Regulatory acceptance of optical imaging

In October 1995, this column addressed the question of admissibility of imaged documents in court proceedings. That article expressly omitted discussion of regulatory requirements for imaged documents. This article takes up that discussion in the context of requirements for media other than paper.

REGULATORY AGENCIES

While legislatures (Congress on the federal level, and state assemblies and legislatures on the state level) are the supreme lawmaking bodies in any American jurisdiction, these bodies often enact legislation which requires detailed, ongoing oversight, as well as a considerable degree of subject matter expertise, for its implementation. Thus, a common adjunct to the enactment of tax, environmental and other similarly complicated legislation is the creation of a regulatory agency to oversee it, or assignment of that oversight to a preexisting agency. The Internal Revenue Service, Environmental Protection Agency, and Occupational Health and Safety Administration are examples of such agencies.

Because of the need for subject matter expertise, and the agencies' presumed expertise, regulatory bodies are commonly granted considerable latitude in the administration of the laws they are charged with enforcing. An agency is usually granted the power to promulgate rules, which have the force of law, to hold hearings, and to sanction violators. Often, the enabling legislation merely sets forth broad goalsthe determination of exactly what is needed, and the details of how to get there, including all the substantive requirements imposed upon regulated parties, are left to the administrative agency. Even in those cases where the substantive requirements are in the statute, the agency is still charged with enforcing the terms of that statute.

The deference accorded regulatory agencies extends to the area of judicial review of agency actions. Although courts are not bound by the statutory and regulatory interpretations of administrative agencies, they, like legislatures, often take the position that the agency is the expert. One court stated it thus: "Although we are not bound by an administrative construction of a statute, such a construction will not be lightly disregarded."1

Agencies are, however, subject to constraints on their discretion. In most jurisdictions, they are subject to the provisions of an Administrative Procedure Act (A.P.A.), which sets forth a series of rules which agencies must obey in the administration of the law and in enactment of rules. Important provisions commonly include requirements that:

Proposed rules be published in order to enable the public to read, comment and submit evidence upon the proposed rule;

The agency receive, consider and respond to any comment;

The agency publish its responses, and republish any parts of the rule modified as a result of the comments;

The agency have a hearing process for persons aggrieved by its rules, or charged with violating them;

There is judicial review available of agency rules and decisions.

AGENCIES AND RECORDKEEPING

An administrative agency's power with respect to information collection and recordkeeping is generally very broad. Although detailed recordkeeping provisions are sometimes set forth in a statute, language such as the following is typical:

Each employing unit shall keep true and accurate work records containing such information as the division of job service may prescribe. Such records shall be open to inspection and be subject to being copied by the division or its authorized representatives at any reasonable time and as often as necessary. The commissioner or a duly authorized representative of the division may require from any employing unit any sworn or unsworn reports, with respect to persons employed by the employing unit, which the director deems necessary for the effective administration of this chapter.2

When operating under the mandate of a statute such as this, an agency promulgates rules wherein it specifies those records to be kept by regulated parties, and the conditions for maintaining those records. Normally, the agency will publish a notice of intent to adopt rules, and will solicit comments concerning the burden imposed by any recordkeeping and information collection requirements.

REGULATORY AGENCIES AND OPTICAL IMAGING

A large percentage of records-related statutes and regulations do not mention records media at all. Among those addressing media requirements, most do not explicitly address optical imaging. When considering the question of regulatory acceptance of imaging, it is therefore often necessary to resort to such tools as statutory construction and consideration of regulatory attitudes toward nonpaper media generally.

Because of their independence, and because there are a large number of agencies, both state and federal, there are a wide variety of attitudes among the agencies with respect to their acceptance of records media. This disparity is further compounded by the fact that many administrative recordkeeping laws are updated only infrequently. A rule promulgated years ago may have been quite forward-looking at the time of its promulgation, and intended a list of technologies to be all-inclusive. However, over the years, it may have become outdated and excessively restrictive with respect to its requirements for records storage media, since it does not list technologies which have now become commonplace. A final complication is that electronic or imaged records systems must sometimes meet detailed indexing and storage requirements in order to be acceptable.

