, working with our leadership team, we built this budget
up from zero. Every dollar we seek properly serves the agency's
mission to foster open, transparent, competitive, and
financially sound markets free from fraud and manipulation,
while respecting the American taxpayer through careful
management of our resources. And I am certain, as I sit here
today, that the $281.5 million is the right level of funding
for the CFTC.
Since becoming Chairman, I have made efforts to normalize
operations and maximize resources. That means a return to
greater care and precision in rule drafting, more thorough
econometric analysis, and a right size docket of new rules and
regulations to be absorbed by the marketplace.
As you know, modern financial technology is transforming
our derivative markets. We must respond with a regulatory
framework that stays ahead of the curve to harness those
innovations. The CFTC seeks appropriate funding to set and
enforce rules that foster innovation while promoting market
integrity and confidence. This includes resources for our
LabCFTC initiative to prepare us to be a 21st century digital
regulator. The budget request also seeks to boost the CFTC's
analytical expertise and monitoring of systemic risk,
especially with central counterparty clearinghouses. This
includes the expansion of sophisticated econometric and
qualitative analysis for risk modeling, stress testing, and
other stability-related evaluations.
As market regulators, we must take every step to thwart
cyber attacks on the world's financial markets. That is why, in
fiscal year 2019, we will devote more resources to
cybersecurity, especially our examination of critical market
infrastructure providers. The day after the White House
announced its intention to nominate me as chairman, I issued a
warning to those who would manipulate America's derivative
markets. I said: There will be no pause, no let-up, and no
reduction in our duty to enforce the law and punish wrongdoing;
the American people are counting on us.
Full funding of our budget request will allow us to
continue to send a clear signal to the marketplace that we will
punish bad behavior and compensate its victims.
In closing, Mr. Chairman, I am reminded of a quote from
Winston Churchill: We shall not fail or falter. We shall not
weaken or tire. Give us the tools, and we will finish the job.
I am grateful for your consideration of our budget request.
With the right tools, we will do the job of overseeing American
markets that are safe and competitive, markets that help grow
our economy and increase our prosperity. Thank you.
[The statement of J. Christopher Giancarlo follows:]
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Mr. Aderholt. Thank you, Mr. Chairman.
Let me start out talking a little bit about bitcoin and
cryptocurrencies. The advent of new futures approved just last
year for bitcoin and other cryptocurrencies seem to have taken
up the headlines recently. And we read stories of people
mortgaging their homes to invest in the market and those that
have thrown away their bitcoin keys wanting to go through the
city dumps and try to recover them in some way. Millionaires
were made and lost overnight.
You briefly mentioned the steps you are taking to regulate
the market in your written statement. Can you go a bit further
into detail as to what role your agency plays regarding the
regulation of this market and what other role agencies have?
VIRTUAL CURRENCY
Mr. Giancarlo. Yes, Mr. Chairman. Thank you for that. You
know, the amount of press coverage on this whole issue of
virtual currencies far outweighs the impact of the entire
marketplace on either the U.S. or the global economy.
Nevertheless, it is, as you say, very, very much in the news.
The approach we are taking at the CFTC is really sixfold.
And briefly--and then I will come back to it--it is to assert
our legal authority where appropriate; increase our staff
competency in the entire matter, our understanding of these
products; and then a very robust consumer education effort to
make sure what we understand is translated to the marketplace;
very aggressive enforcement against fraud and manipulation in
these markets; and then interagency cooperation, working very
carefully with our fellow regulators.
And let me just go back and talk about that a little bit.
As you know, the CFTC's authority is to regulate derivative
markets comprehensively. That means setting standards for
operation of trading platforms in derivatives, all of their
financial adequacy, system safeguards, cyber requirements,
customer handling, the full gamut, when it comes to derivative
markets, so derivatives on any given asset, in this case,
virtual currencies.
When it comes to underlying spot markets, whether those are
markets for commodities, whether they are markets for precious
metals, we do not have regulatory authority. What we do have is
fraud and manipulation authority, the ability to bring
enforcement actions for fraud and manipulation in underlying
markets. That has been the case for our history at the CFTC,
and that is now how we approach virtual currencies. So, in the
case of the two launched bitcoin futures at the CME and CBOE,
we have comprehensive regulatory oversight. In the case of
underlying cash markets--well, they are not really cash markets
because they are trading in bitcoin--what we will call spot
markets in bitcoin, our authority is limited to enforcement for
fraud and manipulation.
We have been active on both of those levels. And in the
case of fraud and manipulation, we brought three cases just in
January alone. And just yesterday, a Federal judge in New York,
in response to a motion to dismiss by the defendants in this
case, ruled in favor of the CFTC and confirmed our jurisdiction
in these products as commodities.
In the case of the bitcoin futures exchanges, the two that
I mentioned, our approach to this is comprehensive. So,
whereas, spot bitcoin markets are, you might say, dark markets,
in the case of bitcoin futures, they are lit markets. There is
public transparency in our weekly Commitment of Traders report,
but there is full regulatory transparency in terms of everybody
who is transacting on those markets, and we know their
positions. We know they are--it is not an anonymous market as
it is, or a pseudo-anonymous market, as it is in the underlying
spot markets. It is a fully disclosed market. It is a margined
market. It is a full KYC, know your customer, antimoney
laundering marketplace. So they are comprehensively regulated
and are highly margined. And I might mention, as a final point,
in the recent market disruption on the 5th and 6th of February,
not a single margin breach in bitcoin futures market. So that
is our jurisdiction, and that has been our approach in those
areas, Chairman.
Mr. Aderholt. Let me move quickly. Recently, you made some
comments regarding the right sizing of the swaps markets, and,
of course, it is refreshing to see someone else that raises
those questions that this subcommittee has raised in the past
about the notional size of swap markets. In fact, I believe you
mentioned these questions in your recent speech at a derivative
conference in New York.
Following the financial crisis of 2008, the swaps market
became a topic of much debate in the public discourse. And the
only number being thrown around was that of notional value. At
the time, the number discussed was in excess of $600 trillion.
Can you take just a minute, before I recognize Mr. Bishop,
and just explain the difference between notional value and the
new metrics you are using and the number associated with each?
ENTITY-NETTED NOTIONALS
Mr. Giancarlo. So thank you for that. In fact, it was this
committee who wrote to the CFTC a few years ago and asked us if
we could have a more precise measurement of what the true risk
presented by these derivative markets are, and it was one of
the first tasks that I assigned to our new chief economist when
he joined the agency to do some research and see if we could
provide some light here.
For years, the notional value of these derivative markets
have been cited, often in requests for funding and other areas
in the hundreds of trillions of dollars. And, yet, as we have
long known in the marketplace, many of those positions are
netted against each other to the neutral position. So, if you
ask yourself, what is the true risk, well, the analysis we
did--and we call it entity-netted notional, is our new
nomenclature--applying this approach to $179 trillion of
interest rate swaps, nets that down to $15 trillion. And if you
use the $15 trillion, the whole thing suddenly makes sense
because the measurement of the size of the U.S. Treasury market
is $16 trillion. The size of the U.S. mortgage market is $15
trillion. The size of the U.S. corporate bond market is $12
trillion. Suddenly, the interest rate swaps market at $15
trillion makes sense in comparison to markets that we have
normally sized in these ways. Suddenly, this $100 trillion
measure that has been put on the swaps markets I think comes
down to its true risk element and what it is vis-a-vis the
other markets.
Now, this notion has been put forward in scholarly papers.
We are looking for peer review. I think there are some good
uses for this, but I don't think it necessarily addresses every
issue. So I don't want to say that we have come up with the
last word on this, but we have certainly come up, I think in
some cases, with the first word on this in getting to something
that is really the true measurement of the risk profile of our
global derivative markets.
Mr. Aderholt. As my time is far gone, Mr. Bishop.
Mr. Bishop. Thank you very much, Mr. Chairman.
Mr. Giancarlo, in the hearing last year, I asked for your
views on using user fees to supplement or fund the CFTC, and
you were commendably frank, as usual, and you said, quote: I am
very concerned that imposing transaction costs on our markets
will contribute to greater liquidity challenges than we now
have. And so I do not support user fees.
The 2019 budget request, which OMB and CFTC both support,
calls for user fees to pay for the $31.5 million increase over
the fiscal year 2017 level of $250 million. It looks like the
administration moved from its 2018 position of a freeze at $250
million in exchange for your endorsement of a user fee of $31.5
million.
Do you know now support user fees? And I would note that
you may get the short end of the deal because Congress has been
resistant for decades to CFTC user fees. If that continues to
be the case, is the administration's position that the budget
should be $250 million?
USER FEES
Mr. Giancarlo. Thank you, ranking member. If I may begin
with just a distinction between user fees as a whole and then
perhaps a subset of that, which would be transaction fees. I
have long been opposed to transaction fees and remain opposed
to transaction fees because they provide a tax on the use of
these risk-hedging markets. And my concern there is, that we--
when you think about the very folks that this committee is
concerned with, farmers and ranchers, you know, they face an
array of risk-hedging mechanisms. One, of course, is our
commercial futures--ag futures markets. Another, in cases where
they are interchangeable, is crop insurance. And we, in a
sense, don't want to put a tax on one that is not on the other.
We want them to make choices in their economic interests and
not face a taxation in the form of transaction fees.
Mr. Bishop. That seems like it is just nomenclature: a user
fee or a tax. I mean, you know, a rose is still a rose. It
seems to me that it is just a matter of calling one a tax and
one a user fee. It seems like they are one and the same because
it goes to the people who actually use it.
Mr. Giancarlo. Ranking Member, I will note that every
administration going back to Ronald Reagan has proposed user
fees. And this administration is in favor as well, similar to
their predecessor, and it is in our budget. At the end of the
day, it is for this committee to decide how much we are funded,
and so our appropriators decide what that is. We will employ
whatever tools our ppropriators and our authorizers put before
us.
Mr. Bishop. I am not going to try to put a wedge between
you and the administration. Let me move on to diversity. At the
last hearing and in the meetings we have had, we discussed
diversity at CFTC. And a couple of questions on the topic.
Could you update us on what the agency has done on diversity,
including recruiting? Could you tell us whether you were able
to offer paid internships the past summer to the 11 students
who accepted internships? Have you had permanent staff from
those internships? Can you describe the strategic workforce
plan that includes increasing minorities and women in positions
at CFTC?
INTERNSHIPS
Mr. Giancarlo. Thank you for that. As we discussed last
time we met, we are committed to a strong diversity program at
the agency, not just in our employment practices but also in
our recruitment efforts. For 2 years now, we have had a
summer--a diversity-based summer internship program.
With our current funding, we have not been able to offer
paid stipends. We would like to think with the budget proposal
before the Committee--we would be able to offer modest, quite
modest, stipends.
Mr. Bishop. Excuse me. You found funds for podcasts in a
frozen budget. And you also spent $365,000 on your fintech
initiative between May and November. Those funds could have
helped pay for the cost of those interns, couldn't it?
Mr. Giancarlo. Well, money is fungible. We do have a core
mission in consumer education. We have a core mission in trying
to stay ahead of the curve in terms of the rapidly changing
nature of these markets. So we believe those were well-spent
funds, but as you know, we are committed to diversity-based
recruitment. And we would like to be in a position, and with
the budget proposal we have before you, we would be able to
offer a modest stipend to interns.
Mr. Bishop. And that is without the user fees?
Mr. Giancarlo. With the budget number of the $281.5 million
that is before the committee, we would be able to.
Mr. Bishop. If you only get the 250 without the user fees?
Mr. Giancarlo. Ranking member, if we only get the 250, we
will be making a lot of hard choices at the agency,
significantly hard choices.
Mr. Bishop. Thank you. I think my time is up.
Mr. Aderholt. Dr. Harris.
Mr. Harris. Thank you very much.
And welcome back. Let me first just followup on something
that we have spoken about before, which is swap dealer de
minimis levels. And I think that you have--you delayed the
effective date of the reduction from $8 billion to $3 billion,
but actually I guess, in response to one of your--to your
response to the chairman, is it because you are looking at this
idea of entity-related notional value and we have been basing
this all on gross notional value? Is that why there is a delay
in what the final ruling will be?
DE MINIMIS THRESHOLD
Mr. Giancarlo. That is not the reason for the delay. The
reason for the delay is, is that any change in that de minimis
will require a commission vote. I only received two additional
Commissioners last September because of the way the
confirmation process went in the Senate. The amount of data to
be analyzed to come to the right conclusion, and then the
process of being able to put something out for notice and
comment just meant we couldn't have gotten it done between
September and December of last year.
So it was my decision as Chairman to say: We will get this
done in 2018. The process has begun of briefing the two
Commissioners on the data sets which we now have through 2017,
and it is good, it is robust data. So I expect to get this done
in a matter of months.
Mr. Harris. And does this entity-netted notional value,
will that enter into it? I mean, it kind of makes sense that
that is the way you should gauge what the risk is of what you
are regulating.
Mr. Giancarlo. So this is an issue that many in the
marketplace feel has gone on for too long. And I think if we
were to use this new metric--which, by the way, is new, and I
do think it requires a degree of peer review and analysis--I
think we would struggle to get this done this year. So I think
the marketplace has a legitimate expectation that we get it
done. I think the entity-netted notionals will take some time
to work its way through the firmament. But there are now a
number of academics who are looking at it and testing it, and I
would hope that a year from now, in a number of other areas
where we have to do risk assessment, it might become the basis
for that.
Mr. Harris. And with regards to the swap dealer de minimis,
is it your feeling that it is a good idea to keep it near the
$8 billion level?
Mr. Giancarlo. Well, I would like to see if we can get to a
unanimous decision. I would like to see if we can do that. So I
would like to hear from my two fellow Commissioners. We will
get it done one way or the other. And if we have to get it done
2 to 1, we will get it done, but I would love to get it done on
a 3-0 vote.
Mr. Harris. Sure. OK. The second issue is something that
regards--something not from under your watch, but with regards
to some of the leases that were issued in the Antideficiency
Act. I know there was a letter I guess sent from the GAO to the
chairman of the committee yesterday--this week--about this
question of whether or not the CFTC has entered into leases
that, because of various provisions that don't limit government
liability, that they would appear to be in violation of the
Antideficiency Act and may require statutory changes or other
things to bring the Commission into compliance. If you would
comment on that.
LEASING ISSUES
Mr. Giancarlo. So we received that letter about 4 o'clock
yesterday afternoon, and I had a brief word with our general
counsel. I haven't had a chance to read the letter itself. I
understand it does open concerns about open liabilities. As you
know, these leases go back to the 1990s and, in some cases, the
early 2000s. It does look like errors were made. I don't want
to shirk responsibility. We will correct what needs to be
corrected. If there are deficiencies to be reported, we will
report the deficiencies, and we will bring ourselves whole in
this.
There have been other issues raised over the last few
years, and in each case, we have done the right thing, reported
the deficiencies, and recently received a clean audit opinion.
So we will take the right steps. I think the bigger issue is
that we are an agency that, years ago, leased too much space,
and that is still something we are fighting with. And as the
chairman noted, we have been able to successfully offload some
of our space in the Kansas City office. We are making a
significant reduction. We are looking to do the same thing in
New York. We have a very active effort to do that. We don't
have as much of a problem in Chicago and in Washington. We will
look to see what we can do, but I take this very seriously. As
a former businessman, that empty space is not a good use of
taxpayer money. So we will try to find a way to continue on the
success we had in Kansas City and do more with it.
Mr. Harris. Well, thank you very much.
I yield back, Mr. Chairman.
Mr. Aderholt. I recognize the gentleman from Wisconsin, Mr.
Pocan.
Mr. Pocan. Thank you, Mr. Chairman.
Thank you for being here today.
If I can follow up on something that the subcommittee
chairman asked around derivatives. So, in the budget, you know,
this is an added responsibility; you went through an extensive
amount of work that you are doing in this area and what areas
you are not in this area.
With the budget that you have, is that sufficient to
continue to do all this work in this new area? And, you know,
what is going to get put aside if not?
ADEQUATE FUNDING
Mr. Giancarlo. Thank you very much. I mean, it is a big
job. The biggest challenge--so great credit to my predecessors;
they got the bulk of the Dodd-Frank swaps reforms done at the
CFTC. We are not only the leading agency in the United States
in terms of completing the workload, but we are the leader
around the world. So we take great pride in that.
But I often think about what is ahead. When Dodd-Frank was
passed, it didn't address cyber. It didn't address algorithm
trading. A lot of the issues we are facing now are what is
coming at us. A lot of what we are trying to do in this budget
is prepare ourselves for this next phase of market evolution,
what I call the digitization of markets. Markets are recently
being driven by computer training and, increasingly, computers
that are using artificial and machine learning to learn from
other activities in the market and then adjust their trading
screens.
So we have a lot to learn from that, which is why we
started our LabCFTC initiative. We have got great people at the
agency, but some people who have been tracking markets for the
last 30, 40 years, not necessarily--despite all that experience
are not necessarily on the cutting edge of where technology is
going. And, you know, when it comes to technologists, we are
competing with some of the biggest, most sophisticated
companies in Silicon Valley and others to get that expertise.
And so LabCFTC gives us a way to learn and then train
ourselves internally. So do I think the budget is the right
number? I have worked this budget very, very hard. I think it
is a responsible budget number. I think it gives us the
resources we need. We may have to talk in the future, but I
think this is the right budget for now and for the mission we
have.
Mr. Pocan. Thank you. And you brought me right to the
second question that I had, which is--and I said this last
year, too--you have established a very good relationship with
your employees. They speak very highly of the relationship they
have built with you. The question is, you know, a lot of the
folks are being rated, so to speak, by other financial
agencies, by private firms. Do you feel that you have been able
to make some progress, the question we asked was, you know, to
keep those people in this very competitive area? How is that
working from a year ago when I asked the question, and do you
need additional resources in this area?
HIRING FREEZE
Mr. Giancarlo. So, with the flat funding we have had for 3
or 4 years, it almost imposes something of a hiring freeze. You
can't backfill. And the problem with that is you can't control
attrition. You can't say, well, we have too many people in this
unit; maybe that unit will suffer more attrition than another.
You have no control. Often, sometimes, it is the very best
people who are recruited away by either competing government
agencies or in the private sector.
Some of our best technologists we have lost recently to
private sector concerns because of the experience they have
gotten at the CFTC. So that is a real challenge.
You know, again, I spent 30 years in the private sector and
14 in a public company working with personnel, and so it is a
big part of my management style to meet frequently. I do
frequent townhalls. I have one coming up in just two weeks with
the agencywide staff. I talk a lot about goals. I try to be
very transparent with personnel at the agency as to what our
mission is, and we spend a lot of time talking about mission.
I will just leave you with one thing. The message I give
the staff is the message that the coach of the New England
Patriots gives to them. And that is every person to their job.
I say: If every person does their job to the level of
excellence, the whole agency will take an approach of
excellence. And not withstanding their loss in the Super Bowl,
they still bring excellence to the game, and that is what we
try to do as well.
Mr. Pocan. And how about specifically to the incentive
question for some of these folks, because if they are being
rated for more money, are you able, with the budget you have,
to be able to do what you need to do to keep the staff?
Mr. Giancarlo. We just reached--and I am very proud of
this--we just reached a 3-year pay package with our union,
first time ever. In fact, when I arrived at the agency, we were
in a dispute with the union. We have gone from dispute to a
very successful 3-year arrangement, and it has in it an up to 3
percent performance-based, merit-based reward for employee
performance.
So we are trying to move more into a reward performance
basis at the agency. And I must say, the union brought the same
goodwill back to the bargaining table that we brought, and I
think that is a recipe for good progress in the future.
Mr. Pocan. Thank you very much.
I yield back.
Mr. Aderholt. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
And, Chairman, good to have you here today. I want to sort
of associate my comments a little bit with the comments of the
ranking member regarding user fees. And you and I have had a
conversation about this as well and the concern being that that
ultimately passes down to farmers and producers in our States
that are already struggling under low commodity prices and, as
you correctly stated, would tax efforts from them to protect
their risk and to hedge and might push them into taxpayer-
funded options. So I appreciate your comments on that.
And I think this committee and this Congress has been
pretty clear over the years that it doesn't support those user
fees, and of course, the good things you are trying to do in
your budget, we will try hard to find general fund dollars to
spend as opposed to taxing the markets and ultimately our
producers.
I want to talk to you a little bit about the plans that the
Fed has to replace CEM with SA-CCR. And, as we know, these are
methodologies for calculating how much capital a bank has to
hold to comply with the SLR rule, or supplemental leverage
ratio, in relation to a cleared option. CEM is a very old risk
insensitive method while SA-CCR is accepted generally to better
gauge risk.
It is my understanding that the Fed intends to move in this
direction, but is likely to do via rulemaking, which interested
parties suggest could take up to 3 years. Meanwhile, markets
are operating in an artificially constrained state because they
are under these old rules. And some say this was evident in the
February market behavior.
So I guess my question for you is, given the increased
volatility we have seen in markets this year, I am interested
in your view of whether this may be an indication that swifter
action is needed than the potential 2- to 3-year rulemaking
process.
CAPITAL REQUIREMENTS
Mr. Giancarlo. Thank you for that, and I think that is a
very perceptive insight. In fact, we do have some anecdotal
information that has come to the agency that, during the 5th
and 6th of February, during that market swoon, suggests we may
have seen the impact of the current form of the supplementary
leverage ratio impacting the ability of larger market makers to
take on positions. And, therefore, the market movement may have
been exacerbated because of the current form of the
supplementary leverage ratio.
And let me just talk about that for a minute. I find myself
in kind of an odd position. I am a Republican who supported the
provision in title VII that says, we want to move bilateral
swaps into central clearing, only to find that some of my
fellow regulators in the system have a supplementary leverage
ratio approach that actually deters moving more products into
clearing. These are at issue.
I think that we made a policy choice in title VII that we
want to see more central clearing of derivatives, and yet in
its current form, the supplementary leverage ratio, which is
not mandated specifically in title VII, has this opposite or
this deterring impact.
So we have got some work to do here. I have been very
candid in my views with folks at the Fed, including a new
Chairman, Powell, and look forward to actually sitting down
with Randall Quarles soon to talk a little bit about this as
well. So I think we can get it right, but we don't have it
right currently.
