Tuesday, February 27, 2007

CIRM's Conflicts: Beware the WARF Syndrome

The California State Auditor has freshened the debate over public disclosure of the economic interests of the men and women who review the applications of scientists and others seeking hundreds of millions of dollars in grants from the state of California.

The auditor's report Tuesday recommended that the California stem cell agency seek an attorney general's opinion on whether its policy is appropriate. CIRM does not require the grant reviewers to disclose publicly their economic and other interests. But it does require them to disclose confidentially to CIRM.

The position of the California Stem Cell Report is that the reviewers make de facto decisions on the grants and that they should disclose their economic interests. Others advocate disclosure as well, including The Sacramento Bee and the San Jose Mercury News.

We are presenting here the text of what the auditor had to say and CIRM's response along with a related paragraph from the Court of Appeal Monday. CIRM has not yet decided whether to seek an AG's opinion. We should note that Jerry Brown, the attorney general, decades ago sponsored the Political Reform Act mentioned in the discussion below, an initiative he touted as a much-needed good government measure.

We have written much on this subject, but would like to add a few additional comments at this point. CIRM is in danger of falling prey to the WARF Syndrome. We refer to the Wisconsin Alumni Research Foundation, which last year told California that it had to cough up royalties for its state-financed stem cell research. The position triggered a flap that only ended with WARF declaring that it would not require the royalties after all. WARF, a nonprofit organization with a longstanding record of supporting science, finally did what was right, rather than focusing narrowly on self-interest and protecting its patents. In this case of reviewer disclosure, CIRM is narrowly focused as well. Various interests obviously have to be balanced. But CIRM has tilted too far in protecting its reviewers from public scrutiny, justifying its position on the untested, hoary premise that the secrecy is the only way to generate "good science." This is a case where CIRM should let the sun shine in. Billions are literally at stake along with public trust in the agency. Public disclosure is the right position. It not only reflects the public's best interests and the best interests of good government, but it helps to protect CIRM itself from the possibility of a truly nasty scandal.
Here is what the auditor had to say:

Although the institute developed a Conflict of-Interest code and policies, improvements are needed to ensure that they are followed

With certain exceptions, committee members and institute employees are subject to the requirements of the Political Reform Act of 1974 (Political Reform Act). The purpose of the Political Reform Act, in part, is to ensure that public officials perform their duties impartially, free from bias resulting from their own financial interests or the financial interests of those supporting them. In response, the committee adopted a conflictof-interest code—a set of rules intended to identify and prevent conflicts of interest that institute employees and committee members might have with entities with financial interests in the stem cell research program, as required by the Political Reform Act and state regulations pertaining to the Fair Political Practices Commission (FPPC).

To supplement the code, the committee also adopted policies designed to ensure that committee members and institute employees avoid conflicts of interest, and that the public views its conduct as open, fair, and free from bias. In addition, the committee adopted conflict-of-interest policies for the working groups that advise and assist it in establishing policies and standards, as well as evaluating grant applications. However, the FPPC has raised questions about the applicability of the Political Reform Act to the institute’s working group members, and improvements were needed in the committee’s conflictof-interest policies, as well as its procedures, to ensure that the policies are followed.

The FPPC Has Questioned the Exclusion of the Working Groups From the Institute’s Conflict-of-Interest Code

The institute formulated and the committee adopted a conflict-of-interest code. With certain exceptions, the institute’s act requires that the committee and the institute comply with the Political Reform Act, which includes the requirement to prepare a conflict-of-interest code. The Political Reform Act also specifies the required contents of such a code. The key requirements are presented in the text box.(See item at the end of this statement.) To provide information on employees designated as decision makers that may affect financial interests and the types of financial interests those designated employees must disclose, government agencies that do not wish to draft their own conflict-of-interest codes may adopt a model code provided by state regulations. This model code may be modified to designate the employees who must disclose financial interests and the extent to which they make disclosures. The committee adopted a modified model code.

The Political Reform Act requires that the institute submit its conflict-of-interest code to the FPPC for review and approval. The FPPC must review the code to determine if it provides reasonable assurance that all foreseeable conflicts of interest will be disclosed or prevented, all affected persons have clear and specific statements of their duties under the code, and the code differentiates between designated employees with different powers and responsibilities. The institute submitted its code to the FPPC in July 2005, and after an exchange of correspondence between the FPPC and the institute, the FPPC approved the institute’s code in May 2006. Subsequent to FPPC approval, the institute submitted the conflict-of-interest code to the Office of Administrative Law for its review and inclusion in state regulations. The Office of Administrative Law approved the institute’s code in September 2006.

