To the surprise of pretty much no one other than perhaps a few conspiracy theorists, the SEC's Inspector General issued a report on October 5, 2011 stating that it "did not find evidence of an improper motive behind Enforcement's longstanding policy of destroying documents related to closed MUIs that did not become investigations." 

As I discussed in detail here and in this column, the agency has for decades followed a policy of discarding its documents and files from preliminary investigations called “Matters Under Inquiry” (MUIs) if the MUI was closed out and not pursued by the SEC as a formal investigation. Some in the media speculated that the destruction of these documents occurred so that the SEC could "cover up Wall Street crimes," but, alas, the IG found no evidence of such a motive.

Why, then, did the SEC implement and follow this policy for so long? The IG could not answer this, finding "a lack of clarity as to the rationale for the policy." The testimony on this point included the following statements from people in Enforcement:

  • An unidentified official stated, “I don't know that a specific reason was presented to me. It was just, ‘This is how we treat these records. This is how we treat these materials.'”
  • "Joan McKown testified that she did not know why it was the SEC's policy to destroy documents after closing a MUI, and that the policy was put into place before she became the chief counsel for Enforcement in 1993. McKown stated to the OIG that the MUI document destruction policy 'was such an accepted procedure, it's hard to think why it was set up that way.'”
  • Jeffery Heslop, the SEC's Chief Operating Officer since May 2010, testified that he had “no idea” why the SEC's policy for years had been to destroy records related to MUIs. 
  • Adam Storch, the Managing Executive for the Division of Enforcement since 2009, testified that he did not “have any understanding why there was that policy.” 
  • An unidentified official "stated to the OIG that the policy to destroy MUI documents may have been set because MUIs were not viewed as valuable enough to keep."
  • An unidentified official stated that the policy "may have continued in part because of space concerns."

The entire report (with certain names redacted) is available here.