Both the media and Capital Hill are abuzz following the allegations by Darcy Flynn, an SEC attorney, that the agency has for years been discarding its documents and files from preliminary investigations called "Matters Under Investigation Inquiry" (MUIs) if such a MUI is closed out and is not pursued by the SEC as a formal investigation. 

Yesterday, Sen. Charles Grassley fired off a letter to SEC Chairman Mary Schapiro asserting that even if a MUI was deemed not worthy of pursuing, discarding the file from that matter "would appear to greatly handicap the SEC's ability to create patterns in complex cases and calls into question the SEC's ability to properly retain and catalog documents." He also added that "these records may contain critical information that could be extremely useful in piecing together complex cases, even if not immediately pursued." Sen. Grassley requested that the SEC provide a full accounting of its document destruction policies, and whether its policies were consistent with the laws governing record retention. He also asked the SEC to state specifically whether (and why) it had destroyed documents from MUIs, and to address whether it was concerned that destroying MUI files might harm future investigations.

Although Senator Grassley has been involved in his share of squabbles with the SEC, he seems to be asking the right questions here. Why throw these files away rather than retaining them somewhere on the off-chance that they may someday prove useful in a future investigation? And did the SEC even have the legal authority to discard these files?

On the other hand, others seem to be asking the wrong questions based on what is known thus far. The headline to the Rolling Stone article that broke this story asks, "Is the SEC Covering Up Wall Street Crimes?" In my opinion, that question seem to be pretty well answered in the negative by the article itself:

Cover-up? The article explains that the destruction of the MUI files "was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. 'After you have closed a MUI that has not become an investigation,' the site advised staffers, 'you should dispose of any documents obtained in connection with the MUI.'"

Crimes? By definition, the records destroyed were not related to "crimes." To the contrary, they related to MUIs that were closed out because the agency concluded that these preliminary investigations failed to show even the the potential to address violations of the securities laws.