However, the FPPC has raised questions about the exclusion of the working groups from the institute’s conflict-of-interest code. The FPPC believes that members of working groups, who perform duties such as advising the committee on standards and policy or evaluating grant applications and making award recommendations to the committee, may need to be included in the conflict-of-interest code. Specifically, the FPPC believes that, under state regulations, working group members may act as decision makers if they make substantive recommendations that are, over an extended period, regularly approved without significant amendment or modification by the committee. Thus, as decision makers, working group members would need to be subject to the conflict-of-interest code. This would mean that working groups would be subject not only to the financial disclosure requirements of the Political Reform Act but also to the prohibition against a member participating in a government decision in which that member has a disqualifying financial interest and may be subject to the penalties that may be imposed on individuals who violate that act.

In response to the FPPC, the institute stated that members of the working groups are not subject to the pertinent requirements because the language in the institute’s act expressly exempts those members from the Political Reform Act, even when the recommendations of a working group are approved over an extended period. Therefore, according to the institute, it is not necessary to engage in ongoing analysis to determine whether, over time, the committee routinely approves the working groups’ recommendations. The FPPC responded that the language of the act “is no basis for exempting working group members from the [Political Reform Act’s] most fundamental disclosure rules if it becomes apparent that the working group’s role in governmental decisions is more than purely advisory.” It concluded that this issue may need to be revisited in the future.

The institute requires working group members to make financial disclosures (as discussed later). However, there are some differences between the Political Reform Act and the institute’s requirements for working group members that would apply if the FFPC’s view were correct. One key difference is that, under the Political Reform Act, the financial disclosures must be made public; the institute’s requirements keep the disclosures private. Also, an individual who is subject to the Political Reform Act may be subject to certain penalties if the individual violates the requirements of that act. As of December 2006, it was too early to assess whether the working groups will make recommendations on grant funding or other substantive recommendations that the committee will accept without significant amendment or modification that might result in a challenge to the institute’s interpretation.

The committee chair commented that the Superior Court of the County of Alameda, when it ruled in May 2006 on the legal challenge to the constitutionality of the institute’s act, considered the question of whether the grants review working group was a decision-making body. The court, based on the evidence presented at trial, including testimony of committee members and the experiences at the one grant award meeting that had been held, concluded that the committee is the “ultimate decision-making body” and not the working group. However, this ruling is not binding as the case is pending appeal.

Our legal counsel advised that, although a court will give deference to the institute’s interpretation of the act, ultimately only a court of law can make the determination of which interpretation is correct. Our legal counsel also noted that other provisions governing conflicts of interest that the act specifically references, and that the institute believes the act also exempts working groups from, may be implicated if the FFPC’s interpretation is correct. For example, California Government Code, Section 1090, prohibits a public official from being financially interested in any contract made in his or her official capacity. Various judicial decisions have held that Section 1090 also applies to those who advise the members of the governing body. The attorney general has opined that an adviser who has a financial interest in a contract or grant must abstain from giving any advice on that matter to avoid a conflict of interest. A violation of Section 1090 may result in a felony conviction and void a contract.

In view of the seriousness of a violation of conflict-of-interest laws and the concerns raised by the FPPC, we believe that it would benefit the institute to seek a formal opinion from the attorney general regarding whether the exemptions created for working groups from conflict-of-interest laws are intended to exempt them from the conflict-of-interest provisions that apply if the recommendations of an advisory body are adopted routinely and regularly by the decision-making body to whom they are made.

Conflict-of-Interest Code as Specified by the Political Reform Act

• Agency positions, known as designated employees, that participate in making decisions that might materially affect their financial interests.

• The types of investments, business positions,real property interests, or sources of income that might be materially affected by decisions made by designated employees. These are considered reportable financial interests.

• Requirements that designated employees periodically file Statements of Economic Interest disclosing their reportable financial interests.

• Specific circumstances that would require designated employees to disqualify themselves from making decisions or influencing the making of decisions. Disqualification is required when a designated employee has a financial interest that could be affected materially by the decision.

