I've read through all the replies to your question and have dealt with this myself. Here is what I have to say.
Take a small piece from what everyone had to say. Here is what I do.
First of all, the law is the law, breaking the law has to be clearly defined in your IT policy.
Is your company a public company or is it privately owned? This makes a huge difference in regulatory compliance which may govern what privileges he is allowed to have.
Become his executive support and keep up to date ghost images, this will only help you in the end.
Most importantly, and most here have stated it, document everything, cross your T's and dot your i's. Make this part of your status report that you submit to your supervisor.
Deffer responsibility, you didn't create the policy and you are not high enough to customize it per user. No need to back down on what you told him. Simply explain you are willing to work with him in trying to get what he needs. (be political) But that you can not allow this without higher approval. The deffer to your supervisor and get it in writing (either by creating a special privleges form or getting your supervisor to sign off on the work order)
The name of the game is to keep the execs happy no matter what, at the same time you need to keep your systems safe so when ever there is a change in order, make sure it is documented thoroughly and signed off on by those who have the authority to change the rules.
Use your own tools against him, we use spyware detection and blockers as well as scanning systems on a weekly basis for unauthorized applications. Just because he gets local admin rights doesn't mean he can install anything he wants. I would not even cover this as part of the admin rights issue. Your IT policy should clearly outline this seperately and it should be treated as a seperate issue. When and if spyware or any other unauthorized software is discovered, you can address that. First by notifying the end user (yes SVP or not, he's still just an end user) via email of the discovery and that the software will need to be removed, CC: your supervisor, then open a work order and schedule the removal.
Summary - Do what ever you can to give them what they want. Don't tell them it can't be done, tell them how it can be done. Document everthing and get signatures where needed. Enforce policy and keep your supervisor(s) in the loop. If the poop is gonna fly, remember to duck.
That's the best advise I can offer.