New missteps in response to the epic fraud of Bernard Madoff threatened to undermine the Securities and Exchange Commission's pitch for more money before a trio of congressional committees on Thursday.
A key senator called for a quick probe into why the SEC's former top lawyer was allowed to advise the agency on the Madoff case while having personal ties to the massive fraud.
And a House lawmaker said people from both parties agreed there was at least an appearance of a conflict of interest.
The SEC's top watchdog is already investigating whether former SEC General Counsel David Becker should have recused himself from advising the SEC on Madoff matters, including how to compensate victims, because he had inherited money from his late mother, who had invested with Madoff.
The SEC voted in 2009 on a method to compensate victims of Madoff with some commissioners and staff unaware that the SEC's then general counsel had received money from Madoff funds, sources told Reuters on Wednesday.
SEC Chairman Mary Schapiro has already told lawmakers she was aware of Becker's Madoff connection.
Senate securities subcommittee chairman Jack Reed said after his hearing that there should be a thorough investigation. It should be done quickly and the response should be made public, Reed told Reuters.
Becker's Madoff link, his clearance to work on Madoff matters by the agency's ethics council, and Schapiro's knowledge of the tie, is raising new questions about the agency which missed several chances to catch Madoff before his 2008 arrest.
It may give ammunition to Republicans trying to slow down and undermine the Dodd-Frank Wall Street reform law, partially by trying to hold hostage promised funding boosts to regulatory agencies.
I can say with a great deal of confidence that there are plenty of 'reasonable' people on both sides of the aisle who agree that there is at least an appearance of a conflict of interest, Republican Representative Randy Neugebauer said at a separate House Financial Services subcommittee hearing on Thursday about SEC budget issues.
As the SEC struggles to implement and enforce dozens of new rules under Dodd-Frank, Schapiro said the agency will miss some deadlines for putting in place new regulations.
Schapiro told the Senate hearing that phased implementation of some rules could help avoid unintended consequences.
FUNDING UNDER PRESSURE
In 2000, the SEC's budget was about $369 million. Its budget now is $1.14 billion. It is seeking more than that for the coming fiscal year at a time when government spending is under intense pressure due to the soaring federal deficit.
In just over a decade the SEC's budget has tripled, said Representative Scott Garrett, who chaired the separate hearing in the House on the agency's spending levels.
Before we even think about giving this agency yet another funding increase, at minimum, the agency will need to show major progress in implementing recommended reforms to make its operations more efficient and effective, he said.
Democratic Representative Barney Frank, who co-wrote the Dodd-Frank law, called it a great piece of illogic to address the SEC's failures by reducing its resources.
Yes, the SEC needs expertise. They're not going to get it with a budget that's less than before, he said, accusing Republicans of using budgetary considerations to hide ideological opposition to Dodd-Frank.
Last month, President Barack Obama asked Congress to boost the SEC's funding by 28 percent to $1.427 billion, in a move that would let the agency hire 780 new staffers.
Budget issues and the SEC's handling of the Becker incident are expected to come up again at a third hearing later on Thursday before House Oversight Committee Chairman Darrell Issa.
Becker advised the SEC on how to decide which victims of Madoff's Ponzi scheme should be eligible to file claims. As a co-executor of his mother's estate, Becker and his two brothers are being sued by Madoff trustee Irving Picard to claw back $1.5 million in phony profits.
House and Senate Republicans are probing the incident, and the SEC's inspector general has launched an investigation.
(Reporting by Sarah N. Lynch and Kevin Drawbaugh; Editing by Tim Dobbyn)