Mary Schapiro, the chairman of the Securities and Exchange Commission, said she wanted to show that her agency was cracking down after missing Bernard Madoff's $65 billion Ponzi scheme. In May, she proposed that almost 10,000 wealth managers undergo surprise inspections to make sure they were not ripping off clients.

"Investors are looking to the SEC to assure the safekeeping of their assets," Schapiro said at the time. "We cannot let them down."

On Dec. 16, she settled for something less sweeping. Schapiro joined four other commissioners in approving a rule that requires about 1,600 U.S. fund managers to submit to unannounced audits, 83% fewer than seven months ago.

The revision came after lobbying by fund companies, including executives from T. Rowe Price Group Inc., who met with Schapiro, and Legg Mason Inc., who met with another commissioner, SEC records show.

The diminished inspections rule is one of at least four Schapiro announced as a way to protect investors and boost confidence, then later scaled back or delayed. In August, she bought herself more time on a rule to rein in short-sellers, after lobbying by hedge funds. In October, Schapiro put off plans to give investors more power to decide who sits on corporate boards after the U.S. Chamber of Commerce questioned the SEC's jurisdiction.

The SEC is reviewing public comments on the still-unfinished credit-rating rules, which would require companies such as Moody's Investors Service Inc. and Standard & Poor's Corp. to disclose how much revenue they get from their biggest clients and subject their employees to the same liability standards as auditors.

"I've been driving people very, very hard in this building," Schapiro said in an interview. "We just don't have the capacity to move any faster. We're still at, I think, a very good pace."

In her first year in office, Schapiro has found that issuing proposals is easier than completing rules. "You get zero points in history for what you proposed," said former SEC Chairman Richard Breeden, who now manages a hedge fund that tries to remove directors at companies he says are underperforming. "You get points for what you get over the goal line."

The SEC under Schapiro, 54, has suffered some setbacks, including a public humiliation in September by a federal judge who called a proposed $33 million settlement of an enforcement case with Bank of America Corp. a "contrivance."

Former SEC officials said Schapiro's strategy of proposing rules and pursuing cases against industries and executives involved in the financial crisis helped rehabilitate the agency's image — even if she has had to change her mind on occasion.

"Sometimes you shoot too fast and you find out there are things you should have thought about first," said Edward Fleischman, a former SEC commissioner who's now a senior counsel at the Linklaters law firm in New York.


On the surprise audits, fund managers complained in private meetings that the agency was unfairly punishing an entire industry for the sins of one of history's biggest fraudsters, according to attendees who requested anonymity to discuss the private sessions.

In May, Schapiro proposed a rule that would give shareholders more power to choose board directors by making it easier to wage proxy fights.

Under the proposal, groups of shareholders who collectively own 1% of the biggest companies could nominate board members directly on corporate ballots, rather than absorbing the cost of printing and mailing a second proxy statement.

Schapiro linked the proposal to the global financial crisis, saying bank losses raised "serious questions" about the oversight performed by directors.

The U.S. Chamber, which represents more than 3 million companies, called the SEC plan "unworkable" in an August letter. The nation's largest business lobby has also been in discussions with attorneys from Gibson, Dunn & Crutcher LLP on a strategy for suing the SEC, said Tom Quaadman, a Chamber executive director.

By September, Schapiro's staff began telling investors that the so-called proxy-access rules would not be in place for 2010 director elections. In October, the SEC publicly announced the delay.

Schapiro said the SEC still hopes to approve the rule in the first three months of 2010.

"It's a pretty profound change to the fabric of corporate governance," she said in the interview. "We need to do it carefully and thoughtfully."

Critics have also knocked Shapiro for catering to lawmakers, but her responsiveness to their concerns may reflect the weakened clout of the SEC after it missed Madoff's fraud and politicians accused it of failing to police Wall Street, said former SEC General Counsel Ralph Ferrara.

"What's being done now is to build credibility," said Ferrara, a partner at Dewey & LeBoeuf LLP in Washington. "If the goal is to protect the agency, then what you do when the bear comes to the mouth of the cave is feed the bear."

There's evidence that the strategy is working.

In May, the Treasury Department was mulling a recommendation to Congress that the SEC relinquish oversight of the $10 trillion mutual fund industry.

Seven months later, the House approved legislation that would increase, not shrink, the SEC's authority by adding regulation of derivatives to its plate and doubling its $1 billion budget. Senate Banking Committee Democrats also want to give the SEC authority over derivatives.

Under lawmakers' plans, banks and investors would trade contracts on regulated platforms that are monitored by the SEC and the Commodity Futures Trading Commission.

Having won the battle to share oversight of derivatives with the CFTC, Schapiro now must prove that her agency can manage the new responsibility. In preparation, she has hired economists and former Wall Street traders to add market expertise to an agency staff made up mostly of attorneys.


Meanwhile, new SEC Enforcement Director Robert Khuzami has tried to restore the prestige Madoff stripped from the agency by focusing on headline-grabbing cases, said Peter Henning, a former SEC attorney who now teaches at Wayne State University Law School in Detroit.

The strategy went awry when U.S. District Judge Jed Rakoff questioned why the SEC settlement with B of A did not accuse any executives of wrongdoing.

The proposed settlement would have resolved allegations that the Charlotte bank misled its investors about billions of dollars in bonus payments during the acquisition of Merrill Lynch & Co.

The SEC now must square off against B of A in court next year and has requested a jury trial.

The agency may also face lengthy court battles against Angelo Mozilo, the Countrywide Financial Corp. co-founder sued for inappropriate stock sales, and billionaire investor Raj Rajaratnam, who was accused of insider trading.

As with some of Schapiro's rule proposals, she cannot declare victory until those cases wend their way through the legal system.

"She's taken on the job under extraordinarily difficult conditions, given constant demands from lawmakers and the evolving financial crisis," said Barbara Roper, director of investor protection for the Consumer Federation of America in Washington.

"That's had an impact on what she's been able to accomplish. The next year will be a real proving ground."

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