Mr. Yoder. Well, I think the Fed is heading in that
direction. My concern is that it can take a while for the
wheels of the Fed to turn, and a rulemaking process could take
2 to 3 years. Are you concerned about the length of time it
could take to fix this because we continue to have this
challenge and this arcane requirement that affects, you know,
the options markets at the same time?
Mr. Giancarlo. I must say: I spent 30 years in the private
sector; the length of time things take here in Washington is
just sometimes astounding.
Mr. Yoder. You get it, and I appreciate your work in that
regard. I also want to ask you a little bit about CFTC's
decision last year to approve a variable storage rate on Kansas
City Hard Red Winter wheat. As you know, I am from Kansas. We
are the biggest wheat-producing State in the country, and
America is the biggest wheat-producing country in the world. So
wheat is a critical part of our economy.
And this was a particularly important decision given the
significant disparity between the wheat farmers' local cash
price and futures price. Could you provide the committee with
an update about the current market situation and your views
about how VSR could fully work once implemented and describe
the CFTC's role in implementing VSR?
VARIABLE STORAGE RATE
Mr. Giancarlo. Thank you for that. I think sometimes people
look at us as regulators and think, as rules evolve or change,
we then walk away and move on to something else and don't
review the evolution. But that is not the case. As our
exchanges bring forward rule changes, we are actively engaged
both in advance, but then thereafter to monitor how those rule
changes are working in the marketplace. And I think it is a
critically important part of what we do.
We don't want markets that are static. We want markets that
evolve as market participation evolves, but we also need to
stay very close to it to see how those evolutions impact. So,
in the case of the variable storage rate, we have a team that
watches this very carefully and are watching it now to see if
the evolution is meeting the needs of our core users but also
those who also provide liquidity to them as well.
Mr. Yoder. Thank you, Mr. Chairman. Thank you.
Mr. Aderholt. Ms. Pingree.
Ms. Pingree. Thank you very much, Mr. Chairman. Thank you
for being in front of us today and for all the topics we have
already considered. I have got just a couple of questions for
you. You have been very articulate in discussing why the budget
number that you have gotten comfortable with is important, and
I think people have asked you a lot of questions, but I just
want to give you one more chance.
And I was thinking particularly of some of the things you
had mentioned around cybersecurity, surveillance enforcement.
So, if you don't get the number you want, how will it impact
some of those really critical things?
BUDGET IMPACTS
Mr. Giancarlo. It is very challenging. So let me just give
you a couple of figures. So I am going to give you four Federal
agencies and tell you what their cyber--I will give you three,
and then I will tell you what the CFTC proposal is and what
their cyber spending is.
So the SEC, their budget for cyber is $60 million. The
FDIC, it is about $110 million. And the Treasury, it is about
$500 million. Our budget request is $7 million. Now, I think
that is still the right number. So, in the most recent FISMA
cybersecurity risk assessment, the CFTC had the highest ranking
of any of those agencies, and yet the smallest budget.
So I am proud of what we are doing, and I think this is
where I bring some of my business management experience. I can
assure this committee: Every dollar we are asking for we will
spend, and it is my intention to be the best cost-effective
dollar spender. So I think we are the best at our
cybersecurity, and yet we have the lowest budget, and I am very
proud of that. But we need that $7 million. We don't need 6.5;
we need the 7. And I say that goes to our budget as a whole. In
every case, we have tried to make it as tight as possible, but
knowing that every dollar is extremely well-devoted.
Ms. Pingree. Thank you for being so articulate and exacting
about that. I think it does help, when sometimes these numbers
become very arbitrary and the cuts just become a slash.
One of the things--your testimony talks a little bit about
the communication you have had with foreign counterparts
through bilateral discussions in the IOSC. Can you just tell me
a little bit more about your engagement with European
counterparts on cooperating on some of these new challenges in
a global--and maybe the Asian side as well?
INTERNATIONAL DISCUSSIONS
Mr. Giancarlo. Thank you. So I take the international
engagement of the agency very, very seriously. Within weeks of
becoming Acting Chairman, I flew to Brussels and met with our
counterparts there. I met with them in London and Asia as well.
I was just in Asia in the autumn. These global relationships
are very important. And I believe in the initiative that was
begun in 2009 in Pittsburgh of the G20 to reform the global
derivative markets and support the CFTC's efforts, and as I
mentioned, we have been a leader in that area.
And as other countries come online, working out
harmonization between us has been a very big part of the
process. One of the big accomplishments of my predecessor,
Chairman Massad, was, in 2016, to negotiate an equivalence
determination for clearinghouse supervision between the United
States and Europe. And since that time, in 2017, under my
leadership, we were able to negotiate two more equivalence
determinations for margin on uncleared swaps, as well as on
trading platforms. So, again, the CFTC has been a leader.
I am concerned, however, that, in the wake of Brexit, the
European Parliament is taking up some new legislation, and it
is unclear in that legislation what the impact would be on the
2016 agreement that we negotiated less than 2 years ago, I
think it was in May, less than 2 years ago with Europe.
So I was in front of the European Parliament 2 weeks ago. I
had the pleasure of testifying in front of them as I am
testifying before you today. And I made very clear that having
negotiated a deal, we expect that deal to stand, and we expect
the parties to that deal to stand behind that deal.
Ms. Pingree. Are there big challenges in sort of a
harmonizing?
Mr. Giancarlo. Again, there are benefits, but there are
also challenges in being a leader. And because we are out in
front, as we see other nations come online, we need to look at
those regulations very carefully and find out where the gaps
are between what we are doing and where the overlap is. So I
would say that there are issues all around but nothing I would
bring to this committee's attention at this point, other than
saying it is a constant challenge. We have got a very good
group in our international affairs group at the CFTC. They are
on the road constantly. They are reading briefing papers,
constantly coming into my office, keeping us abreast of the
issues, but it is a big challenge.
Ms. Pingree. Well, thank you for that.
I yield back, Mr. Chairman.
Mr. Aderholt. Mr. Valadao.
Mr. Valadao. Well, thank you, Mr. Chairman, for being here,
and I appreciate you answering a few of the questions I was
concerned with as well from my fellow members up here.
But I do want to touch a little more on one issue. So, Mr.
Chairman, in 2017, a report by the CFTC's inspector general
criticized the CFTC's outdated method in collecting data on
derivatives markets activity and called some of the data
essentially unusable. Other reports have raised concerns that
the CFTC's technology is outdated and unable to keep pace with
that of the derivatives markets participants overseas.
While I understand the CFTC has been taking a preliminary
look at new ledger technology, such as blockchain, that it
hopes will help better analyze data. Specifically, could you
please tell us the steps you have taken in the last 6 months
towards modernizing the CFTC's IT system? And how would you
currently rate today's system as to whether you are behind,
ahead of, or just keeping pace with IT systems among market
participants that you regulate?
TECHNOLOGY SYSTEMS
Mr. Giancarlo. Thank you. That is a critically important
question. You know, one the core mandates of title VII to come
out of the financial crisis was greater regulatory transparency
into market positions of large market participants. And a big
initiative was to collect data, create swap data repositories,
and make that data available both to us as regulators and to
the marketplace.
I support that core reform and that initiative. Since that
time, however--and I read very carefully that inspector
general's report and took a lot away from it. Again, not to
shirk responsibility, the time period covered was that of the
prior Commission. But what I read in that report and what I
have taken away from that report is really a failure of project
management.
Again, from my experience in the private sector, project
management is the difference between success and failure in any
large project, and this is an enormous project. So I have
changed both the leadership of the project, their goals, and
their deliverables. And as a result, in the second half of
2017, the agency issued, under my direction, a road map to this
data project. We actually said--and my dad used to say to me:
If you don't know where you are going, you will never get
there. We said where we are going, and we said when we want to
get there. And we laid it out in a series of deliverables over
the course of 2018. And by the end of 2019, we intend to
complete this project of data transparency into our swaps
marketplace. Now, that may sound like a long time, but,
unfortunately, progress hadn't been made earlier and so we need
to take where we are today and go forward.
And I thank the OIG for their work because I think it
helped our thinking on this. I think we now have the right
people in place. We have the right goals in place. We have the
right deliverables. We are actively engaged in this, not just
domestically, but internationally as well. We are chairing some
of the key groups at CPMI-IOSCO, which is the International
Association of Securities Regulators, and elsewhere in putting
together the global standards that need to be used because
these are not domestic markets anymore, they are global
markets. And it is only--it will only do us so good if we have
the correct data for our domestic trades but don't have it on a
global basis. So we need to reach the global standard.
And the last thing I would say is that, built into our
budget is allocation for upgrading a number of key systems. The
hardware that is necessary to deliver on this project as well.
So full funding for our budget also means that we will meet the
deliverables of that road map. If we are not able to get there,
then we will have to see how we triage other resources to be
able to stay on target for that timetable.
Mr. Valadao. So, on the second part of that question, which
is, how do you rate the current system? Give us some examples.
Tell me a little bit about how the current system is working in
comparison to what is going on around the world and even some
of the participants in the marketplace that you regulate?
SWAPS DATA ANALYSIS
Mr. Giancarlo. Well, first of all, I don't want to get too
critical because we still do absorb 60 million records a day. I
mean, we take in an enormous amount of data, equal to perhaps
any other financial regulator and probably greater than most
around the world. So we successfully analyze--we are a data
analysis agency. We do a lot with what we have.
However, the next frontier is to do the kind of thing that
eBay and Google and others do with enormous amounts of data,
and they automate the data analysis. You know, our data
analysis is still partially manual, partially automated. You
know, where we want to go in the future would be to bring a
much higher level of automation. That may be a 2020-2021
project. We still have to complete what we have started. But,
that is on the horizon for not just the CFTC but for financial
regulators everywhere, to be able to analyze the data the way,
big Silicon Valley companies analyze commercial shopping data
and all that. They do amazing things with data analysis. We are
not there yet, but that has got to be the path forward.
Mr. Valadao. Thank you.
Thank you, Chairman. My time has expired.
Mr. Aderholt. Ms. DeLauro.
Ms. DeLauro. Thank you very much, Mr. Chairman. Nice to see
you, Mr. Chairman. Thank you very much. I think we all know how
catastrophic the impact of years and years of deregulation was.
I mean, it culminated in the 2008 crash. Dodd-Frank, which I
was proud to support, has put us on the path to reducing that
threat of the too-big-to-fail firms. It protects consumers and
investors so that they are not swindled, they are not ripped
off, and focusing on supporting an economy that works for all
Americans.
And I will just say, took the most dangerous and most
unreasonable risks in the financial system, they have been
greatly reduced. And a financial crash, and I think you
probably would agree, is much less likely due to Dodd-Frank
rules and with everything that was encompassed there. And like
with most laws, it is not perfect, but an imperfect law is
better than no law at all. I think you would agree.
I am, frankly, troubled by the efforts that are supported
by both Democrats and Republicans that would scale back some of
the regulations that have been put in place, and that is to
really unravel Dodd-Frank in many respects. I am equally
concerned with what looks like the Commission's desire to work
on new, bright, shiny object cryptocurrency when there is so
much work to be done in the financial markets that impact so
many more Americans.
For example, we know that just 1,000 individuals own 40
percent of all bitcoin. Bitcoin's own website published a
survey of 5,761 adults on January 24 of this year, and it
showed 60 percent of Americans had heard of bitcoin, and only 5
percent owned any bitcoin. In past year, CFTC has successfully
managed to protect consumers, imposing billions of dollars of
sanctions on bad actors.
So why should the committee support the diversion of
resources to regulate a new financial world when there is so
much that still needs to be done in looking at what is going on
with unraveling the regulations in Dodd-Frank? Why shouldn't we
continue to stay the course, focus our energies on what has
been successful. The regulations were put into place to prevent
another crisis. Why are we going to--how are we going to
continue to maintain the protection of the majority of
Americans if we are going to divert our time, attention, and
resources to some of these other areas?
CRYPTOCURRENCY
Mr. Giancarlo. Thank you for the question.
So it was my predecessor who looked at our law, the
Commodity Exchange Act, and reached the conclusion that
cryptocurrency, at least in the form of bitcoin, meets the
definition of commodities under our act and began the process
there for doing what we are legally obligated to do, which is
enforcing our rules against fraud and manipulation. And so the
process of enforcing laws against fraud and manipulation in
cryptocurrencies began by Chairman Massad, and I have continued
that process.
We don't have statutory authority to ban bitcoin. It is not
within our authority to do that. It would require an act of
Congress.
Ms. DeLauro. It is not a point of banning it, but we are--
when I say 5 percent own bitcoin. This is a very small piece of
the overall picture here. Again, you have a limited budget, and
believe me, I have chaired this subcommittee and increased
funding for the CFTC. But a limited--and why are we then moving
our limited resources to an area where--I understand you want
to do some looking, but it has a very just small piece of the--
--
Mr. Giancarlo. I would be concerned though because, as you
say, there are scammers out there that are taking advantage of
people's interest in these cryptocurrencies, especially young
people. And for us to say, ``You know what, we can't spend the
resources to bring enforcement actions against fraud and
manipulation,'' would in a sense leave those people vulnerable.
So I think we have a duty, if it fits within the definition of
our statute, have a duty to take enforcement action.
Ms. DeLauro. I would just finish with this because my time
is almost up. I understand that, and I think we ought to, you
know, look at the new areas and rooting out fraud and all those
pieces. But as I started my commentary, I am very, very
troubled by how in fact--and as I say, this is both Democrats
and Republicans--are unraveling Dodd-Frank. It was put into
place for prevention purposes given the enormity of the crash.
Quite frankly, I sat in the room with Secretary Paulson and
Ben Bernanke when they told our leadership that--this was a
Friday--that, by Monday, we were going off a financial cliff if
we didn't do something. And I am--I don't come out of your
world or their world, but it was troubling. So we put these
preventions in place.
This is like saying to me, in some regards, where I think
you ought to pay attention--and you are, don't misunderstand
me, you are--and you need to pay focused attention on what is
going to happen. You know, after--we put protections in place
after Hurricane Katrina, okay. Now since we haven't had a
hurricane of that scale, now we are going to dismantle the
protections. That is essentially what is being done in Dodd-
Frank.
And it is my view that that is something that you need to
pay very, very close attention to and what the risks are going
to be to the majority of Americans if some of these things
continue to be unraveled and there is no protection as we
started to--as we tried to put in place.
Thank you.
Thank you, Mr. Chairman.
Mr. Aderholt. Mr. Young.
RIN MARKETS
Mr. Young. Thank you, Mr. Chairman. Welcome. Nice to see
you.
I want to talk about RINs. You know what those are:
renewable identification numbers. So the point of the RFS, as
you know, was to blend more biofuels. When it was adopted the
refiners themselves asked Congress to include an alternative
compliance method comprised of tradeable credits so refiners
would have more flexibility. So RINs are free. You get one when
you blend a gallon of biofuel. If you choose not to blend,
which some refiners do, then you have to buy a RIN.
I want to talk about RIN transparency. In March of 2016,
the CFTC did an MOU with the EPA related to the RIN markets. So
the purpose of the MOU was to, in part, to permit sharing of
business information on the RIN market so that CFTC could
advise EPA on, quote, techniques that could be employed to
minimize fraud, market abuses, or other violations, and to
conduct appropriate oversight in RIN and renewable fuel
markets.
What kind of advice have you given EPA? What have you
learned?
Mr. Giancarlo. Thank you for the question. So we entered
into that MOU and the project that commenced following it was
that the EPA provided the CFTC with trading data in the cash
markets. Let me actually just draw a jurisdictional picture for
you. The EPA has jurisdiction over the physical RINs market. As
you know, CFTC has jurisdiction over the RINs derivative
markets, RINs futures.
And just by way of background, there is virtually no
trading in RINs futures. I mean, less than a dozen. So, arising
from the MOU, my predecessor, Tim Massad, reached an agreement
with the EPA that they provide us with their trading data in
that underlying cash market, and we would review it using our
tools to look for fraud and manipulation if we saw it in that
market.
Unfortunately, as anybody who has worked in data knows, the
ability to draw conclusions depends on the quality of the data.
We were able to go back to the EPA, and say: We do not see
signs of fraud and manipulation in this market. But then,
again, the data is not terribly good. And we gave them some
advice, one regulator to another, as to perhaps steps they
could take to improve the quality of the data.
Mr. Young. So is the data not good because it is just not
transparent, you are not getting the information? Tell me why
the data is not good.
Mr. Giancarlo. Again, it is their process of collecting the
data. It is not our process, but----
Mr. Young. How would you change that process to get better
data?
RIN DATA
Mr. Giancarlo. I would have to go back to our folks that
did that analysis and met with the EPA, but my understanding is
they gave them advice about the very nature of how it is
collected, what is collected, what are the time series of what
is collected, the thoroughness. And it was--it had issues from
soup to nuts.
Now, what I will share with you, Congressman, is recently I
had a chance to sit down with Ag Secretary Perdue, and he
brought up this very issue and his concern that we try to find
a path forward. And I have asked our chief economist to sit
down with his chief economist and maybe folks from EPA as well
to pick up this conversation and to see what can be done going
forward. So there is a dialogue that has begun. I don't know
what their meeting schedule is to see what can be--when I
report to you that process, it was a process that was done
under my predecessor so the information I am giving you is a
little bit secondhand, but it is my understanding as I have
described it to you.
Mr. Young. Well, I think Congress should be kept abreast of
this. I would love to work with you and, you know, working with
the stakeholders as well within the industry in making sure
that we all have a complete understanding of what is happening,
why it is happening, the process, and if there is a need for
better transparency and accountability along the way.
And I just have a few seconds left so I am just going to
yield back, and I will wait for the next round, Mr. Chairman.
Mr. Giancarlo. Thank you. I would be happy to come in and
visit with you once that meeting has taken place amongst the
economists and keep you abreast of the discussions.
Mr. Young. I look forward to that.
Mr. Aderholt. Thank you, Mr. Young.
Mr. Chairman, I am sure you are aware of our fiscal year
2018 bill carries a provision that would amend the Commodity
Exchange Act to require a lower level of margin or capital,
known as variation margin, in transactions of a swap between
one party and its affiliate with whom it has some type of
shared ownership interest. This is in contrast to the current
requirement for a higher amount of capital, known as initial
margin.
Additionally, the bill carries a provision that will
require a more stringent analysis of the cost benefits to CFTC
actions. The question would be, could you explain why the
initial margin requirements were put in place by prudential
regulators but were not initially required by your agency,
which specializes in regulating swaps and has the knowledge and
expertise on these matters?
INTER AFFILIATE
Mr. Giancarlo. I will add to that that not only did we not
follow that approach, but the rest of the world didn't follow
that approach of our prudentials. So our prudentials on this
are a bit of an outlier in global markets. As an agency that
oversees markets that are global, we understand the
implications of a margin requirement that really doesn't
address that the systemic risk is the counterparty to
counterparty not internally within an organization. And the
reason we didn't follow the prudentials approach is we believe
that it actually makes it more difficult for American users of
these products, end users, whether they be manufacturers or
other large businesses to--it is disadvantageous for them to
use an American financial service firm to transact in global
markets because the American firms are the ones paying that
initial internal margin. And it gives an advantage to foreign
financial service firms. And what we find unhelpful about this
approach is essentially it puts our firms in a competitive
disadvantage in operating in global markets. And it causes
American end users to choose foreign financial service firms
over American financial service firms in engaging in foreign
markets. So that is the reason we took the approach we did. We
think it is anticompetitive for American business. And we don't
think it really enhances systemic stability because that is
enhanced simply by the margin being posted when one distinct
firm trades with another distinct firm.
Mr. Aderholt. What was the position of your predecessors on
this issue? And where do you see your policies differ on the
issue?
Mr. Giancarlo. My position on this is completely consistent
with Chairman Massad's position. We came to a similar
conclusion when we were together at the Commission. He voiced
it on behalf of the Commission as Chairman. I know he voiced
that position with the prudentials at the time. And I continue
to believe Chairman Massad got that right, and I think we have
got it right at the Commission.
Mr. Aderholt. In regard to the cost-benefit analysis
requirement, what is your opinion of placing a mandate on the
agency?
Mr. Giancarlo. So I am a big believer on cost-benefit, and
not to be used in the event of a lawsuit. It is just to get the
rule right in the first place. I think that if you do proper
economic analysis, you come up with a better rule and a rule
that serves the passage of time. And so I believe in it. Now,
we don't have as robust a standard of cost-benefit analysis at
the CFTC as does say a comparable agency like the SEC. So there
has been a number of conversations over the years about
enhancing the CFTC standard. And I think that there is a lot of
value in some of those considerations. But at the end of day, I
think good cost-benefit analysis is simply a matter of good
government.
Mr. Aderholt. The House passed both of these provisions in
both the CFTC authorization and the ag approps bill. Are you
aware of opposition either on the Hill or in the administration
that would prevent enactment of these provisions----
Mr. Giancarlo. I am not.
Mr. Aderholt. You mentioned this briefly, you referred to
it, but let me just go a little deeper into labor and union
negotiations. During our hearing last year, we discussed the
situation around your labor union negotiations and we included
in our bill a provision that will allow you to adjust the pay
and benefits to your employees should furloughs or reductions
in force occur as a result of these negotiations. This was done
because there were reports that CFTC would have to lay off
employees if they did not receive its budget request and a
Federal Service Impasse Panel imposed excessive financial
burdens on your agency. I also stated at the time that it would
be difficult to give your agency more funding unless the
situation resolved because the money would not be used to
invest in high priority resources for overseeing the markets
the Commission continues to claim, of course, it needs. Can you
give us a little bit of an update on the labor negotiations for
the current fiscal year and even future years?
UNION NEGOTIATIONS
Mr. Giancarlo. The labor negotiations proceed in, I think,
a satisfactory pace. The very first phone call I made upon
being sworn in as Acting Chairman was to the head of union and
to say that I look forward to good relationships with them. At
that time, we were in a bad place vis--vis us and the union. We
were in dispute mediation. We have resolved those issues, and
we are--as I mentioned earlier, we achieved a 3-year pay
package with the union. We have other items to resolve before
we can get to a similar 3-year collective bargaining agreement,
but we are making good progress on that. And I believe that the
good will continues on both sides. It certainly will continue
on management's side. With the continued good will, I think,
and honesty--that we have brought to the table and that they
have as well, I think we can continue to make progress.