REGULATIONS WHICH DO NOT STATE ACCEPTABLE MEDIA

Many regulations do not explicitly address the question of acceptable storage media. For example: Each club licensee shall prepare a daily summary of all information required to be recorded on source records, including the sale or service of drinks containing alcoholic liquor. The daily summary shall also show the number of servings, kind of drink and normal retail selling price of all complimentary drinks containing alcoholic liquor dispensed. Proper identifying symbols or codes may be used in preparing the daily summary.3

This summary could be handwritten, typed, entered into a computer, produced in hard copy and then microfilmed (or any of the above, and then transferred to an imaging system) with equal ease. Which method complies with the law?

One interpretation of the lack of a list of acceptable media is that it forbids the use of any medium except paper. Indeed, some agencies, such as the New York Insurance Department, have taken the position that certain paper originals must be retained, notwithstanding the fact that governing laws contain no statement at all concerning acceptable media. The Oklahoma Department of Securities takes a similar view: Since the laws it administers predate imaging technology, the agency has concluded that retention of paper originals must be presumed to have been intended, except where other media are explicitly stated.4

This position, however, ignores the very purpose of the law, including administrative regulations: to place the public on notice that conduct is prohibited or regulated, and the extent of the prohibition or regulation.5 In the absence of such notice by means of a regulation available to the public, a party cannot normally be held legally liable for the allegedly prohibited behavior. After listing an extensive set of mandatory procedures for public notice and comment, one A.P.A. states:

A rule adopted on or after September 1, 1988 shall be invalid unless adopted in substantial compliance with the provisions of this section...6

Asserting that the public is required to do or refrain from some act in the absence of a duly promulgated regulation is therefore more akin to the agency's stated position in the event of litigation,7 a position weakened by the fact that the agency itself has declined to make its position mandatory by promulgating a regulations.8

A better construction of such language is that any suitable medium is acceptable, and many, perhaps most, agencies, both federal and state, take this position concerning statutes or regulations which do not specify media. Indeed, in jurisdictions9 where the Uniform Photographic Copies of Business Records Act (U.P.A.) has been enacted, such a construction is mandatory:

If any business, institution, member of a profession or calling, or any department or agency of government, in the regular course of business or activity has kept or recorded any memorandum, writing, entry, print, representation or combination thereof, of any act, transaction, occurrence, or event, and in the regular course of business has caused any or all of the same to be recorded, copied, or reproduced by any photographic, photostatic, microfilm, microcard, miniature photographic, or other process which accurately reproduces the original or forms a durable medium for reproducing the original, the original may be destroyed in the regular course of business unless its preservation is required by law...[emphasis added]

The effect of this language is to prohibit agencies from construing media restrictions into statutes or regulations in the absence of explicit language in the law itself so requiring, and to prevent restrictions on the use of duplicates of any kind.

REGULATIONS WHICH EXPLICITLY AUTHORIZE MEDIA

A number of federal and state agencies have come to the conclusion that a record's storage medium is immaterial to the agency's needs: Contractors may retain records in any medium (paper, electronic, microfilm, etc.) or any combination of media, as long as the requirements of this subpart are satisfied. The process used to create and store records must record and reproduce the original document, including signatures and other written or graphic images, completely, accurately, and clearly. Data transfer, storage, and retrieval procedures shall protect the original data from alteration.10

Language such as this attempts to anticipate future developments-in addition to whatever technologies are listed, the catch-all provision allows in other, unspecified technologies, provided that they are readily retrievable and otherwise comply with the law. A party contemplating implementation of an imaging system can be confident that it will comply with a rule such as the one above-acceptance of new technologies is precisely what the regulation intends.

On other occasions, a law explicitly requires maintenance of paper originals. Although extremely inconvenient from an information management perspective, there is no uncertainty in such a rule. A more problematic situation arises when a regulation lists certain formats that are deemed acceptable, but does not explicitly forbid the use of other storage formats.

