Internal watchdog scolds SEC for destroying records.

• Position: COMPLIANCE - Securities and Exchange Commission

An internal watchdog has scolded the Securities and Exchange Commission (SEC) for a decades-long policy of destroying documents.

Those documents--related to preliminary inquiries into possible Wall Street crimes--should have been preserved as official federal records, the agency's inspector general said. However, SEC Inspector General David Kotz said he would not refer the matter to the Justice Department because he found no evidence of improper motives behind the policy or that it had hampered any investigations.

The SEC from 1981 to 2010 directed employees to destroy all documents connected to matters under inquiry (MUIs) that didn't result in full-scale investigations. In his report, Kotz said, "There was a lack of clarity as to the rationale for the policy."

The National Archives and Records Administration (NARA) had questioned the SEC in 2010 about its policy after a whistleblower, SEC enforcement attorney Darcy Flynn, claimed more than 9,000 files had been destroyed, including inquiries into potential securities law violations at several major Wall Street banks. Flynn also alleged the SEC misled NARA about its documents policy, The Wall Street Journal reported. The SEC halted its document destruction policy soon after NARA's inquiries.

Kotz, in his report released in November, found Flynn's allegations to be true. The report also concluded that the SEC should have retained preliminary investigation inquiry materials it had been...