Mr. Aderholt. Thank you. I think my time is up.
Mr. Bishop.
Mr. Bishop. Thank you very much. Let me return to another
issue. The Futures Industry Association wrote you last December
to express concern about the process by which several CFTC-
regulated exchanges and clearinghouses self-certified certain
futures and options contracts on cryptocurrencies. The letter
said, quote: ``Under law, exchanges may self-certify a product
for trading by the close of business one day and then list the
product for trading the next day. This process does not require
CFTC approval or input and allows little or no time for public
review. While suited for standardized products, this process
does not distinguish for a products risk profile or unique
nature. We believe that this expedited self-certification
process for these novel products does not align with the
potential risks that underlie their trading and should be
reviewed.''
I do understand that your staff had extensive discussions
with these entities prior to the announcement, but, frankly, it
sounds like the agency had to ask for changes, not insist on
them. Given the volatile nature of the bitcoin market, this is
a bit troubling, no pun intended. Would you discuss this?
SELF CERTIFICATION
Mr. Giancarlo. Yeah. So the self-certification process goes
back almost two decades at the agency, it has been long-
standing. And I think that, until recently, it hasn't been
controversial. Over 12,000 products have been self-certified
over that period of time. And to my knowledge, it hasn't been
the subject of a great deal of controversy.
Under those provisions, the exchanges did approach the CFTC
over the course of the second half of last year. And we did
require them to make a number of enhancements that we refer to
as our heightened review process for cryptocurrencies. You are
absolutely right; it was on a voluntary basis. I have asked the
staff to go back and consider whether that can be put into
staff guidance. And even though the process doesn't provide for
public hearings, Commissioner Behnam held, as part of our
Market Risk Advisory Committee, held I think a very well-
attended, very well-considered, very well-thought-through
public hearing on the self-certification process. A number of
ideas came out of that. And I am open to discussing with my
fellow Commissioners whether there should be some adjustments
to the self-certification process, and we will hear ideas
amongst the Commissioners.
Having said that, I do want to make it clear that the self-
certification process is a longstanding feature of the agency.
I think we were able to utilize it to get some quite
unprecedented concessions from the two bitcoin futures
providers, and we will require that on a going-forward basis
for any future self-certifications that we might see for
bitcoin or otherwise.
Mr. Bishop. It seems like the timeframe is so short in that
particular instance that it raised concerns. So I hope that you
will look at that and perhaps get back to us.
On cybersecurity, obviously, that is a constant concern for
both Federal agencies and the industry. And I believe you said
last month that you don't have the authority to impose
cybersecurity regulations on the cryptocurrency industry where
hacks have occurred with relative frequency. Can you give us
the state of cybersecurity at CFTC itself and at the companies
that you oversee, including the cryptocurrency world?
CYBER SECURITY
Mr. Giancarlo. Thank you for that. I am actually glad you
drew a distinction between the CFTC itself and the companies we
oversee. As I mentioned before, the CFTC recently had its
audit, its annual audit, as do all Federal agencies, and we
ranked ahead of many of our fellow agencies. I am very pleased
with the results there.
Mr. Bishop. Is that a good thing?
Mr. Giancarlo. Well, you know, let's hope it is. You know,
when it comes to cyber, you can never say it will never happen
to you. You have to assume it will happen at some point. And
so--which is why I put in a number of reforms since I have
become chairman. I meet monthly with our head of cyber. He
reviews all of the cyber activities every month. We receive
almost 9,000 attacks--attempts a month. So the attacks are
relentless.
We are also looking at human error. So we are upping our
game in terms of doing internal testing of what is called
phishing exercises. I feel we are doing a lot of good things at
the CFTC. I wish I had as good of a feeling--and I will be very
candid with you--of our ability to monitor what is going on in
the ecosystem in the markets we oversee. Right now, we should
have four cybersecurity examiners for the players in our
market. Through attrition, we are down to one. And in our
budget is the resources to fill those gaps, but we desperately
need to do that because I would much rather that our examiner
goes into an exchange or to a clearinghouse and say, ``There is
a gap in your cyber defenses,'' and they fix it. I would much
rather that than to get a phone call the next day or some other
time saying that they have been hacked and now we have got some
problems in the marketplace. So a pound of prevention is
worth--whatever it is. An ounce of prevention is worth a pound
of cure. I would like to make sure we have got that ounce and
fill those three missing----
Mr. Bishop. Are you going to be able to find the resources
to do that not including that $31.5 million?
Mr. Giancarlo. I said in the opening: Give us the tools, we
will do the job. Give us the tools, we will do the job. We will
fill them. I am a persuasive recruiter.
Mr. Aderholt. Mr. Young.
Mr. Young. Thank you, Mr. Chairman.
Mr. Chairman, speed, technology, algorithms, artificial
intelligence. I have got concerns based on the concerns of
farmers. The producers back home ask about the ability of the
CFTC to effectively provide oversight for our farmers,
producers, with all this happening, particularly the balance
between fundamental market users versus the algorithmic trader.
Do we have balance? How do you get it? We need it.
HIGH FREQUENCY TRADING
Mr. Giancarlo. That is a great question. When I meet with
farmers and travel around the country, the question that seems
to be the common question is, what is going on in these
markets? When I go in the market, am I getting run over by a
speeding train of algorithmic traders? What is the role they
play in the market? What is the balance between them and us,
the natural hedgers? It is not an easy question to answer.
There are a lot of anecdotal stories, but that doesn't prove
anything. And this is why we are seeking to really redouble our
economists unit. We want answers to these questions, and we
want good, solid data-driven answers, not answers that are
driven by a story or an experience in the marketplace. You
know, healthy markets are like environments in the natural
world, the healthiest ones, the most durable ones are the ones
that have the most biodiversity, and the same thing is true
about economic markets. You couldn't have a market if you just
had naturals because everybody would be long, there would be
nobody to go short. You need the balance. But balance is the
operative word. What is the right balance? And our markets are
changing so dramatically, so what is a responsible agency to
do? It is to first understand these changes and then decide
what are the right policy responses. The one thing I won't do
is, based on some anecdote, go in and start setting
restrictions on who can be in the market and who can't, because
they may be the very valuable liquidity providers the market
needs. What we need to do is really understand the role of
these algorithmic trades and the proprietary traders that are
not natural--they are not naturally long. They are just taking
the other side of a trade all day long; they can be long or
short. And so we need to understand that dynamic, which is why
we are asking for additional resources for the Office of the
Chief Economist.
Mr. Young. As you the witness the rise of algorithmic
trading, have you seen a rise in volatility? Can you measure
that somewhere? Can you pinpoint it? Is it there? Is it----
Mr. Giancarlo. It is not an exact correlation.
Mr. Young. OK. It is not a correlation. How do you manage
volatility? Should you?
Mr. Giancarlo. Well, that--in many ways, that is what these
products do, the more volatile the market--in fact, somebody
mentioned bitcoin. In fact, what is interesting is the impact
that the bitcoin futures has had on the underlying price. The
day the bitcoin futures launched on CME was the high watermark
of the bitcoin price. And since then, it seems to be
stabilizing around 10,000. So the launch of the future--a
healthy futures market often brings a stability to underlying
markets.
Mr. Young. Can you measure during a trading day which are--
how many are algorithmic trading from computers, and how many
are the true market makers? Is it 10 to 1? Is it 50-50?
Mr. Giancarlo. Again, it is different in virtually every
marketplace. Some markets' financials tend to be more dominated
than the commodity and natural and softs markets. But yet the
markets we live in today are majority automated and
increasingly algorithmic. I mean, the day of the manual trading
is passing with the day of the trading floor. And we have to
accept that markets are becoming digital in the same way the
rest of our world is becoming digital, and they are becoming
increasingly automated and increasingly algorithmic. That is
the world we heading toward, and that is why, as an agency, we
need to be up to that challenge. We need to be as digital as
these markets.
Mr. Young. It reminds me of a line from a Pink Floyd song:
Welcome to the Machine.
I yield.
Mr. Aderholt. Ms. DeLauro.
Ms. DeLauro. Thank you, Mr. Chairman.
SUNSHINE
Chairman Giancarlo, you convened a meeting of the CFTC on
February 28. It was with the SEC Chairman Clayton, SEC
Commissioner Peirce, CFTC Commissioner Quintenz, and the staff
from both the CFTC and the SEC. This is a tweet from your
February 27 gathering at 9:18 p.m., and it reads: Earlier
today, at CFTC, staff at CFTC, Quintenz, and I hosted Chairman
Clayton and SEC colleagues to discuss better harmonizing Dodd-
Frank regs and rules. We are off to a great start.
This was not a public meeting, but one that was behind
closed doors and one among only Republican members of both
Commissions as I understand it. It is troubling, but even more
troubling than the partisanship of the meeting is the fact that
the meeting appeared to potentially violate the Government in
the Sunshine Act, and you know that act. It may require that,
for the CFTC in its current form, you have got two of three
members of the CFTC meeting, that it must be open to the public
unless an exemption applies. It appears to me, based on your
tweet, discussing better harmonization of Dodd-Frank
regulations and the rules involve policy discussions that, to
my mind, should have been open to the public. So let me run
down just a few questions for which I was just looking for a
yes-or-no answer.
Did the information shared during the meeting relate to
national defense?
Mr. Giancarlo. No.
Ms. DeLauro. Was the meeting related solely to internal
personnel rules and practices?
Mr. Giancarlo. The meeting was a briefing by staffs of the
two agencies on progress that had or had not been made in the--
statutorily required harmonization of Dodd-Frank rules between
the two agencies.
Ms. DeLauro. Did the meeting have any discussion of the
current state of looking at what is going on with the
unraveling of the Dodd-Frank regulations?
Mr. Giancarlo. No.
Ms. DeLauro. Was the meeting related to accusing a person
of a crime?
Mr. Giancarlo. No.
Ms. DeLauro. Was the meeting related to information where
disclosure would constitute a breach of privacy?
Mr. Giancarlo. No.
Ms. DeLauro. Was the meeting related to investigatory
records where the information would harm the proceedings?
Mr. Giancarlo. You know, can I say what the meeting was?
Ms. DeLauro. Sure.
Mr. Giancarlo. The meeting was a briefing by staffs that
had worked on harmonization efforts as statutorily required.
And the meeting was overseen by the Office of General Counsel
to make sure that it did not breach the--what is called
regulation in the Sunshine Act.
Ms. DeLauro. Was the meeting related to information which
would lead to financial speculation or endanger the stability
of any financial institution?
Mr. Giancarlo. The meeting did not concern any particular
financial institution.
Ms. DeLauro. Was the meeting related to the agencies
participation in legal proceedings?
Mr. Giancarlo. You know, I am almost uncomfortable calling
it a meeting. It was a briefing. And no legal proceedings were
discussed.
Ms. DeLauro. Why then was the meeting not open to the
public when that is something that is required and you are
talking about, as you said, the harmonization of Dodd-Frank?
And making it such a partisan effort----
Mr. Giancarlo. It is not a partisan effort, first of all,
because any rulemaking that would come out of this would have
to go through the Administrative Procedure Act. My fellow
Democratic Commission was briefed on all the issues discussed
at the meeting in advance of the meeting.
Ms. DeLauro. Why wasn't----
Mr. Giancarlo. The harmonization efforts are Chairman-led
efforts at both the SEC and the CFTC. So Chairman Massad never
involved me in any----
Ms. DeLauro. I am not asking about Chairman Massad's----
Mr. Giancarlo. Of course. But it is a Chairman-led effort,
and the staff was briefing us on progress that had been made so
we could get up to speed when our predecessors left the
agencies and to see what needs to be done going forward.
Ms. DeLauro. I don't know what your general counsel said,
but as I understand the Sunshine Act requires that CFTC--when
two of the members of the CFTC meet, it must be open to the
public, unless an exemption applies.
Mr. Giancarlo. And we were assured that an exemption
applied for briefings. In fact, meetings take place routinely
at the agency where staff brief Commissioners, and those
meetings are closed to the public.
Ms. DeLauro. What was the exemption? What is the nature of
the exemption?
Mr. Giancarlo. It is nondeliberation of Commission matters.
It was a briefing only; it was a one-way information flow.
Ms. DeLauro. Well, thank you. Thank you for the
clarification of that, but I just think when we are talking
about these critical issues these days, it would be good to
have the transparency that we have so lacked in the past with
regard to so many of the these critically important areas.
Thank you.
Mr. Aderholt. Thank you, Ms. DeLauro.
Mr. Chairman, thank you for being here. I think we had a
good hearing today to discuss some of these issues and bring up
some issues that the members of this subcommittee feel are
important. Thank you for sharing and bringing us up to date.
And we look forward as we continue on with the fiscal year 2019
appropriation bill that affects your agency. So we look forward
to working with you, and thank you for your service.
And the hearing is adjourned.
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Thursday, March 15, 2018.
U.S. DEPARTMENT OF AGRICULTURE, OFFICE OF THE INSPECTOR GENERAL
WITNESSES
PHYLLIS K. FONG, OFFICE OF THE INSPECTOR GENERAL, U.S. DEPARTMENT OF
AGRICULTURE
GIL H. HARDEN, ASSISTANT INSPECTOR GENERAL FOR AUDIT, U.S. DEPARTMENT
OF AGRICULTURE
ANN COFFEY, ASSISTANT INSPECTOR GENERAL FOR INVESTIGATIONS, U.S.
DEPARTMENT OF AGRICULTURE
Mr. Aderholt. The subcommittee will come to order. Good
afternoon and welcome to the Agriculture Appropriations
Subcommittee. This is our second hearing to review the fiscal
year 2019 budget request of $87.4 million, which is a decrease
of $10.8 million from fiscal year 2017 level of $98.2 million,
for the U.S. Department of Agriculture's inspector general.
Ms. Fong, I would like to thank you for being here today
with us, and I believe this is your--they tell me your 16th
time straight in a row to be at this subcommittee hearing, or
something close to that.
Ms. Fong. Something close to that.
Mr. Aderholt. And you, of course, in your role as the
inspector general for USDA, so we appreciate your continued
work in that office. I also want to welcome back to the
subcommittee, Gil Harden, the Assistant Inspector General for
Audits, and Ann Coffey, the Assistant Inspector General for
Investigations. So welcome all of you today.
We certainly acknowledge that we have a deeply experienced
team at the OIG, and we always appreciate the opportunity to
discuss the challenges that you face in your Department, as
well as the progress that is being made to correct any
problems, any policies, any practices that may be of concern to
your organization.
As we--as I usually do in the past--as I have done in the
past, I want to take just an opportunity to outline the goals
for this subcommittee as we conduct this oversight
responsibility and craft agricultural appropriations.
The first goal for our subcommittee is to bolster
prosperity and economic well-being in rural America and the
farm economy. The second is to conduct fair and transparent
oversight of agency activities and public resources. Third is
to promote economic growth through effective and efficient
regulation and minimization of regulatory overreach. And the
last goal is to protect the health, safety of people, of
plants, and animals.
The work you do at the OIG covers so many different aspects
of the lives of all Americans, and it ties into the goals of
this subcommittee, especially in regard to conducting fair and
transparent oversight of agency activities and public
resources. Please know that your job is incredibly important to
the integrity and the success of Department of Agriculture.
The U.S. taxpayer should also be supportive of your work
due to the risk exposure of USDA's financial activities. USDA
touches the lives of most--or I would say every American in one
way or the other. As you know, its portfolio includes over $200
billion in assets, $154 billion in annual spending, and more
than $100 billion in loans and crop insurance. Yet, for all of
this responsibility, the inspector general only has a fraction
of the entire USDA's budget to oversee the vast resources and
the programs of the Department. Ms. Fong, your work speaks for
itself.
Year after year, the total dollar impact of the inspector
general's investigations--and that would include in
indictments, convictions, arrests, sanctions, and reports with
recommendations--had on the efficiencies and the savings of the
U.S. Department of Agriculture's programs and funding grew by
83 percent.
Among other things, in our discussion today, I plan to
discuss and bring up issues that are related to your audits and
investigations ranging from oversight to activities, disaster
response, following the Hurricanes Harvey, Irma, and Maria,
USDA's nutrition assistance program, purchase cards,
agroterrorism, and scientific integrity.
We would like to highlight the fact that you have once
again received outstanding recognition for your excellent work
among the IG community. I understand that you have received two
audit awards for excellence in 2017 for your work in evaluating
SNAP administration costs and the operations of the U.S. Meat
Animal Research Center. This recognition came from the Council
of Inspectors General on Integrity and Efficiency, which
encompasses the entirety of the IG community across the Federal
Government. The committee extends our congratulations for these
achievements.
Before I recognize the ranking member, Mr. Bishop from
Georgia, and his opening statement, I just want to remind
everyone that we will do our best to strictly abide by the 5
minute rule. And please make sure you hit the talk button
before you speak and then hit it again after you speak as well.
So, Mr. Bishop, you are recognized.
Mr. Bishop. Thank you very much, Mr. Chairman.
I too would like to welcome Ms. Fong, Mr. Harden, and Ms.
Coffey back to the committee. Thank you for appearing before us
again. This is a very distinguished panel. And judging by the
many years that you have collectively served in the USDA
Department of Inspector General, it is evident that you find
your work rewarding.
The high quality of your work, as the chairman noted, has
been repeatedly recognized, most recently, of course, when your
IG associates gave you awards for the audit of the SNAP
administrative costs and the U.S. Meat Animal Research Center.
That will hopefully lead to better treatment of animals at that
facility and more transparency. So congratulations to your
office for jobs well done.
As I mentioned last week at our CFTC hearing, we are again
in an odd situation budgetwise at the moment with the 2018
bills not finished on a disappointing budget request for 2019.
But I appreciate our committee's focus, and we always get the
job done, and this year will be no exception.
I have an abiding interest in your work and what you do,
and we must do everything that we can to root out fraud, waste,
and abuse, and mismanagement. In a number of cases, States and
local governments actually administer programs on behalf of the
Federal Government.
But like their Federal partners, their budgets are tight,
and they struggle with staffing and training. We rely on
inspectors general to conduct audits and investigations to
ensure the programs that we fund are run efficiently and the
concerns are addressed in a timely manner. In your fiscal year
2018 annual plan, you state that you have a goal to recruit,
develop, and maintain a highly qualified diverse workforce.
That is why I am particularly concerned about the proposed 10
percent cut to your office, including 50 staff this year.
In addition to USDA programs, I want to ensure that civil
rights issues are given thoughtful and appropriate attention
throughout the USDA. I look forward to discussing that with you
as well as other important issues, and I thank you, again, Mr.
Chairman, for allowing me the time. I look forward to our
discussion.
Mr. Aderholt. Thank you, Mr. Bishop.
And, Ms. Fong, you may now proceed with your testimony.
Ms. Fong. Thank you, Mr. Chairman, Ranking Member Bishop,
and all of the distinguished members who are here today. We are
very, very happy to be here and appreciate the invitation to
speak with you today about our work. I want to start out by
thanking this committee for the support that you have shown our
office over the years. You have demonstrated this just in the
past year or so by providing us with a good level of funding
for fiscal year 2017 and also by including us in the disaster
recovery provisions of the Bipartisan Budget Act that was
recently passed.
And we hope that, with these funds that you have provided
us, that we will be able to give good audit and investigative
services to USDA as it rolls out those very important programs
to the affected communities. So thank you for your interest in
us through that funding mechanism and throughout the year.
I know you are very familiar with our work, and you have my
written statement, so I just want to highlight a couple of
pieces of work, some reports that we have done that I think are
worthy of mentioning, and then we can move right to the
questions and answers.
As you know, we continue to do work in food safety
inspections. We view that as a very important mission for our
office. And we issued three audits last year on various aspects
of food safety inspections, looking at equivalency assessments
of exporting countries, controls over allergens in product
labels, and inspection activities at establishments that handle
livestock.
We also spent a good deal of time looking at different
aspects of workplace misconduct issues and complaints and how
the Department is handling those complaints. We did a survey of
perceptions within the Forest Service of the employees in
Region 5 on their sense of how allegations of sexual misconduct
are being handled, and we have some ongoing work in those areas
that we will be reporting on through the year.
While we continue to devote quite a bit of resources to
oversight of SNAP, this year we have also turned our focus to
other programs within the nutrition portfolio at FNS. In
particular, the summer food summer feeding program, which gives
meals to students during the summer when school is not in
session. We have reported a number of very significant case
results on our investigation side because of bad actors taking
advantage of the program, and we have also issued a series of
interim audit reports focused on food safety issues that we
found this past summer. Again, we are continuing work in this
program, and we will be issuing additional reports this year.
I also note that we do reports, as you all know, in the
area of the farm loan portfolio, the rural development
programs, and crop insurance, and we focus a large portion of
our resources on overall management issues affecting the
Department as a whole. For example, financial management,
cybersecurity, and improper payments continue to be challenges
for all of us at the Department. We believe the Department is
making progress in those areas, but those areas will require
sustained attention as we move forward.
So, in closing, I want to thank this subcommittee for your
interest. I think you have brought up a number of very
interesting topics in your opening statements, and we look
forward to engaging in dialogue on these topics.
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Mr. Aderholt. Thank you, Ms. Fong.
I would like if you could give the subcommittee a brief
overview of your plans for the upcoming fiscal year under your
regular discretionary appropriations under the President's
budget request and the recent changes that you have made
regarding your agency's operating structure. While you have
laid out some of these things in your opening statement and
remarks and your budget request, I wanted to ask you to focus a
little bit more on your priorities for the year.
Can you just give us maybe your top three priorities for
investigations and audits for this upcoming fiscal year?
Ms. Fong. I would be happy to address that question. As I
mentioned, for us, one of the very top priorities is any issue
that arises that could affect the safety, security, and health
of the American public, USDA employees, or animals or plants.
And so we do focus quite a bit of work on those issues as they
arise. If we have allegations of tampering with the food
supply, we will look at that. We also have work going on with
FSIS on various aspects of the portfolio.
