The U.S. Securities and Exchange Commission, criticized this week for failing to detect the Bernard Madoff's $65 billion Ponzi scam, needs more money and a new way of getting it, said a key lawmaker on Thursday.

The SEC should be funded from the fees it charges financial institutions, not from appropriations made by Congress, said Democratic Senator Charles Schumer, who plans to introduce legislation next week along those lines.

A major part of the SEC's problem is that its annual budget is lacking in resources, said Schumer, a senior member of the banking committee that oversees the SEC.

I am proposing that we fundamentally alter the way the SEC is funded. ... I am introducing legislation next week, when we get back to Washington, so the SEC can use fees from institutions it regulates to fund its necessary operations.

The SEC brings in more money to the government through fees than it gets back from Congress for its annual budget. Allowing the SEC to keep and spend the fee income it derives would boost its budget by 75 percent, Schumer estimated.

He added that SEC Chairman Mary Schapiro supports the idea of self-funding for the agency. It has been proposed before in years past, but never been approved by Congress.

Some other major U.S. agencies, such as the Federal Deposit Insurance Corp., are already self-funded.

Citing a report that showed the SEC botched numerous opportunities to uncover financier Bernie Madoff's years-long fraud, Schumer told reporters on a conference call that his proposal would help improve the SEC's ability to prevent another Madoff-style scam from escaping notice again.

The agency, which regulates securities markets, missed numerous red flags that may have pointed to Madoff scheme, a U.S. government watchdog said in a report on Wednesday.

The agency never did a thorough and competent probe of Madoff's operation, despite complaints dating back to 1992, said SEC Inspector General David Kotz in the report.

The inspector general made no mention of the SEC's funding as an issue in its executive summary of the report detailing the agency's failings in investigating Madoff.

Madoff pleaded guilty in March to orchestrating the Ponzi scheme, which used money from new investors to pay old ones. He is serving a 150-year prison term.


Answering reporters' questions on the call, Schumer added that he would expect Senator Tim Johnson, a South Dakota Democrat, to become chairman of the banking committee if its current head, Senator Christopher Dodd, decides to leave the panel.

Dodd is next in line to take over the Senate Health, Education, Labor and Pensions (HELP) Committee, which had been chaired by the late Senator Edward Kennedy. It is not yet clear whether Dodd will make such a move.

My predictions are, if Chris Dodd wants to stay, he'll remain chairman. If he wants to move to HELP, it will be Tim Johnson chairing the banking panel, Schumer said.

Johnson suffered a serious brain hemorrhage in 2006. Some lobbyists and aides have said it could impair his ability to run the committee. If he were to be passed over for the chairmanship, Senator Jack Reed would be next in line.

Schumer also said it is still possible for congressional Democrats and the Obama administration to complete a long list of proposed financial regulation reforms before year-end.

I don't think it will slip. The goal is to get both of them done by the end of the year and I think we can do that, he said, responding to a question about whether the intense debate over healthcare would leave room for financial reform.

(Editing by Leslie Adler)