March 5 (Bloomberg) -- Former U.S. Securities and Exchange Commission member Annette Nazareth has taken herself out of the running to be deputy Treasury secretary, according to people familiar with the matter.

Nazareth, who hadn’t been nominated, was warned that her SEC work would be assailed at Senate confirmation hearings, the people said. Before becoming a commissioner, Nazareth was head of the SEC’s market regulation division where she helped design an oversight regime that has been criticized for missing Wall Street’s excessive risk taking.

Nazareth’s decision is a setback for Treasury Secretary Timothy Geithner, who is without any confirmed senior aides as he grapples with the global financial crisis. Caroline Atkinson, an official at the International Monetary Fund, also withdrew from consideration as undersecretary for international affairs, said people briefed on the decision.

“We’re making some progress and we’ll -- we hope to come up for the committee soon with a full slate of very strong people,” Geithner said when asked about staffing yesterday in a hearing before the Senate Finance Committee. “We’re doing this carefully as you would expect and you know trying to make sure that we have the best talent in the country, frankly.”

Cohen, Brainard

H. Rodgin Cohen, chairman of New York law firm Cromwell & Sullivan LLP, is being considered for a senior Treasury job, possibly deputy secretary, said people familiar with the discussions. Lael Brainard, a senior fellow at the Brookings Institution in Washington and former deputy director of the National Economic Council under President Bill Clinton, is a contender for undersecretary for international affairs, the people said. Cohen and Brainard didn’t return telephone calls seeking comment.

Geithner has brought in some high-level aides to work in posts that don’t require Senate confirmation, including Gene Sperling, a former head of the White House National Economic Council under Clinton and Lee Sachs, a former Clinton Treasury official. During the administrations of Clinton and George W. Bush, some top Treasury positions went unfilled for months.

Nazareth, 53, a partner at the Davis Polk & Wardwell law firm in Washington, didn’t immediately return a call seeking comment. She was also frustrated by the length of the selection process, according to the people. Kevin Cavanaugh, a spokesman at the firm, declined to comment. Atkinson wasn’t immediately available for comment.

‘Severe Crisis’

Former Federal Reserve Chairman Paul Volcker late last month told a congressional committee that it was “shameful” that the Treasury hasn’t filled its senior positions during a “very severe crisis.” In addition, bank executives are upset over their lack of access to the department as it crafts policies that will affect their industry for decades.

Scott Talbott, chief lobbyist for the Financial Services Roundtable, a trade association of the biggest financial firms, said the department must bring more officials on board as soon as possible.

“Treasury has a number of large, complex issues on its plate and the need for staffing is critical,” he said.

At the SEC, Nazareth was a driving force in urging a merger of the NASD, an industry-funded regulator of U.S. brokerages, with most of the New York Stock Exchange’s regulatory arm. The SEC approved the consolidation, which formed the Financial Industry Regulatory Authority, in July 2007. That group has come under fire on Capitol Hill for not spotting the $50 billion Ponzi scheme allegedly masterminded by Bernard Madoff.

SEC Record

Before becoming a commissioner in 2005, Nazareth was the staff member in charge of overseeing brokerage firms, market surveillance and stock exchanges. She led the division in 2004 when it designed a program to monitor whether Wall Street’s five biggest securities firms had adequate capital and liquidity.

SEC Inspector General David Kotz faulted the program in a September report, saying the SEC failed to respond to “numerous, potential red flags” at Bear Stearns Cos., such as the firm’s excessive borrowing and over-concentration in mortgage securities.

Then-SEC Chairman Christopher Cox scrapped the program the same day Kotz issued his report. It followed the collapse of Bear Stearns Cos. and the bankruptcy of Lehman Brothers Holdings Inc.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: March 5, 2009 21:28 EST