A second major priority for us is making sure that program
assistance is delivered effectively across the full range of
USDA programs. So we have ongoing work in FSA. ARC/PLC is one
program that we are looking at. We have work in the rural
development portfolio on rental housing and other housing
programs. You know, we try to provide some level of coverage to
all of the major assistance programs, with the overlay of the
disaster programs as well.
And then our third major area is overall departmental
management. And we have alluded to that with respect to the
financial statement audits, which are mandatory every year. We
devote a lot of attention to that. Tied to that are the
improper payments work and audits that we are required to do to
make sure that the Department is dealing with its rate of
improper payments to try and get those rates down. And IT
security enters into all of that as an overlay. We want to make
sure that the Department's data is protected.
Mr. Aderholt. We have--it has been referred to, the
President's budget request for decrease in your staffing levels
about 50 staff years. How does that affect those priorities?
Ms. Fong. Well, those are overall priorities for 2018 and
2019. If the President's request were enacted, we would lose 50
people, as you mentioned, we anticipate. If we spread that
evenly between our audit and investigative portfolios, what we
are looking at is a significantly decreased level of effort.
For example, we anticipate we would issue 16 percent fewer
audit reports and roughly 16 percent fewer investigations,
based on a straight projection. Our return on investment, as
you noted, ranges. Our average over the past 5 years has been
roughly $8 returned for every dollar spent. If our budget is
reduced by $10 million, a straight line projection would be a
reduction in returns to the government of about $80 million a
year.
Mr. Aderholt. OK. How has your recent reprograming and the
creation of the Office of Data Sciences affected your
operational capacity, and how has it improved the outcomes of
your work?
Ms. Fong. That is a very good question. The reason we
created the Office of Data Sciences was because we recognized
that it is critical to be able to analyze and look at the data
that resides within the Department, as well as public sources
of data, to try and determine, are there indicators there that
we can look at, patterns of transactions, indicators of
potential fraud? What do we see in the data that can enable us
to focus our audit and investigative resources more
effectively, to go after bad actors involved with potential
fraud?
And we have seen over the last year that there have been
significant good results coming out of ODS with respect to our
SNAP investigations. ODS has also issued two products this past
year. They completed the survey of the Forest Service
employees' perceptions of how FS is dealing with misconduct
allegations. They also completed a survey of research
scientists within USDA that was done in tandem with our audit
report on scientific research misconduct.
And, in addition, our ODS staff and our audit staff are
leading the IG community in a project to look at purchase card
data across the government. We are teaming up with 20 other IGs
to look at the data that exists on purchase card transactions
to try and figure out, are there indicators of patterns here
where perhaps there are some unusual transactions that we
should be taking a harder look at? So that is where we see the
future of data analytics.
Mr. Aderholt. Thank you.
Mr. Bishop.
Mr. Bishop. Thank you very much, Mr. Chairman.
Ms. Fong, in September 2017, the IG published an audit
which evaluated the AMS' controls over approval and oversight
of the National Organic Program agreements for international
trade and the import of organic products. One aspect of the
audit found that AMS was unable to provide reasonable assurance
that the National Organic Program required documents for review
at U.S. ports of entry to verify that imported agricultural
products labeled as organic were from certified organic foreign
farms and businesses that produce and sell organic products.
Given the hurdles that our domestic farmers must go through
to be labeled organic, it is concerning that farm products
could flood the organic market, thus blocking our domestic
farmers' products.
Can you discuss your recommendations, specifically the
recommendation to sign an MOU with Customs and Border Patrol--
Border Protection, rather, whose own resources are currently
stretched very thin?
Mr. Harden. Yes, sir. We did make that recommendation that
they work with CBP to put some protocols in place so they would
at least have a go-by as to what AMS expects CBP to look at. As
we went in and did the work, they didn't have any guidelines at
all, so they weren't looking at anything. And we did get
agreement from AMS that those protocols were necessary, and so
from what I understand right now, they are working on
implementing those recommendations to put those protocols in
place. But it will be a prioritization of resources on both
sides.
Mr. Bishop. Thank you.
On the issue of civil rights, I noticed that last time you
audited the Office of Civil Rights was in 2012, and we
understand they just recently resolved the recommendations from
that audit with your office. The position for Assistant
Secretary is currently vacant, and even so, on March 9, USDA
proposed a realignment of that office and its functions within
USDA.
The request for Office of Civil Rights is a decrease of
$1.6 million from the fiscal year 2018 annualized CR level,
which their own justification describes as not allowing them to
fill critical vacancies. In fiscal year 2017, that office
reduced its backlog and indicated it is keeping up with current
cases, which must be a challenge, because the caseload
increased 6 percent in fiscal year 2017 from the previous year.
Can you talk about the impact the budget reduction would
have on their ability to address any backlogs and keep current
on cases as they come in? Will you be auditing them again soon?
And what is your opinion about the proposal to reorganize the
Office of Civil Rights? There was an announcement about a
reorganization of the Rural Development's Office of Civil
Rights that was released prematurely and then withdrawn in
January. Do you know where that stands, and have you looked
into that office recently?
Ms. Fong. Well, I will try to address all of those
questions and ask my colleagues to comment as well. You are
exactly right. Our office has a long history of looking at
civil rights issues within the Department and the processing of
EEO complaints. We have not looked at it from the audit
perspective for a number of years. We are planning to look at
that this summer and determine where in our audit plan for the
next year it will fall.
So we will be able to get back to you this summer with a
decision on that. That is not to say that we haven't been doing
work in that area. In the last 2 years or so, we had some
complaints that were referred to us by the Office of Special
Counsel that dealt with complaint processing within the Office
of Civil Rights. And we did quite a bit of work to assess the
process at that time, the backlog, how the office was doing. We
came up with some findings. I believe the Department has
addressed all of those findings at this time. So we will be
looking at the issue in that context.
Mr. Bishop. Has there been some settlements, some monetary
settlements, some awards with regard to complaints recently?
Ms. Fong. We aren't normally in the loop on settlement
discussions involving EEO complaints unless they involve
employees of our own office.
Mr. Bishop. I see.
Ms. Fong. With respect to the reorganization questions that
you asked, we don't have any current work going on to assess
reorganizations within USDA. The proposal on the reorganization
of OASCR, we understand that that is open for public comment at
this point and congressional comment. We are looking at it
ourselves in terms of the impact on our office and how that
might be affected. So we will be analyzing it from that
perspective.
Mr. Bishop. Can you also analyze it from the perspective of
the effectiveness of the reorganization as opposed to the
current organization structure?
Ms. Fong. We will.
Mr. Bishop. Add that to your----
Ms. Fong. We will keep that in mind as we go through that
proposal, and that may be an issue that we have to take into
account as we develop an audit plan for the next year. I think
that might be the appropriate way to approach that, but we are
happy to discuss those issues with you further.
Mr. Bishop. Thank you.
Mr. Aderholt. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Ms. Fong, welcome back to the committee. As you are well
aware, some years ago, Congress passed legislation to create
the National Bio and Agro-Defense Facility, NBAF, to be placed
in Manhattan, Kansas. Lots of money is being spent on
construction and preparation, and the purpose of such facility
is to prepare America to defend ourselves from agroterrorism,
efforts to poison our food supply, our livestock, both the
financial risk, the human risk, the impact that would have on
America. And it is a vulnerability, and we are well aware of
it, and that is one of the reasons we are so supportive and
hopeful that NBAF will prepare us to defend ourselves in a much
better fashion.
I want to ask you some questions about a report that you
released in March of 2017 related to the USDA's Office of
Homeland Security and Emergency Coordination. In that report,
you found that the OHSEC had not adequately overseen and
coordinated USDA's efforts to prevent and detect and respond to
agroterrorism. In particular, your audit indicated that the
Department had failed to comply with the Homeland Security
Presidential Directive 9.
Could you discuss with the committee the findings in that
report, recommendations, and concerns that Congress should have
based upon your audit?
Ms. Fong. I will offer a few comments, and then Gil may
have some additional comments. You are right: we did issue that
audit. We were concerned about whether the Department was
implementing HSPD-9 appropriately. And we found that at the
very high departmental level, that better coordination needed
to happen in order to ensure that the directive was carried
out.
As a result of those recommendations, we currently have
work ongoing in three of the Department's key agencies for
biosecurity. We are looking at APHIS, FSIS, and ARS currently
to make sure that they are appropriately implementing. So I
wanted to just give you that piece of information as well.
Gil, I am going to----
Mr. Harden. Yes, in terms of the compliance with HSPD-9,
there was a severe, I would say, a real lack of coordination
from OHSEC in terms of how it was coordinating with the
departmental agencies and its role. So it really brought into
focus for them where they needed to be focusing on coordinating
the Department activities. They agreed with the recommendation
and are putting together the comprehensive plan to address
HSPD-9. Right now, they are in the process of implementing
that.
The other effort related to this, which Phyllis referred
to, is the work that we have in the three key agencies ongoing
at this time where we are looking at their efforts and actions
to prevent, detect, and respond to agroterrorism attacks. We
are working--late in field work right now, so we hope to have a
report out before the end of the fiscal year. But the
documentation that we are seeing in the individual agencies is
better than what we saw at the Department level.
Mr. Yoder. One of the reasons I bring this particular topic
up is because of the risks we face, of course, as Americans,
and the impact of agroterrorism. But the NBAF project is such a
critical component of this, and there is a proposal in the
administration's budget to move NBAF from DHS to USDA. And I am
wondering, given the findings of noncompliance on HSPD-9, can
you shed any light on whether this transfer would make sense,
and how the audit might help guide us as to whether this is a
proper transfer.
Mr. Harden. I hear your question and let me take that back
and think about it. I haven't thought about the transfer in
connection with that report, but we will get back to you on
that.
Mr. Yoder. Yes, certainly. I think this is a major
proposal. I think the committee is going to have to take a look
at this administration proposal and make sure this is the best
move for the American people, for national security. And your
audit and the work you have done could really be helpful in
helping us understand the deficiencies we have and whether the
administration of these programs are properly being done and
how that impacts the eventual NBAF project.
Thank you.
Thank you, Mr. Chairman. I yield back.
Mr. Aderholt. Ms. Pingree.
Ms. Pingree. Thank you, Mr. Chair.
Thank you all for being here again and the good work and
important work your Department does.
First, I want to associate myself with the remarks of our
ranking member. I, too, am deeply concerned about the issues
around organic importation. And as the ranking member said, it
is a high standard in the United States to meet the organic
standard, and it is very discouraging to farmers if they think
that the same isn't being done with things that are coming from
offshore.
And I guess the one question that I wanted to add on is I
am just worried that the NOP is understaffed, underresourced,
and can't meet the deadlines that they have talked to you about
for the memorandum of understanding and also just to do their
work. They receive about $9 million a year. We expect them to
watch over an industry that has grown to nearly $80 billion. Do
you think that they have the resources and are actually able to
do what we are asking them to do?
Ms. Fong. That is a difficult question to assess at this
time. I think our recommendations went to process and internal
controls, which are the very first things that need to be
addressed. Once AMS is able to get those controls into place,
then the next question would be, are those being executed
effectively? And we would certainly--whenever we go and look at
a program, across the board, we look to see if the resources
are available, if there are sufficient staff resources, IT
resources, financial resources. And if we see issues there, the
program points it out to us, and we will also point it out.
Mr. Harden. We did have an issue regarding their resources
and staff in a prior report a couple years ago which led to
different staffing levels and resource levels for the NOP.
Ms. Pingree. OK. We will certainly be continuing to follow
that, and I hope you will, too.
I want to take a different tack and talk about scientific
integrity. So, in the most recent OIG report, the Audit of
Scientific Integrity at USDA, you surveyed USDA research-grade
scientists at four agencies in 2016. And your report has five
recommendations, and I just want to ask about two.
Question 54 of the survey was: Do you have any other
concerns related to scientific integrity that you want to share
with OIG?
481 respondents answered the questions, and your report
indicates that over half of those 481 respondents indicated
that they had no other concerns. I am wondering about the
respondents who did respond to the question with concerns. Do
you know what their concerns were, and were there any trends in
those responses? I can understand if you don't have this
information in front of you.
Ms. Fong. We need to provide that for the record.
Ms. Pingree. Well, let me go on to my second one, and we
will stay in touch and hope that you can provide us that
information.
On question 19, the survey asked researchers to identify
which research areas have been identified to them as sensitive,
controversial, prominent, or high profile. The top three
responses to that question were: climate change, pollinator
health, and antimicrobial research.
So, of course, those happen to be areas of important
concern to me and to my constituents.
There was an additional question on whether the agency
supports conducting research on sensitive, controversial,
prominent, or high profile topics. Ninety-nine researchers said
no. So that raised concerns for me. I am wondering how you plan
to follow up on this audit in the future. I know that the
agency has agreed to complete your recommendations over the
next year or so, But I think it is very concerning if even one
scientist at USDA believes that their work has been altered or
suppressed, they can't share their research with the public,
and so on. So I think we need to be diligent about this.
Do you have any plans to conduct a similar survey among
USDA researchers after the USDA has completed the
recommendation?
Ms. Fong. At the current time, we have not engaged in
planning that far into the future. I think you do raise a
really valid point that many of the respondents who express
concerns also indicated a concern that, if they surfaced their
issues, that there would be a potential for retaliation or
reprisal, and we think that that issue should be addressed as
well. We want to be keeping an eye on that.
Ms. Pingree. Well, again, I appreciate your response to
that. I hope there will be followup, and I am glad you concur
with me that that is a serious concern. We expect scientific
research conducted by the government to be fair, that the
scientists to be operating without any fear of retaliation if
they say something that they see as true or they are not
allowed to speak out on what they know their research shows
them. That is deeply troubling and particularly in the areas
that we are talking about, which can be politically sensitive
but are very important to people that I and others represent
and certainly to Americans in general.
Thank you. I yield back.
Mr. Aderholt. Mr. Rooney.
Mr. Rooney. Thank you, Mr. Chairman.
Ms. Fong, in the latest disaster supplemental bill we
passed earlier this year, we gave your office $2.5 million to
conduct oversight over the USDA disaster assistance programs
funded in the bill. You clearly have experience, given your
work in this area after Hurricane Sandy. So I have a couple of
questions that I am going to ask all at once, and then we can
go from there.
I would like to know what role, if any, your office has or
could have in conducting proactive oversight over the $2.3
billion Congress provided to the Office of the Secretary for
the purposes of providing disaster relief to producers who
suffered hurricane-related crop losses in 2017.
Then you could you please explain what your role will be in
helping to ensure that the Secretary's administration of that
$2.3 billion in direct payments for crop losses is done so in a
timely, effective, and appropriate manner?
Ms. Fong. Well, there are a lot of questions there for us
to address. Thank you for the question on disaster oversight.
We have, as you mentioned, done quite a bit of it, particularly
I am thinking of our experience with the Recovery Act in 2009,
where billions of dollars were rolled out very quickly, and
then the Sandy situation, as you mentioned.
In 2009, we spent a lot of time proactively looking at each
program that received money from the Recovery Act, sitting down
with the sub-Cabinet members who are responsible for those
programs, saying, ``These are the internal controls in your
area that you should be paying attention to,'' and then
watching to make sure that the controls were there and then, as
the money went out, that the money was going to the right
people for the right purposes. So we did extensive oversight of
that. We had extensive resources to do that oversight.
This time around, we have been looking at the programs that
have received the money. We recognize that these programs, for
the most part, are current programs. They have been operating
for a number of years. We know what the controls are, and so we
are looking not so much to be going in at the front end on the
controls issues but to be really watching the money as it rolls
out to make sure it is being distributed to eligible people for
eligible purposes. So that is our current focus.
Now, we are engaged in discussions with the Department to
just be aware of what their current plans are and timetable. We
have briefed the Deputy Secretary on the fact that we have
these responsibilities, and I think we are looking forward to a
good working relationship on that.
Mr. Harden. In addition to the $2.3 billion, we are also
talking to FSA and NRCS on the big programs that they have.
They haven't gotten money out the door yet, but we are trying
to work with them to know when and where that is going to go so
we can monitor it in the same way. The program that we will
probably get into first is the nutrition assistance program for
Puerto Rico. It got a huge amount of money, and it is money
that is already going out the door. So we expect to start an
assignment on that this fiscal year and have other assignments
starting in 2019 related to the other disaster programs.
Mr. Rooney. Thank you, Mr. Chairman. Thank you.
Mr. Aderholt. Mr. Pocan.
Mr. Pocan. Thank you very much, Mr. Chairman.
Thank you for being here. Let me just say first off, I
wanted to thank you, Inspector General, and specifically Gil
Harden, for meeting with my office and accepting our request,
along with Representative Fitzpatrick, for a new audit of the
USDA's Animal Plant Health Inspection Services Animal Care
unit's enforcement of the Animal Welfare Act for commercial
breeders. So we look forward to working with you on that. So
thank you very much.
As you know, the Food Safety Inspection Service had
proposed a rule entitled Modernization of Swine Slaughter
Inspection. The new inspection model being proposed is based on
a pilot project called HIMP that the agent has been conducting
since the late 1990s. In May of 2013, your office published an
audit report entitled ``Food and Safety Inspection Service
Inspection and Enforcement Activities at Swine Slaughter
Plants.'' Your office was especially critical of the number of
regulatory violations found in some of the plants participating
in the HIMP pilot and the fact that the agency has never
conducted an evaluation of the pilot to determine whether it
was meeting food safety objectives.
In November 2014, the Food and Safety Inspection Service
published an evaluation of the HIMP pilot in market hog
slaughter. The agency is claiming that the evaluation report
and the proposed rule addresses all of the concerns raised in
your May 2013 report. Do you agree that the agency is correct
in that analysis?
Mr. Harden. Actually, at this time, that rule is out for
comment, and so I have members that were on those teams doing
those audits, looking at the rule, and from that work and other
work that we have done to see if we have any comments on that.
Mr. Pocan. So when is that comment period?
Mr. Harden. I would have to get back to you. I just know
that we recently got it so we could provide comments.
Mr. Pocan. Appreciate it. Thank you. A number of consumer,
food safety, worker safety, animal welfare, and public health
organizations have requested that the Food Safety Inspection
Service extend the comment period for the Modernization of
Swine Slaughter Inspection proposed rule for as long as
necessary to allow the pending external peer review of their
assessment of the rule's impact.
Originally, the comment period was 60 days and extended to
90 days, which is still insufficient, particularly since the
peer review is not complete. By comparison, I think the similar
report on an uncontroversial proposed rule to amend egg
products inspection was 120 days, just as a comparison.
I was just wondering if you agree that an extended time
period is needed to make sure the peer--until the peer review
is complete and that the public has adequate time to consider
that?
Ms. Fong. Well, I think you make some very good points.
That decision most likely rests with the program agency and the
Office of General Counsel in terms of how they go about doing
the comment process and receiving comments and evaluating them.
So those may be the offices to take up that particular issue
with.
Mr. Pocan. Thank you.
On the budget, there is an $8.2 million decrease in your
budget. I am most concerned about animal welfare enforcement.
With the President's budget, what oversight projects would have
to be skipped, and specifically around animal fighting, how
efforts around that issue would be addressed with the cut? If
you could just talk about that for a second.
Ms. Fong. I will offer a few comments, and then I think Ann
might have some. We have done quite a bit of work in animal
fighting over the years, and they tend to rise--those issues
tend to arise in the context of investigations, allegations
that there may be some illegal fighting going on, and we then
look at them. And so, because of the nature of how we plan our
investigative work, we will react to allegations as they come
in, prioritize them depending on what is involved, other
felonies, level of dollars involved.
But let me just let Ann comment.
Mr. Pocan. Sure.
Ms. Coffey. Yes. As Phyllis mentioned, we typically look
at--we are sort of a little bit more reactive than proactive on
the audit side. So it is hard for us to say specifically what
that impact will be. It is really based on the allegations and
referrals we receive. We are working closely with the
Department of Justice on their initiative on animal welfare,
and so, you know, we partner with them, and we partner with
State agencies to try to maximize the coverage, even when maybe
resources won't allow us to work on a particular matter.
But at this point, I can't say exactly. I mean, obviously,
a decrease in funding, a decrease in personnel means that we
aren't going to be able to do as many of those types of
investigations.
Mr. Pocan. Thank you. I yield back, Mr. Chairman.
Mr. Aderholt. Mr. Valadao.
Mr. Valadao. Thank you, Chairman.
Thank you, Ms. Fong, and both our guests, all three of our
guests, for being here today. I do want to follow up a little
bit, just a quick comment on the fraudulently labeled imported
organic products. I appreciate my colleagues asking these
questions. I think that is something important we have got to
really focus on. There is a huge investment on the behalf of
farmers to get into the organic business, and to have someone
come in and undercut it is, obviously, very frustrating and
something that has a huge impact on our local economies.
I want to change topics just a little bit to one that I
have a feeling no one else wanted to bring up. Inspector
General, in September 2017, your office released a memo
outlining misuse of USDA's information technology networks.
Specifically, the memo says that, since 2015, the USDA's Office
of Chief Information identified 229 instances of USDA employees
and contractors using government equipment to access
pornography. What I find the most concerning is that the memo
also found that USDA employees had access to child pornography
on government equipment.
My question to you is whether or not any of the individuals
involved in the 229 notices of accessing graphic websites are
still at work for the USDA. Additionally, were the instances of
viewing child pornography referred to law enforcement agencies
for potential criminal prosecution?
Ms. Fong. I will offer a few comments, and then Ann has
more detail. You raise a very good point. The way we work with
the Department on these issues is that when the Department's
software identifies potential improper use, they refer it
directly to our office for investigative evaluation. And we did
see a significant rise in the level of referrals over the past
few years.
Child pornography, as you know, is a felony and a criminal
violation, and so when we receive those kinds of allegations
that look like there is something to them, we make that a
priority.
So, Ann.
Ms. Coffey. So, as noted, we did see a significant increase
in the cases that we received related to pornography. And, yes,
in some cases, they were, of those 229 that were referred, we
have about 32 cases which involve child pornography. That is
really kind of the catalyst that led us to send that memorandum
forward, because that is very troubling for us. And we actually
work those investigations. We don't refer them to another law
enforcement agency. We actually do those investigations
ourselves. We may consult with the FBI, the Federal Bureau of
Investigation, on those.