The records required to be maintained and preserved pursuant to sections 17a-3 and 17a-4 may be immediately reproduced on microfilm and be maintained and preserved for the required time in that form. If such microfilm substitution for hard copy is made by a member, broker, or dealer, he shall (1) at all times have available for Commission examination of his records, pursuant to section 17a of the Act, facilities for immediate, easily readable projection of the microfilm and for producing easily readable facsimile enlargements, (2) arrange the records and index and file the films in such manner as to permit the immediate location of any particular record, (3) be ready to provide, and immediately provide, any facsimile enlargement which the Commission by its examiners or other representatives may request, and (4) store separately from the original one other copy of the microfilm for the time required.11

Does such a list preclude use of other technologies? In many cases, the answer appears to be yes. Courts generally construe statutes and regulations containing lists as excluding by implication those items not found on the list.12 Keeping records on an unlisted medium therefore runs the risk that the agency will deem the records to be out of compliance, and the courts will agree.

Agencies administering laws containing restrictive language sometimes expand their scope informally, by means of broad construction of the restrictive language. The Securities and Exchange Commission (S.E.C.), for example, has taken the position, by means of a No-action Letter, that a WORM 13 imaging system complies with the above quoted regulation.14

Other agencies are even more expansive and informal in their construction of the law. In construing a letter to insurers authorizing the use of microfilm, one state agency asserted: "[E]lectronic imaging that captures an exact replica of the original document is the same as microfilming and would be acceptable" so long as all required records were retained.15

LAWS ALLOWING USE OF COMPUTERS FOR RECORDS STORAGE

A somewhat different situation arises when a law states that storage on a computer or similar device is acceptable:

Invoices, meter readings, pipeline terminal and refinery bills of lading, inventory records, including inventory control records maintained for the State Fire Marshal, and other memorandum must be retained in addition to the information required above. The maintenance of this information in a provable computer format or on microfilm is acceptable in lieu of retention of the original documents.16

Such laws tend to have rather broad language; they usually do not specify particular systems or formats,17 instead commonly referring to such things as "automated data processing," "machine readable" and the like. The question is whether an imaging system falls within this language. The answer is probably yes. An imaging system is, fundamentally, a computer with a high density storage device. Therefore, unless the law explicitly limits its permission to magnetic storage, there appears to be no obstacle to the use of optical imaging. Any other construction would require that imaging systems be considered as fundamentally different from other computer data storage systems, a position which is not technically sound.

Even if acceptable media are explicitly limited to magnetic media, the use of imaging need not be precluded. There is at least one high volume imaging system on the market which uses magnetic tape, rather than optical disks. Such a system would likely fall within the terms of any law referring to "magnetic media" or similar terms, albeit perhaps unintentionally.

REGULATIONS WHICH AUTHORIZE IMAGING

Some regulations which do not explicitly approve of imaging as a storage medium nonetheless do so implicitly:

Records which must be maintained pursuant to this part may be the original or a reproduced copy or a microform if such reproduced copy or microform is duly authenticated by authorized personnel and the microform is capable of producing a clear and legible copy after storage for the period specified by Commission regulations. The record may also be stored in electronic media with the capability for producing legible, accurate, and complete records during the required retention period. Records such as letters, drawings, specifications, must include all pertinent information such as stamps, initials, and signatures.18

The requirement that stamps, initials, and signatures be preserved on electronically stored documents can only refer to imaging-no other electronic format is capable of this requirement. Other regulations explicitly approve of imaging:

Reproductions on microfilm, microfiche and optical disk may be substituted for hard copy as follows: ..19

Unfortunately, regulatory acceptance of imaging is sometimes not as simple as the language above might make it appear. While authorization of imaging is sometimes quite broad, some agencies limit imaging systems to WORM, or impose extensive requirements indexing or storage requirements on imaging systems:

Any optical storage system used to preserve records under paragraph (b) of this section must allow for the preservation of the records required under this Section using non-rewritable WORM (write once read many) media. All records preserved on optical media pursuant to paragraph (b) of this section must be preserved on non-rewritable WORM media. The technology must have writeverify capabilities that continuously and automatically verify the quality and accuracy of the information stored and automatically correct quality and accuracy defects.

