NIH Announces Sweeping Ethics Reform

The National Institutes of Health ("NIH") recently announced sweeping supplemental ethics regulations that will change how pharmaceutical and biotechnology companies interact with employees of the NIH. 70 Fed. Reg. 5543 (February 3, 2005). Issued by the Department of Health and Human Services ("HHS") and the Office of Government Ethics ("OGE"), the new rules amend title 5 of the Code of Federal Regulations, subjecting all NIH employees to stringent new restrictions on: (1) outside activities, (2) stock holdings, and (3) receipt of awards from certain companies that have dealings with NIH.

Although the new rules require extensive disclosures from NIH employees, and violations carry a broad range of penalties, the new rules impose no legal reporting requirements on pharmaceutical and drug companies. However, these companies, as well as health care providers, health care insurers, and other entities, could be substantially impacted by the new rules being enforced.

The new rules prohibit NIH employees from engaging in compensated or uncompensated employment, including consulting and scientific or administrative board service, and compensated teaching, speaking, writing, or editing for the following types of entities:

• Substantially affected organizations (including biotechnological, pharmaceutical, medical device companies, and others with similar interests);

• Supported research institutions (including educational institutions or non-profit independent research institutes that are, or recently were, NIH funding applicants, grantees, contractors, or CRADA partners);

• Health insurers;

• Heath care providers (including hospitals, clinics, and health maintenance organizations); and

• Related trade, professional, or similar associations.

While there is a grace period, NIH employees must terminate prohibited outside activities within 30 days from the effective date of the new rules, or March 5, 2005. An employee may apply for an additional 60-day extension beyond March 5 to the appropriate ethics office.

The new rules also impose annual reporting requirements with respect to outside employment or activities. On February 28 of each year, NIH employees will be required to file with the appropriate ethics office a report of any outside activities. This report is due on April 29, 2005 for this year only.

NIH employees are not prohibited from teaching, speaking, writing, or editing for a political, religious, social, fraternal, or recreational organization. However, if the activity is compensated, other than reimbursement of expenses, or if the position held with the organization requires the provision of professional services (e.g., accounting, legal or medical), then prior approval is required before commencing activity. NIH employees, with Agency approval, may also be compensated for teaching, speaking, writing, or editing that is part of a Continuing Medical Education ("CME") program or other CME-like events. But the assignment must be on a broad topic, and a pharmaceutical or biotechnological company may only fund the event through an unrestricted educational grant.

An additional exception exists for writing or editing activities that are published in a scientific journal or textbook. To be allowable, the publication must subject manuscripts to scientific peer review or a substantially equivalent editorial review process. This kind of activity is permissible even when a pharmaceutical or biotechnology company funds the publishing activity, as long as the company is involved only as an unrestricted financial contributor. The company may not exercise any editorial control. As with all outside activities, prior Agency approval is required.

NIH employees who file either public (SF 278) or confidential (OGE 450) financial disclosure reports are prohibited from owning stock in a pharmaceutical, biotechnology, or other company involved in the research, development, or manufacture of medical devices, equipment, preparations, treatments, or products. This prohibition includes the NIH employee’s spouse and minor children. All other NIH employees, those who do not file either of these reports, are subject to a $15,000 cap on holdings in such companies. This $15,000 cap also includes the employee’s spouse and minor children. Within 60 days of the effective date of the new rules, NIH employees will be required to report any prohibited holdings. Generally, NIH employees, including their spouses and minor children, must sell the prohibited stock within 150 days of the effective date of the new rules.

This prohibition has few exceptions. One exception allows an employee of the NIH, his or her spouse, and any minor children to keep stock arising from pre-federal service employment, such as a pension. Another exception permits an NIH employee, spouse, and any minor children to retain stock that is held by a diversified mutual fund (e.g., S&P 500 index fund) or a non-health care or non-health care related sector fund (e.g., an energy or communications sector fund). NIH employees may seek a written exception to this prohibition once NIH publishes guidance for doing so. Lastly, NIH employees who qualify may apply for a Certificate of Divestiture before selling their stock in order to defer capital gains taxes.

The new rules prohibit NIH senior employees from accepting gifts with an aggregate market value of more than $200 as part of an award given because of their official position, or from entities that may be affected by the performance or nonperformance of the employees’ official duties. The new rules further clarify that this prohibition stands even if the employee is not involved in any action on a matter involving the award donor. NIH senior employees are defined as:

• The Director and the Deputy Director of NIH;

• Members of the senior staff within the Office of the Director who report directly to the NIH Director;

• The Director, the Deputy, Scientific Director, and Clinical Director of each Institute and Center within NIH;

• Extramural Program Officials who report directly to an Institute or Center Director; and

• Any employee with equivalent levels of responsibility who is designated as a senior employee by the designated agency ethics official or the NIH Director, in consultation with the designated agency ethics official.

Senior employees may apply for an exception that would allow receipt of gifts with an aggregate market value of more than $200. However, NIH anticipates only approving such exceptions for very prestigious awards such as the Nobel Prize and other awards that confer an exceptionally high honor in fields of medicine or scientific research.

Non-senior NIH employees may not accept gifts with an aggregate market value of more than $200 that are part of an award offered by an entity that is, or seeks, to do business with the NIH, seeks official action from the NIH, conducts activities substantially affected by the NIH, or may be affected by the performance or nonperformance of the senior employee’s official duties. However, non-senior NIH employees may accept bona fide awards for meritorious public service if such awards meet several criteria:

• The NIH Advisory Committee to the Director reviews and recommends the award for approval;

• The employee meets the regulatory criteria; and

• The employee has no official duty matters involving the donor.

Any employee who fails to obtain approval prior to accepting an award may be subject to administrative discipline and could be required to forfeit the award or take other remedial actions. Also, a cooling period of one year after receipt of any award will commence after the acceptance of an award, during which an employee who has received an award must obtain prior authorization before participating in any specific matter where the award donor is a party.

These new rules remain in effect unless changed by subsequent regulations. HHS intends to evaluate additional ethics regulations, including those regarding outside activities and financial holdings within the next year. HHS will consider public comments received by April 4, 2005 prior to issuance of a final rule. Pharmaceutical, biotechnology, medical device, and other affected companies should strongly consider voicing concerns and commenting on the new rules and how they will transform the industry.

This article is presented for informational purposes only and is not intended to constitute legal advice.