The individuals who we have who work for our technical
crimes division, they are, sad to say, experts--they come from
the FBI in many instances--in identifying that. One of the
challenges I think we have with those types of cases is that
you don't always know that it is child pornography right off
the bat. So we will get the referral. Then we have to do
analysis to determine exactly what we are looking at and if it
rises to the level that we are going to be able to prosecute.
With respect to your question about whether or not those
individuals who were reviewing the pornography are still
employed,--I would have to--check--we usually refer those back,
if they are strictly pornography, to the agencies, to take
administrative action against those individuals. And,
obviously, we follow through on the cases that are, specific to
child pornography. We just had a very significant case where we
had a contractor who was removed from his--well, he left his
position, but he had actually obtained another position. He was
a foster parent, had obtained a position with the Department of
Defense, and had been sent to Iraq. Our agent worked, I would
say tirelessly, to have that person extradited back to the
United States. He is going to be serving 25 years in prison. So
we take those very, very seriously.
Mr. Valadao. Have any of the websites been blocked?
Ms. Coffey. Yes, they have. As a matter of fact, I would
also say that, as a basis for the memorandum, we have seen a
significant decrease in the referrals we have received from the
Department on those matters. So, yes, the Department is
blocking those websites now.
Mr. Valadao. All right.
I am going to change the topic to something a little bit
cleaner. Oversight on USDA restructuring-no, no, no. I am
sorry; you already hit that one, too.
High-risk list. Every 2 years, the Government
Accountability Office puts together a high-risk list which
calls the attention to agencies and programs that are high risk
due to vulnerabilities to fraud, waste, and abuse,
mismanagement, and those that are in need of transformation.
Is your office able--if they were to create a list today,
which USDA agencies and programs would be at the top of that
list, and why?
Ms. Fong. Well, you bring up a good point. We, as an IG
office, do a similar kind of report every year. We call it the
top management challenges facing the Department. And, this
year, we identified seven challenges. Many of them are things
we have been talking about this afternoon--for example, food
safety inspections, FNS oversight of SNAP, IT security,
financial management within the Department, improper payments,
that kind of thing.
We would be happy to provide you that report.
Mr. Valadao. I would like that, yes. And my time is up, and
thanks again.
Chairman, I yield back.
Mr. Aderholt. Mr. Young.
Mr. Young. Thank you, Mr. Chairman.
Welcome, everybody.
The Federal Information Security Modernization Act of
2014--does that ring a bell to you?--required the OIG, you
folks, to review USDA's IT security program and practices.
There are a lot of nefarious characters out there trying to
steal people's identity and their personal financial
information.
It is my understanding that you all have established a
Research Aggregated Data Analysis Repository system, RADAR--
true?
Ms. Fong. Yes.
Mr. Young. OK--that collects, stores, and organizes USDA
information, including information from program participants,
recipients, borrowers, grantees, contractors, employees, as
well as personally identifiable information, personal data,
work-related data, geolocation data, financial data.
How is the USDA mitigating the privacy and security risks
of the RADAR system?
How many different systems are there in terms of, kind of,
computer systems within the USDA? Are they all integrated? Do
they all work fluidly together? I know that other agencies and
departments, such as the IRS, they have about 13 different kind
of systems.
Ms. Fong. Let me just comment on a very high level.
Within the Department, as you know, there are 30 different
agencies and offices.
Mr. Young. Right.
Ms. Fong. Each agency and office has its own systems,
maintains their own data for their own program and management
purposes. And OIG is one of those offices. We have our own
systems as well.
And when we do the FISMA work to look at IT security, we
are looking at how the Department is doing overall, each of its
agencies as well as the Department overall. And we also do a
similar review of our own internal systems to make sure we are
holding ourselves to those same standards of security.
The RADAR system that you mentioned in your question is an
OIG system----
Mr. Young. Okay.
Ms. Fong [continuing]. Not a department----
Mr. Young. Not a department-wide system.
Ms. Fong. Exactly.
Mr. Young. I am assuming that there are folks out there who
are trying to hack every day into the USDA. Do you get reports
on the frequency and when breaches are successful
unfortunately?
Mr. Harden. We do get notification of those incidents. And
as part of the FISMA work, those are followed up to see how the
Department handles those.
Mr. Young. So have there been instances where there have
been breaches and the personal information of farmers,
producers who are receiving maybe payments and have financial
information, personal identifiable information, that their
information is stolen and taken?
Mr. Harden. I understand the question. I don't have an
example right off the top of my head, but let me get back to
you.
Mr. Young. It seems that would be pretty serious, if there
was a breach and----
Mr. Harden. Right.
Mr. Young [continuing]. The information within the USDA of
producers and grantees were downloaded and taken.
Ms. Fong. We do have a very good working relationship with
the Department's Office of the Chief Information Officer, which
is the primary office that would manage the Department's
programs and is aware of potential breaches. And they have a
group there, the ASOC group, that will work very closely with
us when it appears that there may be a breach.
And their relationship with us is through our
investigations side, so Ann might have----
Ms. Coffey. Yes. I mean, we will get referrals if there
is--obviously, a potentially criminal matter, if someone is
hacking or breaching. The FBI actually has primary jurisdiction
over that type of investigation, but we will get notified
incidentally in case we need to do coordination for the
followup investigation.
But I am not aware--at this time, I have not gotten any
information indicating that there were breaches.
Mr. Young. So you are confident in saying that you are
hack-proof and there have not been breaches?
Ms. Coffey. I would not say that. I would turn it over to
my colleague who does the assessments on the IT security
systems. We get notification if something happens----
Mr. Young. Well, let me just ask you this. Let's say there
have been hacks and breaches. What are the protocols to let
people know that, that their information has been compromised,
their personal identification number, their banking account
numbers? Are there protocols in place to let them know that?
Ms. Fong. Yes, there are. There are government-wide
policies. OMB implements them.
But let me just comment to give sort of a big picture on
this. The Department's IT security posture can be better. That
is what our FISMA work basically says. We are looking at it,
and we are concluding--and the CIO agrees with us--that the
Department needs to really strengthen its IT security. There is
the potential for hacking. The potential is always there. And
we know, as you mentioned, that people are trying.
Now, what we are saying is that, when some of these
attempts can occur, we are usually notified by the CIO's office
to let us know that there is a situation that needs to be
looked at. We will coordinate with the appropriate
organizations, law enforcement entities, whoever.
If there has been a material breach of privacy information,
there are protocols in place to notify affected individuals,
and those would come into play. Fortunately, I don't believe
USDA has had any situation like that that I am aware of.
Mr. Young. But you would be aware if there were. You
should, at least, be.
Ms. Fong. We should be.
Mr. Young. What if you are not?
Ms. Fong. Well, ultimately, the----
Mr. Young. That is another report.
Ms. Fong. Ultimately, the Department is----
Mr. Young. But it is serious.
Ms. Fong [continuing]. The responsible organization for
managing the program and making the notifications.
Mr. Young. Thank you.
Mr. Chairman, I went over my time, and I apologize.
Mr. Aderholt. Mr. Palazzo.
Mr. Palazzo. Thank you, Mr. Chairman.
And thank you all for being here today.
In your testimony, you said half of your investigative
resources were devoted to SNAP-related investigations in fiscal
year 2017.
I saw an article out of Memphis just this morning where
seven people were arrested for exchanging their SNAP EBT cards
for drugs. We also know trafficking happens when a retailer is
willing to exchange SNAP benefits for cash or other ineligible
items.
Based on your experience, would you say SNAP trafficking
has increased, decreased, or remained flat over the past 3
years?
Ms. Fong. You raise some very good questions about the
level of SNAP trafficking. We, at this time, don't have a way
to quantitatively assess that. I will say that, in terms of our
investigative portfolio, we have a very steady stream of
casework there. We haven't seen the casework disappear in any
way. We always have many cases involving traffickers and
retailers.
On the audit side, we did issue a report in the last year
or so that is intended to help FNS address ways to identify
potential trafficking. And we made some, I think, very good
recommendations to FNS, which they are in the process of
implementing. So, hopefully, that will proactively get to that
problem.
Mr. Palazzo. OK. So, I mean, are you seeing stacks on your
employees' desk increasing and they are looking at the clock
Friday at 5 o'clock saying, ``I am never going to get through
this?'' Or is it just a steady tempo? I mean, you should be
able to say it has increased, it hasn't, or it is about the
same.
Ms. Coffey. I would say, in terms what we have seen
historically when we look at the, kind of, trends in our SNAP
work for investigations, our work tends to mirror, the size of
the allocation for that particular program is.
So what we have seen within the last--I think last year,
our SNAP percentage of time was about 57 percent. This year, it
is at 50 percent. It doesn't necessarily mean there is a
decrease in the trafficking, but what it shows is that, you
know, we do have, as Phyllis mentioned, a steady stream of work
in that particular area.
But the cases, you know, they are there--unfortunately, I
would say it is probably consistent, the trafficking is
consistent. You are going to have fewer people engaging in it
if you don't have as many people participating in the program,
I think is kind of the way I would characterize it.
Mr. Palazzo. Do you feel like you are going to continue to
see 50 percent or more of your resources going toward SNAP
investigations, like, in 2018, 2019, and beyond?
Ms. Coffey. I mean, I would say probably yes, only because
our cases do tend to take a little bit of time from the
initiation to when it is actually completed. So some of the
work that you are seeing now that is coming to fruition that we
report out on were cases that were actually initiated in prior
years.
So I think you probably will see that trend. And I think
there are probably other factors relative to the program that
may impact that in the future years.
Mr. Palazzo. Do you feel like you have the tools necessary
to do good investigations and have successful outcomes in
prosecuting the people who are cheating in the SNAP program?
Ms. Coffey. I would say our agents do a very, very, very
good job. We have about a 99-percent conviction rate for our
SNAP investigations. So, if our agents are working those cases,
they are doing a very good job at doing that.
You know, I think probably resources are always something
that everyone struggles with. So that is, you know, something
we have to think about and factor in when we are figuring out
how we are going to move forward over the next few years.
Mr. Palazzo. Because you are probably much more familiar
with how these people traffic in the SNAP benefits than the
normal person would be, and maybe even within the agency,
because of your investigations.
Do you ever provide back to your colleagues, hey, you know,
if we could just do this or enact this, we could probably
reduce the amount of fraud in the program? And is that well-
received? And do you share that information with others?
Ms. Coffey. We absolutely do. If we find a particular fraud
scheme that we think is of concern, we will absolutely share
that information with FNS.
And FNS is very receptive to--you know, I think a lot of
times we have to sort of work through, kind of, maybe
challenges to implementation, but they are always very
receptive if we make recommendations to them about how we can
improve the program.
Mr. Palazzo. Would you say the fraud is just pretty much
geographically spread across the United States, across the same
demographics? Or is it more rural versus urban? Or is it just
everywhere?
Ms. Coffey. So I think there is a little bit everywhere.
But I think, historically, just looking at the analysis that we
have done, we do see trends on the eastern seaboard more so,
some in California, in that area, and then in Texas are kind of
the areas where we see--most of our casework is focused.
Mr. Palazzo. I see my time is almost up. One last question.
What is the most outrageous thing that you have seen in the
trafficking for SNAP benefits?
Ms. Coffey. Oh, gosh.
Mr. Palazzo. Lobster? Steak? Other----
Ms. Coffey. I mean, we have seen some----
Mr. Palazzo. People buying puppies?
Ms. Coffey. I think I actually--yeah, I mean, I would have
to think about that a little bit more and get back to you, but
we have seen some pretty unusual things purchased with SNAP
benefits.
Mr. Palazzo. All right. You do not have to submit that for
the record.
Ms. Coffey. OK. Thank you, sir.
Mr. Palazzo. I yield back, Mr. Chairman.
Mr. Aderholt. Thank you.
I want to talk a little bit more about SNAP.
In the past, we have discussed the OIG's report on the SNAP
quality control process used to determine error rates. The
report raised some serious concerns that call into question
some of the methods that States have used to achieve low error
rates in the program. I know FNS has taken the report
seriously, and I am pleased that the agency is working to
implement much-needed changes to ensure accountability and
integrity in SNAP.
Since the Food and Nutrition Service could not validate
that State data was accurate, FNS was unable to calculate a
national error rate for fiscal year 2015. A national payment
error rate for fiscal year 2016 was not released since FNS is
working with States to implement changes to the system.
Since the Food and Nutrition Service hasn't released its
national error rate for SNAP for fiscal year 2015 or fiscal
year 2016, how does this affect the Department's overall error
rate?
Ms. Fong. Well, that is a good question. I don't believe
they issued a rate in fiscal year 2017 either. They are
anticipating a rate to be issued in fiscal year 2018, so that
would be the first in several years. Mathematically, I am not
sure how that would work.
Gil?
Mr. Harden. Yes, I mean, it is just not included--there is
not a number included for it in the improper payment rate.
Ms. Fong. So the improper payment rates are calculated
based on the programs that do have rates that are high-risk.
Mr. Harden. Right.
Ms. Fong. Yes.
Mr. Aderholt. For some programs like SNAP, the error rate
threshold increases each year based on inflation. And I am
aware this happens in other Federal agencies as well.
Do you think that having the error rate indexed to each
year still provides an accurate assessment for improper
payments, or are we just sweeping errors under the rug?
Mr. Harden. I know that they changed how that factored in
recently. So when we go back--and I know we will go back and do
followup work in the QC arena--I would have to take that as
part of the question, to see how that impacted it.
I know that when they changed the threshold with the
Recovery Act from what had been $25 to $50, that errors
wouldn't be reported, then, yes, a lot of the errors were just
not reported because they didn't reach the threshold.
The new threshold brings it back to somewhere in the $35
range, if I am remembering the number right. And then, yes, it
can be indexed, but we would have to see how that works over
time.
Mr. Aderholt. OK.
In your testimony, you mentioned that USDA did not comply
with improper payment requirements set forth by the Improper
Payments Information Act for a sixth consecutive year. Is the
Department making progress in correcting improper payments? Are
you finding the same problems year after year?
Mr. Harden. The compliance report has noted the same three
errors for 6 years running. So, in terms of being able to meet
those compliance requirements, you know, they are making
strides but they haven't gotten there yet.
There is another indicator that would say that they are
making improvements on whether they are having significant
improper payments, and that is a report we do--have done
separately in the past that is now part of the improper
compliance work on high-dollar overpayments.
This one, they have made progress in making sure they were
accurately and more timely reporting information about those
improper payments. And the number of payments, if memory serves
right, has gone down over time.
Ms. Fong. Yes. I would note that I think there are
arguments to be made on both sides of that issue, because it
appears that the Department's improper payment rate for fiscal
year 2017 has gone up----
Mr. Aderholt. Yes.
Ms. Fong [continuing]. Overall. So you have that on the one
hand. And then, on the other hand, you see progress being made
on the high-dollar payments. So it is a mixed bag.
Mr. Aderholt. To reduce improper payments, do you think it
is a matter of having good management in place and following
the laws and rules already on the books? Or do you think there
needs to be to some changes made to programs and the
regulations?
Mr. Harden. I would want them to get a good handle on what
they have to do currently before changing it.
Mr. Aderholt. OK.
Ms. Fong. Yes. And I think what we are seeing is that
individual agencies, the ones with the high-risk programs, are
the ones who need to be focusing in specifically on their
programs to identify the root causes of their improper
payments, which will probably vary agency by agency. But that
is where the effort needs to be put in, at the individual
agency program level.
Mr. Aderholt. OK.
Mr. Bishop.
Mr. Bishop. Thank you very much.
I, too, want to talk about SNAP.
In December 2017, your office published an audit on the
States' compliance with SNAP requirements for participating
State agencies, and it looked at five States, one of them being
Georgia. Four of the States, including Georgia, did not comply
with nondiscrimination requirements, including failures to send
decision letters regarding complaints. Others SNAP regulations
that the States didn't always comply with include the prisoner
verification system, deceased matching system, the income
eligibility verification system.
Now, we understand that the Food and Nutrition Service has
concurred with your recommendations, and I think you have
talked about some of what they are doing.
The administration now has proposed a radical new approach
to SNAP that has come under a great deal of criticism. They
want to provide the harvest food boxes in place of money on an
EBT card. They claim that this will reduce fraud, waste, and
abuse.
Much of your investigative work is dedicated to ensuring
the integrity of SNAP. I would like to know if you have looked
at this proposal, thought about this proposal. And if so, what
opportunities do you see for fraud, waste, and abuse in it?
I heard someone recently suggest that leaving harvest boxes
on the front step would probably mean that they wouldn't stay
there very long in the neighborhoods where the recipients would
probably be looking to get them.
Ms. Fong. You raise some very good questions. We have been
watching this proposal and initiative with great interest,
because SNAP is such a big part of the Department's portfolio.
And I think, at this stage of the game, we are watching it
because we want to get a better understanding of the specifics
on how the new program, if it were enacted, would be delivered.
And I think it appears that there is still a lot of discussion
going on around that.
In the past, when we have looked at SNAP and delivery of
SNAP, we look at, overall, FNS's responsibilities, and we also
look at the States and the State and local responsibilities.
Because, as you mentioned in your opening remarks, there is a
lot of responsibility that is given to local communities to
actually deliver, and I think we would want to keep an eye on
that as well, how the responsibilities are divided up.
Mr. Bishop. It seems as if there would be a lot more moving
parts and a lot more opportunities for fraud, waste, and abuse
and criminal activity.
Ms. Fong. We are watching it with great interest.
Mr. Bishop. Thank you, Mr. Chairman. I will yield whatever
time I have to Ms. DeLauro.
Mr. Aderholt. OK. Well, let me go to Mr. Harris.
Mr. Harris. Thank you very much.
Two quick questions.
One, to follow up, Ms. Fong, last year, I asked you about
what steps were being taken to address the lack of response to
identified cost-reduction measures in the SNAP program,
specifically concerning the per-case administrative costs. And
can you follow up with me and, you know, at this point discuss
what progress has been made since we last spoke to address that
high variance in SNAP administrative costs?
Mr. Harden. Unfortunately, I don't know that I have a lot
to add. I mean, we made that recommendation to FNS, and so they
have would have to go out and figure out how they were going to
do those cost-reduction strategies. And so we would need to
engage with them to see where they are at this point. That is
not stuff that they would traditionally just report to us
voluntarily.
Mr. Harris. And when will you follow up with them to see if
they have, in fact, addressed this variance in administrative
costs?
Mr. Harden. I will commit to taking that up as part of our
planning process this year as we build the 2019 plan. Normally,
we give agencies a couple of years after they have gotten
everything implemented so it can be put in place and it is
functioning before we go in and look again. But we can look and
see if we can do that sooner than later.
Mr. Harris. OK. Thank you very much.
The other question I have is in response to a report or
concerning a report dated this month about the use of purchase
or credit cards in the Department. And, you know, according to
the report, I think the Department has over 12,000 cardholders,
$145 million worth of transactions just in the first half of
fiscal year 2017.
And I understand that purchase cards have to be used, but
what I don't understand, is unusual here, is that it is a
fairly high number and that there are a high number of, quote,
you know, the high-risk transactions, ones where we haven't
taken--obviously, if you are using a purchase card, you are
probably not taking advantage of, you know, the buying power of
the Federal Government, our ability to contract at lower
prices, things like that.
Can you speak to some of the issues? Because I think the
report says 58 percent of the transactions had at least one
issue with them. Can you speak to the kind of issues that you
found?
Mr. Harden. Yes, sir.
And one of the first things I want to point out is that we
did not identify any transactions that we thought were
fraudulent that would need to be referred to investigations.
And so, yes, the 58 with errors in our 100 sample fit in
about 4 major categories. One of them you have mentioned, that
they were not using required sources. That was 34 of them. So
those were purchasing things that they needed to purchase or
were correct to purchase, but they just weren't probably doing
it at the best price, because they weren't using what the
Federal Government had put in place.
The other big number that is in there is ones with missing
documentation. There were a total of 28 that had some form of
missing documentation. It wasn't that they had all the
documentation missing; it was just it had pieces. So it doesn't
break down as big as it sounds, in some ways.
The other two areas, one was seven hadn't paid sales tax--
or had paid sales tax when the government should not be paying
sales tax. And the last one, which is probably the riskiest of
the four that we looked at in USDA, were split transactions,
where there were eight split transactions where they were
trying to buy it in multiple things under a cap.
Another thing I would say for this work, this is work, as
Phyllis referred to earlier, that we are leading in the IG
community. We have 20 different IGs that have done the same
type of data analytics and gone out and looking at what were
considered high-risk transactions. And we are working on that
summary report to go out to OMB hopefully this spring.
Mr. Harris. Well, when you look at that versus other
departments, is your perception that the USDA has less of a
problem, about the same problem, these are common problems
among departments?
Mr. Harden. I would say it is common among departments. And
one of the other things that we found through the work we did
with the 20 is that none of the transactions that the 20 IGs
looked at were fraudulent transactions that needed referring.
Mr. Harris. OK. Thank you very much.
And thank you, Mr. Chairman. I yield back the time.
Mr. Aderholt. Ms. DeLauro.
Ms. DeLauro. Thank you very much, Mr. Chairman. And sorry
to be late. There are many, many hearings today.
Ms. Fong, it is a pleasure to see you again. Thank you.
I have a couple questions here. But in your written
testimony, you mention the integrity of Federal safety net
programs, specifically note that, quote, ``a considerable
amount of resources are devoted to SNAP.''
I think it is important for us to consider the broader
context of other programs under USDA's jurisdiction. In 2017,
the average SNAP recipient received about $126 a month or about
$1,500 a year. In contrast, according to the most recent USDA
data, of those receiving government payments, the average farm
received $9,925 in agricultural subsidies.
I know there has been a lot of conversation, at least I
have heard, about SNAP and improper payments and so forth. I
believe this comes from a December 2017 document that you all
produced. This is ``Appendix C: Summary of Monetary Results.''
And it talks about the findings and potential for improper
payments identified during site visits to each State. There are
about five States listed here, and the total amount was
$29,574. I will put that number up against any dollar in any
agency that we have with regard to fraud, waste, and abuse in
this system.