(1) The system must:

(i) Use removable disks;

(ii) Serialize the disks;

(iii) Using a permanent and nonerasable time-date, it must timedate all files of information placed on the disk, reflecting the computer run time of the file of information; and

(2) Persons using optical storage systems must maintain on their premises, keep current, grant access to and surrender promptly, upon request by representatives of the Commission or the Department of Justice, all information necessary to read, convert to hard copy and download records stored in optical storage units, including directory structures and indices. This shall include but not be limited to a copy of logical file formats and field formats of all different files written on optical disks, the hardware make and model and operating system software version and release level of the computer system hosting the storage device and identity of the device driver used to write the optical media, including the release level, and if records are written in an ASCII or EBCDIC format other than standard non-compressed ASCII or EBCDIC, documentation of the method used to encode data providing a thorough description of any compression algorithm, including the physical file format and conversion routines to transform the records to a non-compressed ASCII or EBCDIC format.20

It is noteworthy that such requirements are often imposed on imaging systems in the same regulation which authorizes computer or microform records, and which imposes virtually no restrictions or conditions upon the use of those formats. At least in some quarters, there is apparently still fear that imaged records are particularly susceptible to loss or forgery, and a failure to recognize that other formats, particularly records on magnetic media, are at least as susceptible to any such problems. A reasonable conclusion is that these regulations are written by persons who do not have a good grasp of the various technologies which the regulation attempts to deal with, and are responding, not to any actual weaknesses in the technology, but rather to its relative newness and unfamiliarity.

RESOLVING THE UNCERTAINTY

As can be observed from the above discussion, the regulatory situation regarding optical imaging is something of a mixed bag. Agency attitudes range from indifference or open acceptance, to a flat refusal to recognize the legitimacy of new technologies.

Thus, when considering the question of regulatory acceptance of an imaging system, there is no substitute for careful study of the governing statutes and regulations, and determining precisely what media are permitted or prohibited, for what records, and under what circumstances. If a law is long, confusing or poorly written,21 this may mean painstakingly parsing it out sentence by sentence or word by word. In addition, any specific indexing or other requirements applicable to the imaging system must be accurately determined. The appropriate course of action depends upon a combination of factors:

Exactly what does governing law say?

What is the actual cost savings at issue?

Is this a U.P.A. jurisdiction?

What is the penalty for noncompliance?

What is the agency's opinion as to the law's silence or ambiguity on the question of media?

What is the organization's tolerance for risk?

What is the agency's response likely to be if the organization takes an aggressive position and implements a media system of which the agency declines to approve?

What is the likely response of courts in this jurisdiction in the event the matter is litigated?

Is there any possibility of negotiating a mutually agreeable construction of the law with the agency?

Is an inquiry to the agency likely to create an issue where none presently exists?

Depending on how these factors are weighed, the appropriate response might range from retaining records in only those forms which the agency deems acceptable, to reading a lack of media specifications as a blanket approval of all media, proceeding accordingly, and being prepared to take one's chances in court. Particularly as regards the legal factors, the right mix might create a situation where acceptance of imaging could be unavoidably mandated, or at least powerfully argued. The wrong mix might well demand following agency guidelines, even informal ones, strictly, particularly if the potential penalties for noncompliance are severe. In the event of uncertainty, careful consultation with legal counsel is warranted.

FUTURE TRENDS

As imaging becomes a more widely accepted and used technology in the business world, there is a general trend toward regulatory acceptance of optical imaging. This trend coincides with a general trend toward acceptance of paperless information management. Over time, many laws are being revised, either explicitly to authorize imaging, or to remove restrictive language which prohibits or limits its use. There will, however, continue to be problems: Many older laws will undoubtedly stay on the books for years to come; some agencies will continue to have very conservative attitudes about new information management technologies; and some well meaning regulators will continue to exhibit an unwarranted fear of imaging, and impose excessive or unreasonable conditions upon its use.

Once on the books, laws must be obeyed, for good or for ill, or the price for noncompliance paid. If future regulations are to deal with imaging (and whatever newer technologies ultimately supplant imaging) in a rational, cost-effective way, it is imperative that regulators be fully educated about the details of the technologies prior to writing the language which is to govern the use of these technologies. Thus, it is equally imperative that records managers and other information management professionals participate in the process of revising regulatory requirements to deal with them.

