Records Retention: From The Basement To The Boardroom

Records retention has suddenly emerged as a hot issue for in-house attorneys — who are faced with developing and implementing policies that can manage the explosion of electronic records and comply with new regulatory obligations under Sarbanes-Oxley and other laws.

In the post-Enron climate, federal agencies are aggressively auditing and investigating internal business affairs — and those regulators are armed with new federal laws imposing criminal penalties on high-ranking corporate officers for failing to preserve company records.

Meanwhile, ubiquitous electronic data — most notably e-mail — is becoming damning evidence in lawsuits against corporate defendants.

As a result, records retention “has gone from the basement to the boardroom,” said Alice Lawrence, a records management specialist with the Jordan Lawrence Group in St. Louis. “This is no longer an option.”

But despite the pressing need to implement an effective records retention and destruction program, in-house counsel are often faced with internal inertia or indifference.

“No one in senior management wants to embrace this as a major issue,” said Thomas A. Bockhorst, senior counsel of Welch Foods, Inc., who spoke at a recent records retention seminar co-sponsored by the New England Corporate Counsel Association and the Boston law firm of Prince, Lobel, Glovsky & Tye.

Jean Ciurra, president of the Chicago Chapter of the American Records Management Association, noted that “in-house counsel play a critical role in moving a records retention program forward. Most programs will fail without a sponsorship by in-house counsel. They have to persuade senior management that it’s a critical mission of the company.”

One way to bring home the message, experts suggested, is to emphasize not only liability risk and possible criminal sanctions, but also that effective record keeping can enhance productivity and the bottom line by allowing employees to find records quickly.

Once senior management is on board, finding the right fit for a company is no easy task.

“This is a troublesome topic for companies,” said William A. Worth, an employment law attorney at Prince, Lobel. “They have to find a balance between getting rid of the data that may come back to haunt them that’s mixed in with documents they are required to keep. It’s a great challenge.”

And the potential traps are many, according to Richard A. Glovsky, also an employment attorney with Prince, Lobel.

“The stakes are substantially higher than ever before. It’s mind-boggling how many statutes and regulations there are now,” he said.

As an example, Glovsky pointed to the little-known statute used by the federal government in prosecuting Arthur Andersen (18 U.S.C. §1512(b)(2)(B)). The statute allows the prosecution against anyone who “corruptly persuades” someone to “alter, destroy, mutilate or conceal an object with the intent to impair the object’s integrity or availability for use in an official proceeding.”

Glovsky, who along with Worth spoke at the seminar, said the statute “is rarely enforced, but that’s what the government used to bring down Andersen. It shows how critical records retention has become.”

Staying On Top Of It

Lawrence stressed the importance of acting quickly to create or revamp a company’s policies on storing data.

“You need to get a program in place quickly. Don’t make it too complex,” she said. “Obsessing over the wording of a policy is counterproductive. It’s more important to focus on implementation and enforcement.”

After reviewing current policies and procedures, in-house counsel should request relevant information, identify the corporate structure, and establish the overall strategy for developing and implementing the program, Lawrence suggested.

Ciura, Midwest manager of records management for Archer Management Services, an Oce Company, said an in-house lawyer has to help “design a schedule that meets all regulatory requirements for retaining records, as well as maintaining vital records, which must include an assessment of e-mail.”

The next step is to devise an auditing methodology to ensure enforcement, Ciura added.

Consistent enforcement is essential in helping to fend off government audits and minimize liability risks, in part because courts scrutinize whether document destruction is part of a systematic program, according to Glovsky.

Lawrence agreed.

“The systematic implementation eliminates the appearance of selectivity in destroying records, and minimizes employee discretion, inconsistencies and oversights,” she said.

Systematic enforcement will help to reduce permanent storage of documents and to avoid catchall “miscellaneous” categories that are hard to decipher, Lawrence noted. And it minimizes the risks of employee non-compliance, she added.

Another key challenge for in-house counsel is to see to it that all corporate records are gathered under one umbrella.

Typically, a company has different sources of information, some of it redundant, from paper records stashed in warehouses to electronic records stored on a server, according to Lawrence.

Effective enforcement requires a “hub” of records storage so in-house counsel can quickly communicate a “hold alert” to suspend routine destruction of specific types of records due to a pending or imminent government investigation or lawsuit, Lawrence said. Plus, records are retained under a common set of rules and standards, and research is dramatically simplified.

“In-house counsel [have] to oversee the process, with a records manager reporting directly to the legal department,” Ciura said. “A records manager should not be seen just as someone who provides information regarding off-site storage or someone in the IT department. The role of a records manager is to work with legal and financial departments.”

The Trouble With E-Mail

A particularly nettlesome problem is reining in indiscriminate and inappropriate use of e-mail.

The issue is “alarming,” according to Worth.

“People are flippant and informal sometimes,” he said. “But it doesn’t feel the same when it’s shown on an easel years later before a jury. It’s treated like a written record when it was never intended to be a written record.”

Compounding the problem are employees who see managing an e-mail inbox as the least important part of the job, according to Bockhorst, meaning hundreds of unnecessary e-mails are retained indefinitely.

And a persistent misconception of what “delete” means is widespread, Worth noted. Many employees don’t realize that a deleted e-mail remains stored on a company’s backup tapes, as well as its e-mail server, until it’s randomly overwritten.

The proliferation of e-mail and other electronic documents has prompted litigators to mine e-data during discovery.

“The buzz is out there,” said Worth. “Attorneys are searching for discovery forms to get broader access to electronic data. They are conducting discovery of information technology employees first [to discern what’s available]. The momentum is building to discover e-documents and that should be a major concern for in-house counsel.”

Bockhorst added: “The challenge for in-house counsel is to get the business people to believe that what they say in an e-mail will appear on the front page of the New York Times. People have to avoid putting ‘half thoughts’ in e-mail.”

Lawrence acknowledged that e-mail helps management do their jobs, but retaining e-mail past a minimum period of time, such as 60 days, creates huge risks as potential evidence against a company.

She advised an auto-delete policy of 60-90 days, and an even shorter retention period on backup tapes.

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Below are some federal laws and regulations pertaining to corporate record keeping:

Sarbanes-Oxley

The key provision concerning destruction of corporate records in Sarbanes-Oxley is 18 U.S.C. §1519, which states that anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies or makes a false entry in any record, document or tangible object with the intent to impede, obstruct or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter or case, shall be fined … imprisoned not more than 20 years, or both.”

Other key provisions require accountants of public companies to maintain all work papers for five years (18 U.S.C. §1520(a)(1)), and audit and related papers must be kept for seven years.

Corporate Records

Payroll records, collective bargaining agreements, employment contracts and sale and purchase records have to kept for three years (29 CFR §516.5) and basic employment and earnings records, wage rate tables and order, shipping and billing records have to be maintained for two years (29 CFR §516.6).

EEO Records

29 CFR §1627.3(a) requires various employment actions such as hiring, promotion, layoffs, and rates of pay to be held for one year from the date of the personnel action. And 29 CFR §1620.32 mandates that companies hold for at least two years records describing the basis for any wage differential to employees of the opposite sex.

Family Medical Leave Act

The FMLA requires records to be kept for three years (29 CFR §825.000), including basic payroll data, dates of leave, notices of leave and disputes. Also, 29 CFR §500(g) requires that medical certifications and re-certifications and medical histories be separately maintained..

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