The Institute Has Established Processes to Disclose Financial Interests

Committee members and institute employees are requiredto disclose their financial interests, such as investments and incomes, that meet thresholds identified by the Political Reform Act. These financial interests are reported on Statements of Economic Interest, which are public documents. The Political Reform Act sets timelines for public officials to file these forms. Committee members are required to file within 30 days of assuming office, annually thereafter, and within 30 days of leaving office. All committee members and their alternates filed their Statements of Economic Interest from 2004 to 2006. We found 10 occurrences of late filings by members and alternates during 2004 and 2005. The number of late filings decreased to four in 2006.

Institute employees were not required to file their initial Statements of Economic Interest until 30 days after the conflict-of-interest code became effective. However, to promote transparency, the institute asked its employees to file their statements before the required date. After the conflict-of-interest code became effective, institute employees filed their statements again, within the required time frame.

Although the institute maintains that working group members are not subject to the Political Reform Act, the institute’s act requires the committee to adopt conflict-of-interest rules for noncommittee members of the working groups, such as scientists and other experts. These rules must be based on standards applicable to members of scientific review committees of the NIH. NIH standards require reviewers to alert officials to any possible conflict of interest and, before and after every meeting, identify any application on which they have a conflict of interest and certify that they will not be, and have not been, involved in the review of any application in which their participation constituted a conflict of interest.

In response to the act’s requirements, the committee has adopted conflict-of-interest policies modeled after the NIH for its two working groups that review grants. The standards used for the rules of the third working group are described in the next section. In addition, although not required by NIH standards, the noncommittee members of the three working groups are required to file confidential financial disclosure statements signed under penalty of perjury. The institute considers these conflict-of interest policies to be so significant to the public interest that it has submitted them to the Office of Administrative Law to have them included in the institute’s regulations.

During the public comment portion of this rulemaking process, members of the public expressed concern that the act does not preclude the institute from publicly disclosing the working group members’ confidential financial disclosure statements and urged the committee to require public disclosure. The committee disagreed with the suggestion. According to the institute’s president, making the financial disclosure statements public would deter scientists from joining the working groups because grant reviewers feel that a public disclosure is an invasion of their privacy. Further, the institute’s president stated that grant reviewers consider the confidential disclosure statements to be sufficient because they sign them under penalty of perjury, and they believe their work is an act of “good will” because it helps their competitors get funded and because their per diem rate is low.

The financial disclosure statements for working group members require information similar to what is required from the committee members and institute employees, such as sources of income of $5,000 or more from biotechnology and pharmaceutical companies, as well as California-based academic or nonprofit institutions. All noncommittee members of the Scientific and Medical Accountability Standards Working Group (standards working group) and the Scientific and Medical Facilities Working Group (facilities working group) who participated in committee meetings, as well as all the members of the grants review working group who reviewed training grant applications, filed confidential financial disclosure statements, as required.


Here is what CIRM had to say concerning the recommendation that it seek an attorney general's opinion on its disclosure policies for grant reviewers:

CIRM is committed to ensuring that the evaluation of grant applications is free from both real and apparent conflicts of interests. For this reason, the ICOC has adopted conflict of interest policies for members of the working groups that go beyond the requirements of the Political Reform Act (“PRA”). As the audit notes, however, CIRM disagrees with the FPPC’s opinion that members of CIRM’s working groups might be subject to the PRA at some point in the future.

Although we believe that Proposition 71 clearly exempts the working groups from the Political Reform Act, we understand the merits of seeking an opinion from the office of the Attorney General and we will seriously consider the recommendation to do so. But for the record, it is important to consider what is not in dispute.

First, even under the FPPC’s interpretation of the law, the members of CIRM’s working groups are not currently subject to the PRA’s economic disclosure and disqualification requirements. As the Alameda County Superior Court found, the ICOC made significant changes to the Grants Working Group’s recommendations regarding the training grants. The ICOC, the Court concluded, is the ultimate decision-making body, not the Grants Working Group. Second, as required by Proposition 71, the members of CIRM’s working groups are currently bound by conflict of interest rules adopted by the ICOC. These rules, which are modeled on the National Institutes of Health and National Academies of Science’s conflict provisions, require disclosure and disqualification, but unlike the Political Reform Act, they also extend to “personal” and “professional” conflicts of interest. Because the FPPC’s opinion may lead to the erroneous belief that working group members are not currently subject to conflict of interest rules, or that the PRA’s provisions are stronger than those adopted by the ICOC, we believe a brief discussion of the law and the ICOC’s policies and regulations is warranted.

