Wednesday, September 28, 2011

SEC Enforcement Director Responds to Senator Grassley's Inquiry on Document Retention for Matters Under Inquiry

Senator Charles Grassley (R-Iowa) is engaged in a discussion with the SEC over whether the agency for years destroyed investigative documents inappropriately or illegally. Prompted by an agency whistleblower, Senator Grassley, Ranking Member on the Judiciary Committee, is communicating with the agency as new information and questions emerge. He received a response to his latest letter from the SEC’s enforcement director, Robert Khuzami.

The Director said that the SEC does not classify any of its activities as matters under investigation. Rather, the enforcement division has two general categories of matters: 1) Matters Under Inquiry (MUI) and 2) Investigations. An MUI is a pre-investigative inquiry to evaluate whether opening an investigation would be an appropriate use of Commission resources, said the Director, and as such is designed to be a quick look at readily available information in order to determine if an investigation should be opened. The threshold for opening an MUI is low, he explained, and hence an MUI can be opened on very limited information. Because of an MUI's limited purpose, its duration is also limited. By contrast, an Enforcement investigation is designed to determine if there have been violations of the federal securities laws and, if so, whether the staff should recommend that the SEC take enforcement action.

Enforcement staff is under orders to close an MUI or convert it to an investigation within the earlier of 60 days or 80 hours of work. Starting in 2003, enforcement policy automatically converted any MUI that exceeds 60 days. Also, during a pre-investigative inquiry, staff is not authorized to issue subpoenas to compel testimony or produce documents. The threshold for closing an MUI is low, noted Director Khuzami, and the closing procedures are abbreviated.

The Director said that guidance on document retention regarding MUIs was changed in July 2010 after questions were raised. Since that time, MUI documents have been handled under the Enforcement Division's document retention policy for investigative files, which are covered by a records control schedule approved by the National Archives and Record Administration (NARA). After discussions with NARA and because the proper disposition of records involves issues of interpretations and judgments in the application of technical provisions of federal law, said the Director, the Division recently decided to retain all documents created, received or maintained for all enforcement matters, including MUIs, investigations and litigation, until the Division is certain that its document retention policies satisfy NARA standard.

Under the old guidance, MUI files were not stored as official files of the SEC and documents obtained in connection with an MUI were discarded. However, the SEC does not believe that current or future investigations have been harmed by the Division's previous guidance. The electronic MUI information that has been retained allows SEC staff to connect the dots between closed and current matters. The SEC retained significant information on all MUIs even under the old guidance. As part of the Division's case tracking systems, the SEC maintains electronic information concerning all MUIs opened during the past 20 years, including key information such as the title and source of the matter and the general subject matter of the inquiry. The MUI information is searchable and available to staff of the Division of Enforcement. Indeed, noted the Director, the electronic MUI information was designed to be and in practice has proven to be a useful resource for Enforcement Division staff.

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