INFLUENCING FUTURE REGULATION

Becoming involved in the regulatory process is not as difficult as one might expect. Federal agencies, as well as many state agencies, publish proposed rules, along with addresses where comments may be directed. Often, there are also public hearings, where interested parties may speak or present evidence. Notification of these activities usually appears in the federal or state register. In addition, many agencies maintain lists of interested parties, and mail notification of specific rulemaking activities to all parties on the list. In most cases, anyone can be an interested party. Getting on the list is usually only a matter of making a phone call or writing a letter-a considerable improvement over attempting to keep up with an agency's activities by reading the federal or state register every day.

Anything in the proposed rule is fair game for comment. Information collection and recordkeeping requirements are frequent subjects of comments and suggestions for change, particularly with respect to their burden upon regulated parties. Published responses to comments are often quite lengthy and thoughtful, and many agencies are quite receptive to changing regulations based upon public response to the proposed rules.

Although the notice and comment process is far from perfect-an agency may reject even the most apt suggestion-it is far better than having a regulation written with no feedback at all from those parties most affected by it and with the greatest understanding of its subject matter and ramifications. At the very least, the agency will be made aware that its actions are being scrutinized by the public and be guided accordingly.

It is also possible to prod an agency into action even when it may have had no intention of moving itself. Administrative agencies can be petitioned to initiate a rulemaking action on the initiative of a member of the public-the S.E.C. No-action Letter cited above came about as the result of an initiative by the securities industry. Legislation is often initiated (and sometimes drafted) by members of the affected public. If a regulation is particularly onerous or out of date, an initiative to change the regulation or supersede it with legislation might well be worth considering.

CONCLUSION

Regulatory acceptance of imaging is widespread, and getting more so. However, there still remain pockets of resistance to this and other new information management technologies. This trend can therefore be expected to proceed most expeditiously if information management professionals have an active hand in the legislative and regulatory processes which will shape it.

REFERENCES

1. Robinson v. Board of Trustees, 523 A.2d 1376, 1379 (Maine 1976) 2. 5 I.C. 96.11 (7.) (Iowa) 3. K.A.R. 92-24-17 (Kansas Regulation) 4. June 29, 1994 letter to Information Requirements Clearinghouse from John W. Miner, Jr., Chief Financial Officer, Oklahoma Department of Securities. 5. See, e.g., 24-4-103 (4), C.R.S. (198 Relp. Vol. 10A) (Colorado). See also People v. Boban, 626 P.2d 1132 (Colo. 1981). 6. 24-4-103 (8.2), C.R.S. (1988 Repl. Vol. 10A) (Colorado). 7. A reality publicly acknowledged by the New York Insurance Department. 8. Presumably, the agency's argument would be that reasonable business practice requires the retention of paper originals even in the absence of a law so requiring.

9. Currently the Federal government and some 13 states. 10. 48 C.F.R. 4.703 (d) (Federal Purchasing Regulations).

11. 211 C.F.R. 240.17a-4 (f) (Securities and Exchange Commission Rule). 12. See. e.g., Silva v. Bosch, A.2d 301 (N.H. 1980), Westcott v. Allstate Insurance, 397 A.2d 156 (Maine 1979). 13. Write Once Read Many times. 14. S.E.C. No Action Letter, June 18, 1993 to Michael D. Udoff, Chairman, Ad Hoc Records Retention Committee, Securities Industry Association, Inc. A No-Action Letter is a statement by the S.E.C. that some course of action will be deemed compliance with the law, and that no enforcement action will be taken against a party complying with the terms set forth in the Letter.

15. June 15, 1994 letter to Information Requirements Clearinghouse from Donald L. Belanger, Senior Examiner of the New Hampshire Insurance Department, discussing a general letter to insurers dated March 2, 1984, from the Insurance Commissioner, which authorized the use of microfilm format for retention of required records. 16. N.A.R. 81-007.02 (Nebraska Regulation). 17. Except in the case of reports required to be submitted to the government electronically. Often, this information must be submitted in specific formats so as to be readable by the government's equipment.

18. 10 C.F.R. 74.31 (d)(2) (Nuclear Regulatory Commission Rule). 19. 17 C.F.R. 1.31 (Commodity Futures Trading Commission Rule). 20. 17 C.F.R. 1.31 (d) (Commodity Futures Trading Commission Rule). 21. See, e.g. 17 C.F.R. 1.31 (Commodity Futures Trading Commission Rule).

Copyright Association of Records Managers and Administrators Inc. Apr 1996
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