Health and Safety Code section 125290.50, enacted by Proposition 71, requires the ICOC to adopt conflict of interest rules for the working groups based on standards applicable to members of scientific review committees of the National Institutes of Health (“NIH”) and to appoint an ethics officer from among the staff of the institute. Importantly, it also exempts members of the working groups from the PRA and other Government Code provisions:
“(3) Because the working groups are purely advisory and have no final decisionmaking authority, members of the working groups shall not be considered public officials, employees, or consultants for purposes of the Political Reform Act (Title 9 (commencing with Section 81000) of the Government Code), Sections 1090 and 19990 of the Government Code, and Sections 10516 and 10517 of the Public Contract Code.”

These provisions establish a regime by which the members of the working groups are covered by conflict of interest rules based on the NIH standards as opposed to the PRA. This makes sense for two reasons: First, the working groups are closest to the peer review committees of the National Institute for Health; no similar body exists under state law. Thus, it is logical to look to federal conflict of interest policies as the model for CIRM’s working groups. Second, the PRA would impose narrower conflict of interest rules on the working groups and it would impose such rules only after certain requirements are satisfied, i.e., if a working group makes substantive recommendations that are, and over an extended period of time have been, regularly approved without significant amendment or modification by the ICOC (FPPC Regulation 18701). If these conditions were never met, the working groups would not be subject to PRA conflict of interest rules. Furthermore, because FPPC Regulation 18701 requires an analysis of past conduct, it necessarily draws a line that is visible only after it is crossed.

Section 125290.50 avoids this uncertainty by declaring that the working groups are advisory, exempting them from the PRA, and by imposing separate and more extensive conflict of interest rules on working group members. In so doing, this section ensures that conflict of interest disclosure and disqualification rules are in place from the outset of working groups’ work.

As stated in the audit report, the success of the CIRM research program and its ability to maintain the confidence of the people of California depends critically upon the agency’s ability to fund the highest quality research proposals, chosen without bias. Strong CIRM conflict of interest policies are therefore essential. Thus, the ICOC adopted conflict of interest policies in 2005 to apply to each working group. These rules were inspired by policies of the National Institutes of Health, as required by Health and Safety Code section 125290.50, subdivision (e)(1). The ICOC did not stop there - the ICOC has taken the unprecedented step of codifying these policies in regulations. Unlike the Political Reform Act, these regulations encompass not only financial sources of conflicts but also address professional and personal sources. Thus, the working groups, under Proposition 71 and the policies and regulations adopted by the ICOC, are subject to more stringent rules than nonadvisory public officials under the Political Reform Act.

Moreover, the members of the two grants working groups, research and facilities, undergo a pre and post-award review of their required disclosures and the potential sources of conflict, and attest under penalty of perjury that they have not participated in review of any application for which they might have a conflict of interest. This is not required of any public official under the PRA. CIRM will maintain appropriate records of the disclosures and participation of working group members to make them available for audit AND will report to the Legislature any violations of the rules AND describe corrective actions taken to prevent future occurrences. Neither the report nor corrective action is required under the Political Reform Act.

These regulations strike the proper balance between the privacy of volunteer advisory body members and the public’s desire for information about the individuals. The review by staff and independent auditors, and the records that substantiate those reviews, ensure that the utmost vigilance will be maintained to ensure the integrity of the working groups’ efforts. As a result, the Institute has in place conflict of interest regulations and policies that are stronger than either the PRA or NIH standards.

Here is what the Court of Appeals had to say regarding decision-making by grant reviewers:

The Council (editor's note: meaning CIRM opponents) contends that if the more general statutory and common law conflict of interest provisions are not applicable to the ICOC members, they should nonetheless apply to members of the grants working group. This argument is based on the incorrect assertion that the grants working group is a decisionmaking rather than an advisory body. However, section 125290.50, subdivision (e)(3) provides that '[b]ecause the working groups are purely advisory and have no final decisionmaking authority, members of the working groups shall not be considered public officials, employees or consultants for purposes of the Political Reform Act' and other conflict of interest statutes.

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