This is an interesting issue.
Speaking for WAME (World Association of Medical Editors), I can say that to my knowledge WAME has no explicit ethical requirements or policy recommendations that would suggest that a journal must purge rejected papers (see e.g. policies at http://www.wame.org/resources/editor-s-syllabus
However, there is a requirement for REVIEWERS to do so ("The submitted manuscript is a privileged communication; reviewers must treat it as confidential. It should not be retained or copied.") - see http://www.wame.org/resources/ethics-re ... -journals/
There may be other customs in other disciplines, and I am curious to learn about other practices.
In practice, many medical journals keep their files for 1-2 years, but there are also others which now keep them indefinitely, esp those using electronic management submission systems, see discussion athttp://www.wame.org/resources/wame-list ... ipt-files/
As one editor said there, disk space is cheap...
My personal opinion is that ethically there is nothing wrong with keeping the files, as long as they are accessible by a defined set of people (in our case, "publisher, editor, and their designates") only, and as long as they are only used for certain purposes, and as long there is disclosure. Re the latter we added a statement to our editorial policies stating that we keep all (incl rejected) manuscripts unless the author objects (no one ever does). See ABOUT section at http://www.jmir.org
for our wording under "Record Keeping Policy" - I'd be interested in feedback on whether this policy makes sense.
On the other hand, in my 10 years of experience as editor I had NEVER the situation where I had to dig out a rejected paper. But there may be situations where this may become necessary (e.g. an author whose manuscript has been rejected ignores the rejection and resubmits the ms - this is not completely unheard of).
And then there is the research argument - research into peer-review and open access publishing is badly needed. I just received (finally!) a CIHR grant to study the "Impact of Open Access on Knowledge Translation", and would be very interested in getting in touch with journals / journal editors who would like to do research in this area (and/or research in peer-review - please contact me at geysenba at gmail.com).