Why the SEC Keeps Backpedaling

In the wake of Bernie Madoff's $65 billion Ponzi scheme, Mary L. Schapiro, the new chairman of the Securities & Exchange Commission, said she wanted to show that her agency was cracking down. So in May she proposed that almost 10,000 money managers undergo surprise inspections to make sure they weren't ripping off clients. "Investors are looking to the SEC to assure the safekeeping of their assets," she said. "We cannot let them down."

On Dec. 16, however, Schapiro settled for a less sweeping measure. She and four other SEC commissioners approved a rule requiring unannounced audits for only about 1,600 fund managers, 83% fewer than under the original proposal. The downsized inspections came after executives of fund companies, including T. Rowe Price Group (TROW), met with Schapiro, and representatives of Legg Mason met with another commissioner, SEC records show.

That's just one of several Schapiro measures—announced with fanfare as a way to protect investors and boost confidence—that were later scaled back or delayed. In August she bought herself more time on a proposal to rein in short-sellers, traders who bet the prices of selected stocks will fall. The move came after lobbying by hedge funds. In October, Schapiro put off plans to give investors more power to decide who sits on corporate boards. "You get zero points in history for what you proposed," says former SEC Chairman Richard C. Breeden, who now runs a hedge fund that has tried to oust directors at companies he believes are underperforming. "You get points for what you get over the goal line." Schapiro says the SEC is doing all it can. "We just don't have the capacity to move any faster," she says. "I've been driving people very, very hard in this building." Former SEC officials say a flurry of new rules, including still-unfinished proposals aimed at tightening supervision of credit rating companies and money market funds, have helped rehabilitate the agency.

Schapiro, 54, has spent more than two decades in financial regulation. She first served as a staff attorney at the Commodity Futures Trading Commission, followed by stints as an SEC commissioner, chairman of the CFTC, and then CEO of the Financial Industry Regulatory Authority, a Wall Street-funded overseer of brokerages. Edward Fleischman, a former SEC commissioner who is now a senior counsel at the Linklaters law firm in New York, says Schapiro "doesn't appear to be a steamroller who says, 'I made the proposal, so it must be right.'"

In May, Schapiro proposed giving shareholders more power over corporate boards by making it easier to wage proxy fights. Long a goal of investor advocates, the proposal would have allowed some shareholders to nominate board members directly on corporate ballots rather than pay to print and mail a second proxy statement. The U.S. Chamber of Commerce called the SEC plan "unworkable" and got ready to file a lawsuit. By September, Schapiro's staff was telling investors the proxy-access rule wouldn't be in place for 2010 director elections. In October the SEC said the rule would be delayed.

Schapiro's agenda has also been driven by political pressure, says James J. Angel, a finance professor at Georgetown University who has advised stock exchanges. Democrat Barney Frank, chairman of the House Financial Services Committee—one of the SEC's overseers—said at a Mar. 10 press conference that after speaking with the SEC boss, he was "hopeful" that "within a month" she would reinstate the uptick rule; it requires that investors wait for a stock to rise before betting against it, which prevents short-sellers from piling on. In April, Schapiro proposed the rule—only to postpone it.

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