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After falling flat on its face in the Bernie Madoff case and in other situations, the SEC could be rewarded with a raise. New York Senator Charles Schumer wants to increase the SEC’s budget by hundreds of millions of dollars.

Schumer plans to introduce his proposal next week. It would allow the SEC to keep all of the fees it collects from the financial companies it regulates. Right now, the SEC collects the fees, but Congress determines the size of the agency’s budget. From Schumer’s statement:

“The SEC’s failure to catch Bernie Madoff shows a level of incompetence unseen since FEMA’s handling of Hurricane Katrina. It is clear the SEC needs a bigger, more reliable funding stream so it can retain and recruit the top talent that has fled the agency of late,” Schumer said. “Under the current system, the agency’s rank-and-file personnel are struggling to keep up with the more sophisticated actors in the market. We cannot keep starving the SEC’s budget or the agency will remain a shadow of its former self.”

Schumer’s proposal would give the SEC the same privileges the Federal Reserve and the FDIC enjoy — they’re both funded through the fees collected from the institutions they oversee.

It doesn’t sound like a terrible idea, considering that the financial markets grow ever more complex, and the SEC’s resources haven’t been increased to keep up with the times. But a report out this week suggested that in the Madoff case, “the agency simply didn’t see what was happening right in front of them.” Perhaps that was man/woman power, perhaps it a lack of expertise or perhaps it was something else.

At Daily Finance, management consultant Peter Cohan says Schumer’s idea is, in fact, “absolutely terrible.” Problem number one: using the fee structure, the SEC would be funded by the very industry it’s supposed to regulate — Wall Street. Problem number two: the SEC will never be able to pay salaries that compete with Wall Street’s, so the “best” will always chose Wall Street over working for the SEC.

Cohan’s alternative solutions:

First, as I’ve said before, the U.S. should create an independent government agency to create financial reports so we can stop letting companies and investment managers write their own report cards. Second, the U.S. should put Wall Street pay in escrow so that dealmakers’ fees are at risk along with investors’ returns.

By changing the way Wall Street gets paid and reports on its performance, the opportunities for financial scam would probably decline significantly.

What do you think about Schumer’s idea?

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