But let me move on. I am concerned about your recent
reports which have shown shortcomings of the Risk Management
Agency's oversight of the Federal crop insurance program. In
December, you found that the RMA is not effectively reviewing
crop insurance agents and loss adjustors with abnormal claims.
Just last month, another audit report found that four of
five producer claim files from a crop insurance provider did
not contain the required evidence to support indemnity payouts,
resulting in questionable payments totaling $7.7 million just
for producers.
Five States, $29,754.
In light of the findings, is it possible that fraudulent
claims and improper payments associated with the Federal crop
insurance program are more widespread than previously believed?
And what recommendations has OIG made to further address crop
insurance fraud?
If you can answer, because I would love to get one more
question in, and I know I was late to this hearing, so----
Mr. Harden. In terms of the crop insurance, that is
something that they have been analyzing, those----
Ms. DeLauro. Hit the button.
Mr. Harden. Oh. I apologize.
That list that they have created, they have been creating
that list since 2001. So, yes, we looked at them to see what
type of--how are you using the analytics that you are using.
One of the things we found, that the AIPs, the insurance
providers, were being given a part of the list to track down,
and they really weren't coming back to RMA with good, solid
information. They would just say something was corrected or
something was----
Ms. DeLauro. Yes.
Mr. Harden [continuing]. Completed.
Ms. DeLauro. Yes.
Mr. Harden. I do know from other work that we did as part
of that, a part of the list is given to the Farm Service Agency
to follow up with, and they have found significant problems
with what is being found.
Ms. DeLauro. So I am presuming the answer to the question
is that the Federal crop insurance program, there is more
widespread improper payments than is currently believed.
I have asked the question, and if you can't answer it now--
what I want to know from you--from 2001, 2018, let us know what
recommendations OIG is making to further address crop insurance
fraud and how we do in crop insurance fraud. I would like to
get that report, and I would like to get it fast, as we go into
discussions about a farm bill and crop insurance and SNAP and
other kinds of programs.
Mr. Chairman, I don't know. I have 36 seconds left. Is it
possible to ask another question?
Mr. Aderholt. I will tell you what. We are going to come
back around.
Ms. DeLauro. That is perfect. I will take it. That is
great. Thank you.
Mr. Aderholt. OK. Let's go over to Ms. Pingree.
Ms. Pingree. Thank you, Mr. Chair.
I think I have a relatively short question. And I think you
have heard from all of us today that we greatly appreciate the
work that you do. And it is vitally important for this
committee to have oversight, and we are always grateful when
you are willing to go in and do some more for us.
But I have this question about OIG workplace environment.
So, every year, the Partnership for Public Service and Deloitte
produce rankings on the best places to work in the Federal
Government. Federal agencies receive an index score that
measures employee engagement, which is defined as the
satisfaction and commitment of the workforce and the
willingness of employees to put forth discretionary effort to
achieve results.
For 2017, the USDA's overall index score increased by 2.8
percent compared to the previous year. But for the same year,
OIG's index score decreased by 9.8 compared to the previously
year.
So, given your important role at the USDA, it is concerning
that employee satisfaction and commitment seem to have dropped
last year. Do you have some thoughts about why that happened?
And, also, just what you are doing to make sure there is plenty
of commitment and satisfaction in the workplace.
Ms. Fong. This is an issue that is very important to us.
And I think if you go back a year, you may have noticed that
for the FEVS results not for last year but the year before, we
were the highest within the Department of Agriculture.
Ms. Pingree. I did see that, yes.
Ms. Fong. Yes.
Last year, we were looking at--OPM started to use a lot of
different scales. We are very focused on those numbers. And it
is important to me personally that we have that commitment.
One of the things that we are doing this year, because we
want to keep an eye on our profile, our workplace satisfaction,
in response to the ranking member's question as well, is we
have engaged a contractor to come in and help us do an analysis
to see whether there are any barriers within our current
practices and procedures that are standing in the way of us
really getting to the next level in terms of diversity and
workplace satisfaction.
So we are very engaged in that work right now. We should
have some recommendations from them in the next few months to
move forward.
Ms. Pingree. So I guess it wasn't clear to you what was
causing the change in the numbers, what employees were feeling,
but what you are saying is you have a contractor helping to
determine what the dissatisfaction is?
Ms. Fong. We do. And we are working on that.
We also are engaging with our workforce to get their
thoughts on what we can do better. We have that initiative
actively going on as well.
Ms. Pingree. Great. Well, thank you for that. And I hope
you will report back to us, just to give us a better sense of
where you go with that. Thank you very much.
Mr. Aderholt. Mr. Young.
Mr. Young. Thank you, Mr. Chairman.
Some questions about the Rural Utilities Service's
broadband loan program. I know that you have had some reports
done on that in 2005. I think 2009 was probably the last
report? OK.
Some are critical of the program, and based upon a lot of
questions that we have raised up here on Capitol Hill. A well-
intended program. Want to make sure that we get broadband out
to those areas that don't have it.
But it appears that there have been some grants or loans
made to areas where there has already been broadband build-out,
so you are kind of piggybacking on another network there. And
it is kind of competing against the taxpayer or private
entities out there. As well as that they are not always going
to unserved or underserved areas.
Have you seen a shift where these grants and loans are
going to more unserved areas where it is really needed?
Mr. Harden. That is an issue that we did see when we did
the Recovery Act work from 2012 through 2015 or so, where you
still had some of those questions of are we getting out to the
ones that are most needing the service.
And as part of this year's plan, we also have a proposal to
look at broadband, to go back in to kind of see what changes
they have made, where they are going, have they improved in
those areas. Because, as you said, we have had findings where,
you know, they are going into places where there is already
service, it doesn't seem to be meeting the most rural need. So
we want to see what progress they are making in those areas.
Mr. Young. Yes.
Are we all missing something? I mean, it seems to me that,
if there is service somewhere, OK, they have service, we
shouldn't go there. If they don't have service other places,
that is where we need to be.
Do we need to be so explicit in maybe some authorization
language where we have to really spell that out to folks at the
USDA and the RUS service, that where there is not service, that
is where we should go? And why piggyback where there is service
already? Because no one is really being served in that
capacity. It is a waste of money.
Mr. Harden. I hear your question, and we have had the
same----
Mr. Young. I know. I am not venting at you, Gil. I like
you. You are a good guy. But it is--to me, it gets goofy to me.
Mr. Harden. Yes. We have had the same type of discussions
with them, and it doesn't yield great answers.
Mr. Young. It sounds like a future meeting before this
committee or maybe just in my office. But thank you.
I yield back.
Mr. Aderholt. OK. I think we need another round. So we will
quickly--you know what? Let me go ahead and recognize Ms.
DeLauro.
Go ahead.
Ms. DeLauro. Thank you very much, Mr. Chairman.
As you are aware, farmers are able to receive subsidies
through both a traditional farm subsidy program like ARC or the
Price Loss Coverage program, PLC, as well as subsidized crop
insurance. Together, farm subsidies represent a huge taxpayer
investment every year, often with the largest amount of farm
subsidies going to the largest, most successful farm
businesses.
In addition, the Agriculture Risk Coverage program in Title
I and the federally subsidized crop insurance program in Title
XI, they are similar in nature, raising the question about
duplicative payments going to farmers.
How much money is USDA paying through farm subsidies to pay
farmers twice for the same loss?
Mr. Harden. We currently are wrapping up an assignment on
the ARC/PLC program. As part of that work, I can't talk about
the specific findings right now because they are not ready to
be public. But we did have conversations with RMA concerning
some of their programs as they relate to FSA programs--or to
the ARC/PLC program specifically.
Ms. DeLauro. OK.
Mr. Harden. So I think we will have something to talk
about----
Ms. DeLauro. How soon will we have that?
Mr. Harden. I hope in the next couple of months.
Ms. DeLauro. OK. Thank you.
It is my understanding that the nonpartisan Congressional
Budget Office estimates that--there was a bill introduced by
Congressman Duncan and Senator Flake to end the duplicative
payments and, in fact, that that would save--this is CBO--save
taxpayers more than $60 billion over 10 years.
So I will be very anxious to see the report that you are
doing. Because when you want to take a look at significant
savings, these are the places where we need to look.
In October 2017, you published an audit report entitled
``Evaluation of Food Safety and Inspection Service's
Equivalency Assessments of Exporting Countries.'' You made a
number of recommendations. ``FSIS needs to strengthen its
oversight of the equivalence process.'' You found that FSIS
auditors were inconsistent in conducting, completing, and
documenting audit procedures. FSIS had approved individual
sanitary measures for exporting countries that were
inconsistent with domestic food safety standards. FSIS needed
to establish a policy on foreign plant delistments.
Your office and the agency did not reach management
decisions on all the issues raised.
FSIS's procedures for conducting ongoing verification
audits did not include corrective actions recommended in
previous audits. You made some specific recommendations to
address this finding, and the agency's response, if this is
accurate, did not satisfy your office.
In light of your findings, to what extent does your office
believe that FSIS has improved its oversight of the ongoing
equivalence verification audit process since your previous
audits on this issue?
To follow on, do you believe the agency needs to develop a
procedure to revoke the equivalency for a country that has had
numerous suspensions of exports due to food safety concerns or
where the verification audits show that a country has failed to
implement corrective actions from previous audits?
What has FSIS done? Do you believe they have improved its
oversight of ongoing equivalence verification?
Mr. Harden. The positive thing is, since we issued that
report, we have gotten an agreement on all the recommendations.
So they do have plans in place now to make the program better
and address the weaknesses that we identified.
Ms. DeLauro. What kind of timeframe is on that?
Mr. Harden. I don't have that. I will get that date for
you, but----
Ms. DeLauro. Please.
Mr. Harden. OK.
Ms. DeLauro. I would like that.
And then the other question is, do we need to develop a
procedure to revoke the equivalency for a country that has had
numerous suspensions of exports due to food safety concerns or
the verifications audits show a country has failed to implement
the corrective actions from previous audits?
Mr. Harden. It is my understanding--and understand that I
have done audits of this particular program at USDA multiple
times myself and led the teams. I do believe they have the
authority that you are talking about to do that now.
Ms. DeLauro. So there is a procedure in place now--and if
that is the case, I would really like to see where the
authority comes from--to revoke equivalency from a country that
has not met the standards.
Mr. Harden. I will go back and find that, because----
Ms. DeLauro. That would be great.
Mr. Harden [continuing]. I am working off memory of my
experience----
Ms. DeLauro. OK. Appreciate it very, very much.
Thank you very much, Mr. Chairman.
Mr. Aderholt. OK. Thank you, Ms. DeLauro.
Ms. Fong, Ms. Coffey, Mr. Harden, thank you all, all three,
for being here today, for your testimony. I know there is a few
things that you are going to get back with us on the record.
There may be some members that also have some questions they
would like to submit for the record, and that will be forwarded
to you.
So, again, thank you for your being here again this year.
And we look forward to working with you as we continue the
fiscal year 2019 ag appropriations process.
The committee is adjourned.
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Tuesday, April 17, 2018.
FY 2019 BUDGET--FOOD AND DRUG ADMINISTRATION
WITNESS
SCOTT GOTTLIEB, M.D., COMMISSIONER, U.S. FOOD AND DRUG ADMINISTRATION
Opening Statement--Mr. Aderholt
Mr. Aderholt. The subcommittee will come to order.
Good afternoon, everyone. I want to welcome all of you to
today's hearing. Our primary goal this afternoon is to examine
the Food and Drug Administration's fiscal year 2019 budget,
while also reviewing the use of funds past and present.
Our witness today is the Commissioner for the Food and Drug
Administration, Dr. Scott Gottlieb.
Welcome to the subcommittee, and good to have you here.
Welcome.
Commissioner Gottlieb, you have not quite reached, I think,
your first-year anniversary, but are getting close. But you
have already accomplished or made progress in a number of high
priority public health initiatives, from the record number of
generic drug approvals to a first-time gene therapy for cancer
to new strategies in combatting addictions.
While myself and my colleagues will not always agree with
you 100 percent of the time on the agency's regulatory actions,
you have overwhelmingly gained bipartisan support for the way
you have handled difficult policy matters. So congratulations
on that.
This is a real feat in Washington, as you know, these days.
So I want to commend you for your leadership in that area.
You lead an agency that touches the lives of every single
American every day and millions of consumers, not only in the
United States, but around the globe, whether it is through
human and animal foods, human and animal drugs, medical
devices, vaccines, and cosmetics.
And we appreciate you and your folks on the front lines in
the public health. As noted, we may not always agree on FDA's
level of regulatory enforcement, but I want to recognize your
actions and efforts toward providing flexibility in a number of
regulatory actions.
As you may have seen many times in the past, FDA employees
can sometimes become a bit too zealous and inflexible in their
development and the implementation of the rules, and you have
wisely recognized the negative impacts of rigid regulations,
and a number of times this past year have allowed regulated
industries more time to comply with these rules.
As long as you do not sacrifice safety and public health,
which I trust that you will not, I encourage you to continue to
provide regulatory relief where feasible for the sake of a
small and medium size business, as well as maintaining jobs in
and bringing jobs back to the United States.
FDA's budget and workforce continues to grow substantially
despite what some people claim. It is difficult to say with
certainty what the right size is. We will need to deliberate on
this matter as we develop the fiscal year 2019 appropriations.
We do know the reasons for growth vary. First, the cost of
paying, training, and supporting scientific and medical experts
is on the rise.
Second, FDA is a regulator of products sourced all over the
world in the complex nature of an international workplace in
resourcing intensively.
Thirdly, Congress continues to place more requirements and
responsibility on the agency, sometimes too much.
And lastly, Congress and the private sector continue to
invest more in medical research and development.
This Congress added $3 billion to NIH research last year
alone, with a total of $37 billion in NIH research for fiscal
year 2018. We will eventually see medical breakthroughs, which
need to go through FDA before they can reach the marketplace.
To put FDA's growth in context, when you last worked at FDA
back in 2007, Congress funded FDA at $1.79 billion. FDA's
fiscal year 2019 budget request before us today stands at $5.8
billion.
The Trump administration's fiscal year 2019 budget request
for FDA is likely to be the boldest and largest funding request
in recent memory and maybe ever. There appears to be nine
different funding initiatives, plus request for agency
infrastructure.
The discretionary budget seeks to increase in excess of
$400 million, or approximately a 16 percent increase.
When Secretary Perdue appears before this subcommittee,
which is scheduled for tomorrow, he may wish he was in your
position to be asking for such an increase when the
administration proposes a comparable level of decrease.
The wide assortment of medical product initiatives goes
beyond FDA's typical regulatory boundaries. For example, FDA
seeks $12 million for an initiative entitled ``Bring Tech Med
Manufacturing Home: Advanced medical device manufacturing and
quality.'' The agency requests $100 million alone for the new
Medical Data Enterprise.
One more example involves the promoting of domestic
manufacturing for $58 million. This latter initiative involves
the concept of continuous manufacturing, a production process
that could be revolutionary if adopted by medical product
companies on a large scale.
While FDA's narrative seeks to address real world problems,
this committee must make some major decisions on whether or not
to invest these initiatives and, if so, at what cost should we
do them.
I also hope to touch upon the funding and the policy
decisions included in the fiscal year 2018 omnibus bill enacted
last month. The members of this subcommittee were key players
in an appropriation which targeted increases to several of the
Nation's highest priorities: food safety, drug compounding, the
Oncology Center of Excellence, and the opioid epidemic
impacting every community across the Nation.
The opioid increase of $94 million should help FDA go after
illegal and counterfeit drugs entering this country through the
international mail facilities. We hope to hear from you today
and over the second half of this fiscal year on FDA's
performance with these new resources.
I am also aware that you have unveiled a nutrition
innovative strategy that included issues of interest to this
subcommittee, such as standards of identity for food products,
providing nutritional information to consumers, and
recommendation for sodium levels.
We look forward to discussing these items, as well as the
continual implementation of the Food Safety Modernization Act.
As we conduct our oversight responsibilities and craft the
agriculture and FDA appropriations bill for fiscal year 2019, I
want to outline just briefly our goals for this subcommittee.
First of all, the first goal is to bolster prosperity and
economic wellbeing in rural America and the farm economy.
Second is to conduct fair and transparent oversight of
agency activities and public resources.
Number 3, to promote economic growth through and efficient
regulation and minimization of regulatory overreach.
And the last goal is to protect the health and safety of
peoples, plants, and animals.
As we move forward, we will use these goals to guide us as
we consider the budget request and adequately fund critical
programs. The aforementioned items just scratch the surface of
the issues to discuss today and in the months ahead.
As a committee, we analyze these requests and focus on
allocating funds using the goals that I have outlined to target
the most effective and the highest priority programs.
Again, thank you, Dr. Gottlieb, for your being here today
and for your presence, and we look forward to your testimony.
And at this time, I would like to recognize the
distinguished ranking member of this subcommittee, Mr. Bishop,
for any opening remarks that he may have.
Opening Statement--Mr. Bishop
Mr. Bishop. Well, thank you very kindly, Mr. Chairman, and
welcome, Commissioner Gottlieb.
Mr. Chairman, I am pleased to be here again today as we
have our subcommittee's third hearing on the administration's
budget for fiscal year 2019.
It also gives me great pleasure to welcome Commissioner
Gottlieb before our subcommittee once again.
Commissioner, you have been accessible to me and to other
members on a consistent basis, and I am very grateful for that.
When we met last year, we were dealing with a disastrous budget
proposal that sought to replace all of the discretionary budget
authority that funded medical product reviews with user fees,
which would have reduced FDA's discretionary spending by $769
million.
It also cut $174 million mostly from food safety. What a
difference a year makes. With the agreement on discretionary
spending caps for fiscal year 2018, 2019, our 2018 bill was
$980 million over the administration's request for FDA and $41
million of fiscal year 2017.
Continuing on that path, the fiscal year 2019 budget
proposes an increase of $372 million over 2018, a 13 percent
increase. It includes some welcome proposals, such as
modernizing how generic drug applications are handled at FDA
and spurring work on rare disease treatments.
But I would be remiss, Mr. Commissioner, if I did not note
two major shortfalls in the budget, two things that really
seriously concern me.
First, there is no increase for work on opioids. This is
surprising given the President's stated commitment to solve
this epidemic and his declaration of the opioid epidemic as a
national public health emergency.
We have all seen the numbers, and we have all heard the
news reports. In 2016, opioid related overdoses killed more
than 42,000 Americans. That is an average of 115 deaths every
single day. This is a problem that will require the full force
of the Federal Government to solve, and individual agencies
with different jurisdictions will all have to play a part.
As the agency that oversees the approval of these drugs,
FDA has a unique responsibility. I understand FDA is
considering new ways to facilitate appropriate prescribing
practices, and I look forward to hearing more about that.
Secondly, I am also stunned that you only have a token
increase of $10 million for food safety. The FDA, along with
this subcommittee, has spent lots of time and invested many,
many resources into the implementation of the Food Safety and
Modernization Act. I know you understand that food safety
compliance on the farmers is a huge issue and it has to be done
well, partnering with the States, counties and the farmers
themselves.
To get the medium and the small farms ready, I expected to
see a significant increase in outreach, education, and
training, and there is nothing. So this is a disappointment to
me.
On a more promising note, you have mentioned that, quote,
``We need to envision a world where cigarettes lose their
addictive potential through reduced nicotine levels and a world
where less harmful alternative forms efficiently delivering
satisfying levels of nicotine are available for those adults
who need or want them,'' end of quote.
I agree. This is an area where innovation can have a big
influence.
I want to thank you for delaying product review application
deadlines on e-cigarettes until 2022. As I mentioned before,
vapor products offer a promising path for harm reduction for
those who are seeking to quit or limit their smoking.
The Cole-Bishop legislation finds common ground on this
issue. It allows users to transition from regular cigarettes
while at the same time addressing concerns of the public health
community, such as keeping it out of the reach of children and
establishing strict advertising and labeling rules.
As you can see, Mr. Commissioner, we have a lot to discuss.
I look forward to continuing to work with you on all of these
important issues, the issues that this subcommittee faces to
ensure that FDA can adequately fulfill its mission of
protecting the public health by ensuring the safety, efficacy
and security of human and veterinary drugs, biological
products, and medical devices, and by ensuring the safety of
our Nation's food supply, cosmetics, and products that emit
radiation.
Mr. Chairman, thank you for the opportunity to welcome the
Commissioner and share my concerns, and with that, I yield
back.
Mr. Aderholt. Thank you, Mr. Bishop.
At this time, I would also like to recognize the ranking
member of the full Committee of Appropriations, Mrs. Lowey, if
you have any opening comments that you would like to make.
Opening Statement--Mrs. Lowey
Mrs. Lowey. Thank you very much, Chairman Aderholt and
Ranking Member Bishop, for holding this hearing.
Commissioner Gottlieb, it is a pleasure to welcome you back
before this subcommittee.
The FDA regulates more than $2.4 trillion worth of products
consumed by Americans, including food, cosmetics, prescription
drugs, medical devices, and tobacco. That amounts to Americans
spending about 20 cents of every dollar on FDA regulated goods.
In short, you have an enormous responsibility to the
American public. Unfortunately, while the fiscal year 2019
amended budget request contains a significant increase for FDA
of $372 million above the fiscal year 2018 omnibus levels, I
have concerns that it is not adequate to fully meet the needs
of FDA, American families, and businesses which rely on its
success.
Given FDA's responsibility to regulate roughly 75 percent
of the food supply and implement the new Food Safety
Modernization Act rules, a $10 million increase in fiscal year
2019, which would not even keep up with inflation, seems
insufficient.
In addition, while I am pleased by proposals to modernize
and invest in medical products, bring generics to market, and
encourage product development for rare diseases, a vision for
FDA's ability to combat the opioid epidemic is glaringly
missing from this budget request. Every level of government
must do all it can to combat the opioid epidemic.
Lastly, as you know, I am deeply concerned by tobacco use.
I will repeat that sentence again because it is so important. I
am deeply concerned by tobacco use by youth, in particular, the
prevalence of e-cigarettes. I commend your leadership to reduce
the levels of nicotine in cigarettes and truly believe that if
we are able to accomplish this goal, it would be a game changer
for our public health and save thousands of lives.
