The big buzz this week is an article in Rolling Stone regarding the SEC’s policy of destroying documents related to Matters Under Investigation (MUIs) which do not result in any agency action being taken.

At first blush, it may appear to be some sort of cover up, and that’s exactly what Rolling Stone writer Matt Taibbi wants you to think. Under further scrutiny, however, it appears that nothing improper is being done. All smoke, and no fire.

I have been critical in the past of the SEC’s inability to catch the bad guys, which was highlighted with the Bernard Madoff fraud, reported multiple times with great specificity by whistleblower Harry Markopolus.  But that doesn’t stop me from seeing this for exactly what it is… a lot of hand-waving.

The allegations come off as credible at first glance. Darcy Flynn, a former SEC employee in the enforcement division, “blew the whistle” on the SEC’s policy of destroying documents related to MUIs that do not get elevated to informal or formal investigations.

When Flynn didn’t get the results he wanted from the federal government, he hired lawyer Gary J. Aguirre to represent him in a whistleblower action.

Broc Romanek at The Corporate Counsel explains exactly what an MUI is:

A MUI – stands for “Matter Under Inquiry” – is simply a database entry by a SEC Enforcement Staffer anytime a Staffer comes across anything remotely suspicious. It plants a flag for the rest of the SEC Staff to know that someone else came across something about the same incident/person – this enables the Staff to avoid duplication of effort and allows for coordination. In the vast majority of cases, the MUIs are really nothing at all – some Staffer read a newspaper article perhaps that sounded a little curious and inputted it into the database in case another Staffer comes across something more suspicious.

So it’s clear that the SEC collects haphazard data about companies, sometimes takes a better look, and then decides to not do anything. The SEC policy then directed employees to destroy the materials because they didn’t find anything to investigate. From the SEC’s internal guidelines:

“After you have closed a MUI that has not become an investigation, you should dispose of any documents obtained in connection with the MUI.”

What’s so wrong with that? Nothing! Why should our government accumulate materials on people and companies who the SEC looked at and found nothing  to actually investigate?

Sure, there are people saying that it makes sense to keep these materials in case anything later comes up about the target. Those documents might become useful someday. But at what point do we say that people and companies have a right to not have the government accumulating materials on them when they have done nothing wrong… have not even done anything that has caused the SEC to do a real investigation?

So where is the big cover-up that Taibbi and others claim happened? There wasn’t one. The process of destroying file materials was completely out in the open. It was not done in secret. Normally frauds are covered up for obvious reasons. In this case, the SEC’s policy was spelled out in black and white for anyone who cared to look.

The New York Times presents a contrary view: That the SEC might not have authority to destroy these documents.

That has worried Paul M. Wester Jr., chief records officer at the National Archives and Records Administration, who has written three letters to the S.E.C. since July 2010 on the matter. His concern was repeated Thursday in a statement by the archives.

In the absence of an approved plan to retain records, Mr. Wester wrote in one of the letters, the agency “remains concerned” that the records “remain at risk,” despite an S.E.C. guarantee that it has been keeping those documents since the disposal policy came to light last year.

The S.E.C. “did not have authority to dispose of” the records, said the statement issued Thursday. The archives is continuing “to work with the S.E.C. to prevent future unauthorized destruction” of investigation files.

The destruction of these documents has stopped since Darcy blew the whistle, but that doesn’t mean we should ignore this issue. The SEC is perpetually complaining about its budgetary needs and its inability to do the job it has been given. (Eliminating things like looking at porn while on the job may help ease budgetary woes?)

Even if you ignore the privacy implications of the current policy of retaining all materials regardless of the non-investigation status, maybe this is something that should be abandoned as a cost-saving measure. Let’s get the focus back on the SEC investigating real crimes by real bad guys.