However, at the same time that FDA is focusing on nicotine,
its delay in regulating e-cigarettes could very well open
Pandora's box, and I am sincerely worried that FDA will replace
one addiction with another, and that FDA's silence of e-
cigarettes could open the gates to the next public health
emergency.
I do want to discuss this with you further during my
questions. I am very concerned whether it is a high school in
my district. I was talking with a group of youngsters in East
Hampton, New York. Sixty percent of the students are using e-
cigarettes, and we will discuss that further, because they have
these gadgets. Thankfully, their parents in many instances and
the teachers do not even know what they are doing.
So I am concerned about the deaths. I am concerned about
the addiction to nicotine, and I do hope that we can have
adequate time later on during questions to discuss this.
So thank you again, Commissioner Gottlieb. Thank you for
joining us. I look forward to your testimony.
And thank you, Mr. Chairman.
Mr. Aderholt. Thank you.
And, Commissioner Gottlieb, let me just say without
objection, your entire written testimony will be included in
the record.
[The information follows:]
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Mr. Aderholt. And before I recognize you for your comments,
let me mention the White House has set up a briefing this
afternoon. I do not know if you consider this fortunate or
unfortunate. So we are going to have to adjourn here probably
shortly after 2:30. So if you could keep your comments to a
minimum.
Also, in order to accommodate all of the members, we are
actually reducing our time down to 4 minutes per member so that
everyone will have a chance to ask questions.
But at this point, let me turn it over to you,
commissioner, and we look forward to your testimony.
Opening Statement--Dr. Gottlieb
Dr. Gottlieb. Thanks a lot, Chairman Aderholt. Thank you,
Ranking Member Bishop and members of the subcommittee.
I would like to thank the Committee for your commitment to
FDA. We have been fortunate to receive strong bipartisan
support in recent years, and the 2018 budget was no different.
With your support, we have more opportunities to deliver on our
public health mission than at any time.
The President's 2019 budget request builds on these goals.
Overall, it requests $5.8 billion in total resources for FDA,
and at this level, the budget includes an increase of $473
million in budget authority and $190 million in user fees.
The budget requests new resources for FDA to make
significant investments in advancing critical areas of science,
domestic technology, and public health. I would like to
highlight one of those initiatives for the Committee today in
particular, and it is our efforts to build a knowledge
management platform as part of our Medical Product Review
Programs.
This platform would enable us to store/manage the collected
experience of our medical review staff, to have a way to
identify how decisions are made across different functions, the
scientific precedents we establish in the course of our review
process, and the knowledge we develop.
Right now, if you ask me how we made a particular review
decision in the past, I would begin by asking our review staff
if they have confronted a similar clinical circumstance and how
it was decided and why.
We have limited options to query or review decisions to
extract how we reached certain conclusions. We cannot store or
interrogate our own scientific precedent.
This sort of knowledge management system is key to how we
are modernizing our Medical Product Review Programs. Among
other things, our new efforts are aimed at bringing a more
team-based approach to medical product review to facilitate the
easier sharing of information across scientific disciplines and
to bring more consistency to decision making across different
disease products and disease areas.
As part of these new steps, we will set up a policy office
inside our Drug Center's Office of New Drugs that will distill
and align regulatory, clinical, and scientific reasoning of
review divisions to promote policy transparency and
consistency. And we will be converting more of that information
into hundreds of new disease-focused guidance documents once
these efforts are fully engaged.
We will also take new steps to make sure that these drug
policy documents stay up to date.
These guidances will outline clear, concise, and up to date
development guidelines as a way to foster innovation. Among
some of the many areas we are working on right now are new
guidances to lay out modern criteria for the development of
drugs targeted to ulcerative colitis, rare pediatric cancers,
pediatric HIV, and serious, life-threatening and non-cancer
blood disorders like aplastic anemia.
These guidance documents will aim to apply modern
principles to make drug development more efficient by focusing
on the most effective ways to prove safety and efficacy.
For example, the guidance on blood disorders will allow
drug developers to reduce the use of animal testing and will
outline ways to measure benefit that may permit more efficient
development programs and earlier approvals.
There is a common theme here. One aim is to focus more
guidance on laying out the pathway for developing drugs
targeted to less common and serious conditions where there is a
lack of available therapy, and drug development pathways can be
more challenging.
But bringing more alignment and shared learnings and more
consistency to how we evaluate scientific principles and make
decisions requires us to have more than just up to date
guidance documents. It also means we need to have better tools
for capturing and sharing what we learn so that we can develop
the rigorous principles that inform these guidances.
And that is where the new knowledge management system
becomes a critical element of our efforts. Let me give you one
tangible example of the connection between the knowledge system
and how we can advance better and safer medicines.
In the late 1990s and early 2000s, several drugs were
discovered after approval to carry a risk of sudden cardiac
death leading to their withdrawal. To identify drugs with this
pro-arrhythmic potential, a new clinical study requirement was
introduced as a preapproval obligation for all new drugs.
These study requirements looked at something called QT
prolongation, where the heart's beat becomes elongated. But
doing these QT studies is very costly, and the results are
imperfect. The studies can flag drugs as having a risk when
none really exists and can miss drugs that carry the danger.
Recently, we have improved on this approach by developing
cell-based assays that can better discriminate the medicines
that are likely to have this side effect. We have done these
things using a data warehouse that we have built by collecting
knowledge and information over many years and across many
different drug reviews and evaluating the differences between
drugs that do and do not have this risk.
This new assay is being introduced across all drug programs
and all FDA divisions right now. It will replace the old QT
study requirements, and this sort of innovation, how we assess
risk and benefit, we can make more routine with better
capability for curating knowledge gleaned across our Drug
Review Programs.
This is the sort of innovation that improves drug
development and efficiency, lowering costs while improving our
predictive accuracy. It is with better regulatory tools, better
management of our process, and your continued support that we
will continue to fulfill our critical consumer protection role
and advance opportunities for Americans to improve their
health.
Thank you.
Mr. Aderholt. Thank you, Dr. Gottlieb.
And I will start out with the questioning and, again, like
I said, we are going to reduce it down to 4 minutes, and I am
usually pretty lenient on our time, but because of our
restrictive nature today, we are going to try to stick by 4
minutes and keep it at that, certainly including myself.
FY 2019 PRIORITIES
As I noted in my opening statement, FDA is requesting the
most discretionary dollars in its history, without the typical
budget gimmicks. It is tempting to tell us that everything in
the budget is equally important.
On the surface, it is challenging to say that new drug
development might be a more impactful investment than an
equally important initiative, which may advance medical
devices.
You may be so vested in these issues that it feels like I
am asking you to pick a favorite child. However, like you and
your agency, we have to make hard decisions.
First, I want to dive into a particular funding initiative
that intrigues me and, I think, also intrigues a lot of members
of this subcommittee. Then I want to get a bigger picture of
the funding issue.
Back in 2011, just a few years ago, Dr. Woodcock was quoted
in saying that manufacturing experts from the 1950s would
easily recognize the pharmaceutical manufacturing process of
today. What my question would be: is this still true 7 years
later after Dr. Woodcock's comments?
And if it is, would you provide us a real-world example of
how this might work and what role FDA plays and what might be
reasonable outcome from this effort?
Dr. Gottlieb. I think there is still some truth in that,
Congressman. I appreciate the question. I think we have made
improvements in terms of trying to bring the pharmaceutical
sector towards more modern manufacturing, but there is still a
long way to go.
And the fundamental issue is that drug companies are
reluctant to innovate and introduce a lot of new technology for
the fear that it is going to introduce uncertainty as well
because they are not sure how FDA is going to embrace changes
in manufacturing.
But we know that there are a lot of technologies that would
allow manufacturing to happen in a way that is higher quality,
that could be safer, less prone to shortages, and I will give
you one tangible example.
We have talked about continuous manufacturing, and there is
a proposal in the budget for $58 million to help FDA support a
transition to continuous manufacturing on the new drug side. In
the biologics context, right now we manufacture flu vaccines in
eggs. It is 6-month process. It takes a very long lead-up time,
as you know, and is prone to problems.
If you had a continuous manufacturing platform
manufacturing flu vaccine, you could quite literally
manufacture in a cell-based environment a recombinant vaccine
basically using a gene cassette, and it would allow you to
basically change the flu vaccine that you were producing by
just changing the gene cassette, which is something that could
happen in a matter of weeks.
So you could scale up much more quickly and you could
convert to different kinds of vaccine if you saw changes in the
contours of the resistance patterns over the course of a
season.
That is just one very tangible example, but on the whole,
we know that this technology could lead to a better public
health outcome but for our ability, we believe, to put out
guidance to train our review staff on it, to train our
inspectorate on it, and to try to work in public-private
partnerships with the industry to help them convert over to
these new technologies. It is going to be a very slow
migration.
ADMINISTRATION'S PRIORITIES
Mr. Aderholt. Again, my time is coming to a close, but I
want to get back to a bigger picture briefly with the
administration's priorities.
There may be eight or nine funding issues in the budget
request or there are that many, but can you just pick out a top
couple of initiatives that you think have potential to deliver
the greatest public health impact?
Dr. Gottlieb. Well, you are talking about picking out a
favorite child. So I have three children. So I will pick out
three, if that is okay?
I think that the ones that I would point to are the ones
that I think can be the most fundamentally transformational for
the FDA, and it would be what we are doing on continuous
manufacturing; the efforts with respect to evidence, to try to
move towards more real time monitoring for safety in the post-
market right now. Even with what we do with Fentanyl, it is
retrospective. It is looking at claims data. We want to move
towards more real time monitoring where we are looking at data
in electronic health records and have an active surveillance
system. That is going to take an investment to do that.
And then what I talked about with respect to the knowledge
management system across the whole continuum of medical
products, being able to capture and query our own precedent,
these can be transformational types of infrastructure changes,
if you will, for the agency on a data side and on a qualitative
side.
But I think it is going to take an initial up-front
investment to make these happen, and I think we have an
opportunity now to do that.
There will be dividends in terms of more innovation; I
think lower costs as well.
Mr. Aderholt. All right. Mr. Bishop.
E-CIGARETTES
Mr. Bishop. Thank you very much.
Commissioner, at last year's fiscal year 2018 budget
hearing, I mentioned that Public Health England and the Royal
College of Physicians both concluded that e-vapor products are
95 percent less harmful than combustible cigarettes; that these
products effectively move people off regular cigarettes; and
that, in fact, many of my constituents have been referred by
their physicians to e-vapor products to stop smoking.
Since that time, the American Cancer Society has added its
voice in support of e-cigarettes as a more healthy alternative
to combustible tobacco.
I mentioned that the Cole-Bishop legislation finds common
ground by helping people quit smoking, but also establishes a
variety of requirements and restrictions that address public
health groups' concerns, such as keeping these products out of
the reach of children.
That is why I am concerned about reports that indicate that
under-age use of vapor products is increasing. A majority of
vaping consumers are adults. What is FDA doing to ensure that
these products are not being accessed by youth?
And specifically, what are the steps being taken to enforce
against secondary marketing platforms, such as eBay and others
that may not age-verify their consumers?
Regarding the e-vapor products as a whole, last year you
mentioned you were still working through this unit; that you
wanted to make sure you were fully grounded in the facts before
beginning a policy discussion with career officials inside the
Tobacco Center. You assured us that whatever you did in this
area would be science based.
A year later, can you comment on that?
PREMIUM CIGARS
And finally, last month the Food and Drug Administration
announced that it was reconsidering its premium cigar
regulations. The comment period for the public to voice their
opinions on issues is open until June 25.
You are looking for comments on a lot of different topics:
use patterns, public health considerations, standards regarding
consumer perceptions, and studies on whether any applicable
manufacturing, marketing, sales, distribution, advertising,
labeling and/or packaging requirement restrictions should be
applied.
I am a strong advocate for getting it right the first time.
Is 90 days enough?
Dr. Gottlieb. Thank you for the question, Congressman.
As you know, we have engaged in a comprehensive policy with
respect to tobacco to really put nicotine at the center of our
regulatory efforts, and at the same time that we move to
regulate nicotine and combustible cigarettes to render them
minimally or non-addictive, provide opportunity for products
that might present less risk than combusting tobacco to be
available for adults who still want to have access to
satisfying levels of nicotine, and these are the electronic
cigarettes and things like Electronic Nicotine Delivery Systems
(ENDS), and there are other technologies available that are
coming onto the market or being put forward.
We need to make sure we have the right regulations in place
to properly evaluate these products and put them through an
appropriate series of regulatory gates to make sure that they
actually can help smokers transition off of combustible
tobacco.
We are engaged in that policy right now. We are going
forward on the rulemaking with respect to the nicotine in the
combustible cigarettes, and we are also exploring the issues of
flavors of cigarettes and whether the flavors continue to
create a lot of youth initiation and whether or not the agency
should take action with respect to flavors in cigarettes,
including menthol.
With respect to the youth use, I will say that we are
deeply concerned about this. Whereas we see the potential for
some opportunity for the ENDS and the e-cigarettes to provide a
viable alternative for adults that potentially poses less risk
than combusting tobacco, we also recognize that that
opportunity is not going to be available if the youth use
continues to increase at the rate at which it is. It is simply
unsustainable. It is not going to be tenable. Congress is going
to step in. We are going to have to step in.
So we are going to have to address what we are seeing on
the youth side. We cannot just addict a whole generation of
young people on nicotine with e-cigarettes and consider that a
public health advance.
So I will tell you that we will be taking some very
vigorous enforcement steps in the coming weeks, starting in the
coming weeks, and we will continue that action to try to
address what we perceive as inappropriate utilization by youth,
and so we see the agency stepping into this fight very soon.
Mr. Bishop. I believe my time has expired.
Mr. Aderholt. Okay. Thank you.
We have the former chairman of the committee, Mr. Rogers,
here today, and I would like to recognize him.
OPIOID EPIDEMIC
Mr. Rogers. Thank you, Mr. Chairman.
Commissioner, FDA is the traffic cop for prescription
pills, and frankly, when this epidemic burst upon the scene 15
years ago, FDA was asleep at the switch, and the opioid
epidemic has flared like a wildfire.
Now it is at amazing heights. We are losing 60,000 people a
year in the country to opioid abuse and overdoses.
You were kind enough to come to the summit that we had in
Atlanta a couple of weeks ago with the heads of NIH, CDC, the
Surgeon General, and so on and forth gathered, 3,300 people
representing all walks of life on the fight against opioid
abuse. Your testimony there, your speech there was well
received and encouraged the rest of us greatly by the actions
that you are taking.
So I commend you for making opioid abuse high on your list,
as it should be.
I want to ask you briefly about two or three of the actions
which you have taken, which I salute. For example, you started
in May 2017. You announced an opioid policy steering committee
to examine mandatory pain management education for health care
professionals and revamping your risk management
responsibilities. That is a great step.
You took Opana off the market after a review of data showed
significant potential for abuse and misuse.
You announced that you would implement a risk evaluation
and mitigation strategy, REMS, for the prescribing of immediate
release opioids to ensure that the benefits of how these drugs
are prescribed continue to outweigh the risks of misuse, abuse,
addiction, overdose, and death.
That is the first time to extend the same regulatory
requirements to the manufacturers of immediate release opioids,
and it is significant because 90 percent of opioids prescribed
today are immediate release.
I could go on about the things that you are undertaking
that are in great measure the reason why for the first time we
are now seeing actually a reduction in prescription pill
overdoses, sad to say being supplanted by heroin laced with
fentanyl.
Can you tell us what you plan to do with the REMS plan that
you already are underway with?
Dr. Gottlieb. Well, thank you for the comments,
Congressman. I appreciate it very much and the recognition of
what the staff has done at FDA over the last couple of years to
try to confront this epidemic.
I will just say what we are looking at right now with
respect to risk management is whether or not we can move
towards a system where we try to develop evidence around what
the appropriate dispensing should be by indication.
You know, we believe we have an important role to play with
respect to new addiction, people who still become medically
addicted to opioids. Upwards of 50 percent of people who become
addicted, their first exposure will be from a lawful
prescription.
So people are still becoming addicted from a prescription,
although for more and more people, their first exposure is
increasingly a street drug, which is increasingly the low-cost
alternative.
But what we want to do is put in place more measures that
could help rationalize prescribing and make sure that when
pills are dispensed it is for an appropriate duration. So the
idea that we would build in place evidence-based guidelines
that could be used perhaps in labeling, and perhaps by
providers and health systems to better adjust what gets
dispensed, and we are working through that right now, how we
can develop such a system.
PAIN MANAGEMENT MEDICATION
Mr. Rogers. The miracle drug hopefully that comes along is
an effective pain management pill that is not addictive. NIH
and CDC are working heavily to make that happen.
Have you any thoughts on that?
Dr. Gottlieb. We certainly see drugs in early development
that look like they could be effective at treating pain and
might not have all of the addictive effects that opioids have.
I will say that within this category, when it comes to
chronic administration of any drug for the treatment of pain,
there has been no free lunch. All of the drugs have had some
liability associated with them, whether there are safety issues
with chronic administration, or abuse potential.
So we would need to look at this very carefully, but we do
see some promise in the early pipeline.
Mr. Rogers. I salute you on taking on the opioid problem.
Dr. Gottlieb. Thank you.
Mr. Aderholt. Mrs. Lowey.
E-CIGARETTES
Mrs. Lowey. Thank you, Mr. Chairman.
And, Commissioner Gottlieb, what does this look like to
you?
Dr. Gottlieb. I know exactly what it is, but it looks like
a USB key.
Mrs. Lowey. It looks like a JUUL.
Dr. Gottlieb. Well, that is what it is.
Mrs. Lowey. I am glad you are familiar with JUUL because it
seems most kids are, but most parents are not.
And this is a JUUL, which is now among the most popular e-
cigarettes on the market. It resembles a flash drive, can be
charged in the USB port of a computer, and offer ten kid-
friendly flavors like mango, cool mint, and fruit medley. It
delivers nicotine at a higher level than most e-cigarettes. In
fact, one JUUL pod like this contains as much nicotine as an
entire pack of cigarettes, one pod.
And, frankly, I have been all over my district. I have
heard from teachers, parents, superintendents, and even
students that JUULs are all over our schools, and worse, people
are assuming they are safe.
According to JUUL's own social media post, its highly
popular mango and cool cucumber flavors were not, frankly,
there until 2017 when they were first introduced to the market.
This appears to be a violation of FDA's ``deeming rule,''
which prohibits new e-cigarettes and other newly deemed tobacco
products from entering the market after August 8, 2016, without
going through an FDA pre-market review.
Did JUUL submit a pre-market application to FDA for its
mango and cool cucumber flavors? Did they?
Dr. Gottlieb. Well, Congresswoman, I do not want to
telegraph coming enforcement action.
Mrs. Lowey. Well, do me a favor then. I will finish my
discussion of it, and then you could say yes or no because I do
not want to take advantage of the time.
If yes, has FDA reviewed the application, issued a
marketing order allowing the flavors to enter the market?
And if not, why is FDA not using its enforcement authority
to remove these flavors from the market pending an FDA review?
And then you could ask me; perhaps you can suggest. I would
like to know if these products are safe. I think they should be
off the market, period. So if you could respond with the
application and what you have done with it, I would be most
appreciative.
Dr. Gottlieb. Well, I can comment briefly. I appreciate the
question.
As you know, when all of the requirements for regulation on
the newly deemed product, including e-cigarettes, went into
effect last year, we have authorities over these products to go
and inspect and impose Current Good Manufacturing Practices
(CGMP) standards and enforce age restrictions.
I think you are going to see us stepping into this fight in
a vigorous way in the coming weeks. I look forward to coming
back to you and briefing you on what we are doing. We are going
to be taking some action to address these concerns.
I share your concerns. This is top of my mind and top of
mind for a lot of people in the Agency because, as I said to
Congressman Bishop, I do think that there is some potential
opportunity from these products to help adult smokers, but not
if all they end up doing is hooking a whole generation of young
people on nicotine. That is not tolerable for me, and we will
be addressing this.
Mrs. Lowey. Well, I really appreciate your response because
in the seven seconds I have left, I think it is important that
our colleagues know that in these high schools, 60 percent of
the kids are smoking this stuff, and half of the teachers do
not even know what it is, and their parents certainly do not.
So whether it is cucumber mint or mango, I think we have
got to do something about it, and I thank you very, very much.
And every physician I have spoken to says this is a gateway to
addiction.
So I appreciate what you are doing with cigarettes, and I
appreciate you taking first, important action on these. Thank
you very much.
Thank you, Mr. Chairman.
Mr. Aderholt. Mr. Yoder.
TOBACCO CONTROL ACT RULEMAKING
Mr. Yoder. Thank you, Mr. Chairman.
Commissioner, thank you for coming back to the committee,
and I think whether it is Mr. Bishop's questions or Mrs.
Lowey's questions, I think the committee and the country stands
unified that we do not want these products in the hands of
children, and so we appreciate your work.
I think there are some themes you are going to hear from
many of us that your work under the Tobacco Control Act is
critical to make sure that these rules and regulations and laws
are enforced uniformly, with lots of clarity and information,
so that the public as well as the regulated industries, we very
clearly target what matters most, and we are hitting those
things in a predictable manner.
I know last July you made some announcements in regards to
rethinking the way FDA regulates these products to go in that
direction so that we have clarity. And some of the challenges
we have had are lack of clarity, uncertainty, unpredictability.
One of the items you mentioned was the need for
foundational rulemakings, including a proposed substantial
equivalence rule. In recent public statements, CTP Director
Mitch Zeller has indicated the proposed SE rule, when issued,
will be identical to the one issued and withdrawn on the same
day during the last administration.
As I understand it, that draft rule did not include key
definitions or provide clarity as to the FDA's expectations for
what should be in an SE application.
When FDA proposes such a rule, will you commit that the
proposed rule will provide clarity, transparency and
predictability for both the agency and the regulated industry,
including defining the same characteristics and different
questions of public health as outlined in the Tobacco Control
Act?
Dr. Gottlieb. I appreciate the question. We are working
through that draft rule right now that is inside the Agency. I
can assure you it is not a carbon copy of the rule that was
displayed briefly in the last administration.
We have learned a lot since that rule was originally
drafted, and we have also announced a lot of policy, and that
needs to be accommodated in how we approach the regulatory
process and how we approach that rule.
I think we will be in a position in the coming month or two
to submit that rule for review with the Department, and Office
of Management and Budget (OMB). We are nearing the end of that
process, and I am hopeful that will provide the kind of clarity
that you are suggesting.
I do not want to comment on specific elements of the rule,
if I may, here, but the point is well taken that the industry
does need certainty and clarity around these provisions, and we
need to get in place these foundational regulations.
Mr. Yoder. Do you believe, Commissioner, that we can have a
definition of same characteristics as part of this?
Dr. Gottlieb. I think it is possible to clarify that either
in regulation or guidance. I am not sure where the appropriate
place would be, but we would need to address that.
Mr. Yoder. As well as different questions of public health.
Dr. Gottlieb. That is a fundamental question that we would
want to address in some fashion.
Mr. Yoder. You believe that will be addressed in the rule?
Dr. Gottlieb. I do not want to commit to where we would
address it, but we certainly need to address these kinds of
considerations. These are the considerations that are elements
of the review process itself.
PREMIUM CIGARS
Mr. Yoder. OK. Along the same vein, as the FDA looks at
considering making changes to its approach regarding premium
cigars, something that former chairman has spoken of very
eloquently, there is concern the FDA would continue to enforce
existing cost requirements that might hurt small businesses
when it very well may amend how those categories are regulated.
Can you speak to that?
Dr. Gottlieb. Well, as you know, we pushed off the
application deadline, which I think was the most costly
requirement. A lot of the other requirements relate to things
like making sure there are adequate warnings on products and
making sure that they are not being sold to minors.
You know, if, in fact, and I am speculating here, which is
always dangerous, if, in fact, we end up going through a
regulatory process and we determine that premium cigars raise
different questions of public health and, therefore, should be
regulated differently, that does not necessarily mean that they
should be exempt from all regulation.
Certainly, there would be things I think people might agree
on that might be good things to continue to require, like
restrictions on sales to minors, and so this would need to be
determined in regulation.
Mr. Yoder. I appreciate your measured approach there, and I
appreciate your candid answers.
Thank you, Mr. Chairman.
Mr. Aderholt. Ms. DeLauro.
DRUG AND MEDICAL DEVICE SAFETY
Ms. DeLauro. Thank you very much, Mr. Chairman.
Commissioner Gottlieb, let me start with what I believe to
be at least alarming to me, the theme throughout your written
testimony and the budget.
You refer to new regulatory pathways for pharmaceuticals,
third party certifiers for certain medical devices, and
voluntary programs for device manufacturers.
With regard to medical devices, I would like to point out
that research from the National Center for Health Research has
found that in a recent year, half a billion medical devices
were recalled as, quote, ``high risk'' recalls because of the
potential for death or very serious injury.
I do have a copy of your action plan, but nevertheless,
item number two, explore regulatory options to streamline and
modernize timely implementation of post-market mitigations,
quite frankly, surprises me or alarms me, not surprises. It is
alarming.
The policies you propose do not sound like they have the
best interest of consumer safety and public health. It really
sounds like the Commerce Department or a business community.
You are the Commissioner of a regulatory agency. I am
really concerned about the ways in which you propose to modify
FDA's oversight in the name of efficiency and not public
health, in my view.
The changes have a potential for disastrous impacts on drug
and medical device safety. I am just going to make that
statement and move on to a question in the interest of time.
This is a question with regard to drug approvals.
Again, alarmed by the recent media reports regarding the
drug Nuplazid. Nuplazid received expedited FDA approval for the
treatment of Parkinson's disease psychosis, hit the market in
June of 2016. Since then, 1,000 adverse effects have been
reported to the FDA, the number of reported deaths rising to
greater than 700, a staggering amount of reports for a new drug
that is unprecedented.
And just as concerning is the drug manufacturer is moving
forward with clinical trials to get the drug approved for a
larger patient population, dementia related psychosis.
In October the FDA granted breakthrough designation for
this possible use, and thus, the drug will again go through a
similar expedited review process. Shocking to me that this is
going to be made available to an even larger patient
population. I do not know why it should stay on the market,
especially when the FDA has not determined it to be safe, and
while the number of adverse events continues to soar.
You tell me what does it take for a drug like this to be
taken off the market? How many more adverse events do we have
to have reported? And how many people, quite frankly, have to
die?
Why does the industry always take precedence over public
health and safety, Dr. Gottlieb?
Dr. Gottlieb. Well, I appreciate the question,
Congresswoman. We had a very similar exchange last year with
respect to a medical device, as I recall, and two weeks ago we
took action to make that medical device, a restricted medical
device, conditioned sale on some stringent post market
requirements.
Ms. DeLauro. That is Essure.
Dr. Gottlieb. Right. That is Essure.
Ms. DeLauro. And I appreciate that and spoke about that,
but you know, we have had this conversation over and over
again. I still do not know why it is on the market in this
country when it has been taken off the market in other
countries.
Dr. Gottlieb. I just want to, if I may, just address the
medical device issue more generally.
You know, we are looking for additional ways that we could
put in place additional pre-market controls, as well as better
data collection in the post market so that when we do learn of
a safety problem post approval, we could take action more
quickly.
I think that along with seeing a lot of innovation in
material science, science and technology, it is allowing us to
have better medical devices that can address fundamentally new
matters of public health.
I think our expectation should be that those same advances
also lead to devices that are safer, and that is the recurring
theme in the report we put out today. It is trying to create
pathways to help build in a better assurance of safety in
devices pre-approval, and in the post market when we do
discover problems, discover them more quickly and have the
tools to take action more quickly, as well.
That is what we are trying to pursue. It is a balance we
are trying to strike.
With respect to the product that you are talking about on
the drug side, I would rather not, if I can, get into a
product-specific discussion other than to say that there is
great care taken across the medical product continuum trying to
balance risk and benefit relative to the medical condition,
which we are trying to address.
And when you get into issues of unmet medical needs, it is
the case that there sometimes is a higher tolerance for risk so
long as the patient is properly informed of what those risks
are.
But that is a very difficult balance to decide on a case-
by-case basis. I will examine the product that you are talking
about in particular. I am familiar with it, but I will go back
and take another look at it.
Ms. DeLauro. Thank you, Dr. Gottlieb.
Seven hundred people have died. I think that that is a
pretty startling event, and with regard overall to devices, we
need to take a very hard look at what we are going to do about
making a process efficient that leads to adverse outcomes.
Mr. Aderholt. Dr. Harris.
SODIUM
Mr. Harris. Thank you very much.
And I will try to yield back a little time, if possible, so
other members can ask as well.
Thanks again, Dr. Gottlieb, for being in front of the
subcommittee.
Just on some issues, and you can get back to me, and maybe
we will submit questions for the record. On the salt issue, I
am still a little worried that it looks like there is going to
be this population-wide recommendation when we are actually
going to individualize medicine, and you know, whether or not
we differentiate that there are people for whom a low salt
intake is actually not good now. It is probably a minority of
the American population, but it is true.
So I hope when we come up with the guidelines that we take
into account that individualized medicine is the future, and
population-wide restrictions maybe are not good for some
people.
FOOD GUIDANCES
With regard to the FDA guidance, there is a long list of
FDA guidance that is necessary for food providers now to meet
FDA regulatory deadlines. They include the new labeling
requirements, small packaging issue, and the format
requirements, the new dietary fiber definition, added sugars,
listeria.
But in general, given the short timelines for compliance,
particularly when a product reformulation is necessary, I hope
the FDA will provide some enforcement discretion for food
providers who act in good faith frequently. They want to
comply, but in essence, specially when reformulation is
necessary, hopefully there is enforcement discretion so that
the people trying to comply with the regulations are not caught
up in it.
TOBACCO
Just with regard to tobacco, I do want to thank you because
the FDA Center for Tobacco Product recently has issued the do
not sell order to rolling paper manufacturers regarding youth-
related merchandise, and I know that was something that your
administration accomplished, and that is important because
obviously protecting children is a high priority for all of us.
With regard to the product approval process for cigars,
especially the premium cigars, I know the FDA recently
announced a change through the provisional substantial
equivalence process, and my question is: will the FDA take a
similar approach for newly deemed products under the regular SE
process and prioritize products under that regular SE process
that are, quote, less likely to raise different questions of
public health, which is my understanding one of the changes in
the provisional process.
So that is really the only question I am going to leave you
with to answer today, and then I am going to yield back my
time. We are going to do some QFRs later for the other issues.
Dr. Gottlieb. Thank you for the question.
You stated it correctly, Congressman, with respect to what
we did on the provisionals in terms of not requiring some of
the provisionals to undergo any additional review in making a
determination that they are less likely to raise significant
questions of public health.
We did do that on the basis of a risk-based assessment in
terms of how dissimilar they were to the predicate that they
were referencing in the application, and we were able to make
that determination.
We would take a risk-based approach across a continuum of
tobacco products. So it would certainly be the case that in
terms of how we would treat a regular application, as well. The
level of regulatory touch would be adjusted based on the
novelty of the product and how likely it is to raise new
questions of public health.
I think one of the critical things to point out is that as
we are working into this process, and this is a relatively new
program, agencies never had this authority before. We are
learning a lot of new things about how to make these scientific
assessments, and that is allowing us to make easier calls.
So, for example, with the provisionals, we were able to
exempt the cigarettes that had the new fire-resistant paper
because we made the determination that the existence of that
paper alone is not likely to change the characteristics of the
cigarette in a way that is going to be more harmful to the
consumer.
That is something that it took time for us to figure out
that basic scientific principle as we got more familiar with
the paper and the nature of the cigarettes themselves.
So we are able to make determinations in a more efficient
way as we get smarter about the science.
Mr. Harris. Thank you very much, Doctor.
I yield back.
Mr. Aderholt. Ms. Pingree.
ADDED SUGARS
Ms. Pingree. Thank you very much, Mr. Chair.
Thank you, Commissioner Gottlieb, for being with us today
and for your work on a whole variety of things. We have had
topics here, obviously, ranging from food safety to addictive
substances, all critically important.
I want to address something slightly different since we
have a limited amount of time, and I have a variety of other
questions that I will certainly be glad to submit for the
record, but I do appreciate you have been very responsive to
our questions in the past and are willing to pick up the phone
any time, and that is very helpful.
I want to talk a little bit about added sugars, and while I
am very supportive of the work you are doing on the nutrition
innovation strategy, I think that is really great that you have
taken that on, and I know it can be controversial at times, but
moving head on, and I think people totally deserve to
understand exactly what is in the food that they eat.
I am a little concerned about the added sugar standard, and
while I am happy to have added sugar as a labeling issue, in
most products I think about it from the side of the small to
medium size farmer, farmers generally, and how it is impacting
maple syrup and honey.
I learned, I think, last year in the committee that you
make your own maple syrup. So that is very impressive. I know
you know the product well, but in Maine, maple syrup
contributes about $30 million to the Maine economy. We are
third in the Nation in maple syrup production, and we actually
are proud to say we have the highest maple syrup yield per tap.
Maybe that will change as the climate changes, but so far, we
are in a good place.
I brought you a little bottle from Kenny's Sugarhouse in
Maine in case you are running out of your own supply, but just
so you can taste how delicious it is.
In the guidance in February on added sugars, the guidance
shows that honey and maple syrup, which are obviously single
ingredient products, must label their sugars ``added sugar.''
There is, I know, a provision, and you and I have talked about
it a little bit, that you can put an obelisk on there and then
some added information.
I guess what I am saying is I think it is going to be very
confusing for the consumer, and it is particularly confusing I
would say in the honey side because there is so much fraudulent
honey. I do not have the numbers, but I think it is one of the
highest likely to be fraudulent products where just sugar water
or other products are used and sold as honey.
So you have already got some confusion about is the honey
real or not. Then you say ``added sugar.'' Then somebody is
wondering is that just really sugar or what is going on?
So anyway, we may not resolve this today, but I just want
to make it really clear that I think calling a sweetener
product something with added sugar in it has the potential to
raise a lot of concerns in a time when consumers are very
concerned about their food.
And for us, looking at it as a State where we produced a
lot of honey and maple syrup, I think we just want to
understand what was your rationale to do that on a sweetener
product, while it is particularly appropriate on anything that
literally does add sugar.
Dr. Gottlieb. Yes, Congresswoman, part of our rationale or
a lot of our rationale is driven by the statute, and the
statute itself is prescriptive in certain places, and so we are
interpreting the law and the regulations as they exist.
We recognize that there are concerns, and you have
expressed them well here today, about the potential for
confusion here. The guidance that articulates our approach to
this with the obelisk is out for public comment. We recently, I
think, on Friday extended the comment period another 90 days.
So we are certainly going to take into consideration this
kind of feedback, which we have been getting, and reconsider or
take into consideration this perspective in what we ultimately
choose to do here.
But the point is well taken, and you know, I have heard the
concerns, and we will try to see what we can do to address
them.
Ms. Pingree. Great. Well, thank you for extending the
comment period. I am sure anyone from our State or other maple
syrup and honey producing regions will want to weigh in, and we
will look forward to having further conversations about it.
And please enjoy your Maine maple syrup.
Dr. Gottlieb. Thank you.
Mr. Aderholt. Mr. Young.
Mr. Young. Thank you, Mr. Chairman.
Nice to see you again, Doctor.
Dr. Gottlieb. Good to see you.
MEDICAL MARIJUANA
Mr. Young. I have got about 15 questions, and I am not
going to get through them all. So I will be submitting some for
the record, Mr. Chairman.
But I want to talk about the opioid crisis and alternatives
to treating chronic pain. Medical marijuana is talked about a
lot. States are doing their own things.
Do you see any kind of derivative or form within marijuana
to be helpful to ease chronic pain?
Dr. Gottlieb. Well, we see derivatives of medical marijuana
both being approved as drugs in certain clinical situations, as
well as in development right now. In fact, this week we are
having an Advisory Committee with respect to one product that
is a Cannabidiol (CBD) as a derivative of marijuana for the
treatment of rare forms of epilepsy.
So there is potential that the active ingredients in
marijuana might serve to be useful therapeutics in certain
situations. They need to be put through an appropriate
regulatory process and a scientific process that evaluates them
for those purposes. FDA is very open to considering those
opportunities and those applications.
Mr. Young. To be put through the regulatory process, you
need a lot of research out there to see what can be done with
the plant and what is effective, maybe not effective. That
research comes about more prominently and easily by moving it
from a Schedule 1 to a Schedule 2 drug, I would imagine, or
Schedule 3.
Do you have any thoughts on that? Has the administration
come down with any statement of an administration policy
regarding moving marijuana from a 1 to a 2 or a 3?
Dr. Gottlieb. I am not aware of any position the
administration has taken on moving marijuana out of Schedule 1.
It is certainly something Congress could take up if Congress
chose to do it.
As you know, there is a pathway to evaluating even Schedule
1 drugs and studying them, and there is a supply that is
available for companies that do want to study botanical
marijuana or the derivatives of marijuana, despite the fact
that it is a Schedule 1 product.
Mr. Young. Because the train has left the station on this
issue. You see a lot of what States are doing, and overseas as
well, with studies and research. I was just wondering your
general thoughts on it. I will not ask you your personal
thoughts.
Dr. Gottlieb. Well, my general thoughts on it are that----
Mr. Young. Unless you want to give them.
Dr. Gottlieb. Well, I will give you my general thoughts,
and I am not going to duck the question. My general thoughts
are that the best way to deliver an active pharmaceutical
ingredient is in a measured dose in a form where you can purify
the ingredient and you know what you are getting, and you can
demonstrate a dose effect, and you can provide a reliable
treatment to a patient.
And that generally is probably not going to come from
something that is smoked. Rolling something up in a piece of
paper and lighting it on fire and smoking it is not the most
efficient way to deliver an active pharmaceutical ingredient. I
cannot think of another drug that we deliver that way at least
therapeutically.
Obviously, recreationally people take drugs that way, but
you want to make sure the patient is getting a reliable dose
and a reliable effect with each administration.
And also the lung itself is not a very efficient drug
delivery platform. We generally would prefer not to deliver
drugs through the lung unless we were treating the lung in some
fashion.
Mr. Young. I appreciate you clarifying that because I think
there are some misnomers out there that inhaling or smoking is
the best way to get any kind of benefits from the plant.
RARE DISEASE THERAPIES
One last quick question. Drug development for rare disease
therapies can be especially complex because of small population
sizes that make traditional clinical trials infeasible. FDA has
helped develop novel approaches to review treatments for a
number of rare diseases, including cystic fibrosis, a rare
genetic disease that causes progressive lung damage and life-
threatening lung infections.
Only 30,000 people in the U.S. have cystic fibrosis. Can
you speak to the agency's current thinking about how he can
ensure treatments are safe and effective as clinical trial
designs are updated to accommodate in this new paradigm?
Dr. Gottlieb. I can speak more generally to just how we
develop drugs in a paradigm where you are targeting drugs to
very small populations, and there are a number of measures that
we have taken with respect to clinical trial design, but one of
them is in the budget, and one of them is the new initiatives
that we are highlighting today and asking for resources around,
and that is to try to develop natural history models to model
the behavior of patients who have a rare disease.
So, for example, if you think of a patient with a Duchenne
muscular dystrophy or myotonic dystrophy, generally they have a
predictable course in terms of their decline in function. We
ought to be able to model that and use that model as a placebo
arm in trials to make the trials and the development process
more efficient.
Sorry, Mr. Chairman. I heard. I am sorry.
Mr. Young. I will have some questions for the record.
Mr. Aderholt. Yes, and I apologize, too. It is out of our
control.
Mr. Pocan.
DRUG DEVELOPMENT
Mr. Pocan. Thank you, Mr. Chairman.
And thank you, Commissioner. I want to echo our ranking
member's comments about your accessibility. I do really
appreciate that.
In fact, over the break, we had a sit-down with a bunch of
biotech life science companies, Kevin Conroy and others--I know
you know Kevin--had helped put together.
You know, in Madison, Wisconsin, there are not a lot of
Trump Administration officials that are especially popular.
Among almost all of the companies that work with the FDA, we
have had really good feedback. So I just want to let you know
that almost to the company, they are really appreciative.
The one issue that did come up though is a lot of the
companies I am dealing with are a lot smaller, and just the
amount of money that it takes to go through the regulatory
process and keep floating while they are going through that has
become a burden for some companies.
I was just wondering your reaction about what we can do to
help some of those smaller companies that are trying to stay
afloat while that process takes as long as it does, what we
might be able to do to help streamline that process.
Dr. Gottlieb. I appreciate the question. I think it is
underappreciated what the true cost of drug development is. We
think about the cost of drug development as the cost of doing
the clinical trial, but if you are trying to finance a drug
development program, as many of you know, I was on the other
side of this working with a venture capital firm before I came
into this position.
The biggest cost when you model out what your costs are
going to be is the time cost of capital and the risk because
you have to adjust your model for what the degree of risk is in
the drug development program in terms of trying to think of
what your costs are and what your expected return needs to be.
And I think FDA is uniquely positioned to try to address
those two issues because to the extent we can provide more
clarity, more certainty about what the objective measures are
going to be on which we assess risk and benefit, we can help
reduce not only the time cost of capital, the time it takes to
do the programs, but the risk inherent in the programs.
You are not shooting at a moving target. You know the
target you are shooting at.
What I talked about at the outset in my oral comments
today, trying to get more disease specific guidance, is
directly on point to try and address these issues, and I think
if I was to point to one thing I think we can do it is to try
to get out more guidance about what the objective measures are
so we can reduce the cost and reduce the uncertainty.
KRATOM
Mr. Pocan. All right. Thank you. I just want to make a
quick comment. I know we have talked about alternatives for
pain management, which everyone is talking about opioids now
again. We had talked about the issue of kratom, the worry that
it could get to Schedule 1, and whether or not there is going
to be research or not.
Interestingly, when Dr. Volkow from the National Institute
of Drug Abuse was before another subcommittee, they kept
referring to kratom as a synthetic, and as you know, it is a
plant. It is not a synthetic, which I think is part of the
problem, why people have been looking at it, because it is used
in some synthetic forms of heroin.
So it is kind of like if you took every ingredient in
something and looked at it wrong. So I hope that we can
continue that conversation. I appreciate the advice you gave
me, and we are going to pursue that through the appropriations
process, but I just want to state that.
GENERIC DRUGS
The last area, if I can, in the minute and 15 seconds left,
prescription drug prices, specifically some insulin. There is a
product called Humalog, which has had big, big increases in
insulin cost. Yet we have had a hard time finding generic
equivalents.
And there are some questions about if we are aware if there
are any applications for substitute generic insulins that are
pending with the FDA and what that status might be.
Are you aware of any generic companies having difficulty
obtaining samples needed to show that a generic product works
the same as a brand name insulin?
I think I saw your agency said you had about 150 inquiries
on sample locking by brand name companies, and if you could
just talk about the priority because I know you have talked
about it to me personally, about trying to make sure we are
getting generics to the market faster, but specifically in this
area.
Dr. Gottlieb. We are aware of companies, generic companies,
having problems getting access to the samples they need and the
doses they need in order to run the studies that are required
for FDA approval of a generic drug, and that is a big concern
of ours because I think the system is dependent upon their
ability to run those studies.
With respect to the insulins more generally and not to
comment on this specific drug, but just generally speaking,
they are regulated as drugs. We are trying to put more guidance
on how to genericize these complex drugs.
These insulins are going to be moving to the biosimilar
pathway, and we are also going to be putting out very soon a
suite of policies that address how to bring on biosimilars to
the market as well.
So this is something we are acutely focused on as one
element of how we are bringing more competition to the market.
Mr. Pocan. All right. I thank you.
Mr. Aderholt. Thank you, Dr. Gottlieb, for being here, and
I apologize for the schedule today and apologize to the other
members of the subcommittee.
Like I said, this was out of our control and came at the
last minute, but the administration has a briefing on Syria, of
course, and I know a lot of members are very interested in
that, and certainly it is an important issue that we are
dealing with.
So thank you for your time being here today. I know a lot
of members will submit questions for the record, and we
appreciate your diligence in getting responses back to them.
So with that, the subcommittee is adjourned.
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