Newly revealed missteps by the U.S. Securities and Exchange Commission in its handling of the epic Bernard Madoff fraud undermined its pleas for more funding on Thursday before a trio of congressional panels.

Seizing on questions about a former top SEC lawyer's financial ties to the Madoff affair, Republicans opposed to more money for the SEC -- and to dozens of new financial rules it is implementing -- grilled agency officials.

Some Democrats joined in demanding answers from SEC Chairman Mary Schapiro as to why former General Counsel David Becker was allowed to advise on the Madoff case despite disclosing he had inherited Madoff funds from his mother.

The Becker affair may be one of the greatest challenges to the SEC's credibility since Bernard Madoff managed to dupe so many Americans, House Oversight Committee Chairman Darrell Issa, a Republican, told one of the hearings.

The SEC's top watchdog is investigating whether Becker should have recused himself from Madoff matters, including advising on how to compensate the swindler's victims.

It did not strike me that his mother's account, closed years ago, would present a conflict, a financial conflict of interest, Schapiro told the afternoon hearing where Issa spoke.

I realize in light of this incident that as chairman I have to ensure that we go beyond what may be required in any particular situation, she said. I wish that Mr. Becker had recused himself.

The SEC voted in 2009 on a method to compensate Madoff's victims with some commissioners and staff unaware that Becker had received money from Madoff funds, sources told Reuters on Wednesday.

Senate securities subcommittee chairman Jack Reed said after a hearing he led that there should be a thorough investigation. It should be done quickly and the response should be made public, Reed, a Democrat, told Reuters.

House and Senate Republicans are already probing the incident.

Becker's link to Madoff, his work on Madoff matters at the agency, and Schapiro's knowledge of the tie, are all raising fresh questions about the agency that missed several chances to catch Madoff before his 2008 arrest.

FUNDING UNDER PRESSURE

The episode was giving 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 morning into 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.

She told the Senate hearing that phased implementation of some rules could help avoid unintended consequences.

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.

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 improve its operations, said Representative Scott Garrett, who chaired the Thursday morning House hearing.

Last month, President Barack Obama asked Congress to boost the SEC's funding by 28 percent to $1.43 billion, in a move that would let the agency hire 780 new staffers.

BECKER'S ADVICE

Becker advised the SEC on how to decide which victims of Madoff's Ponzi scheme should be eligible to file claims with Madoff trustee Irving Picard.

At first, in early 2009, the SEC took a position that would potentially hurt Becker's financial interests by recommending that investors could only file claims based on net equity, or the difference between what they put in and what they withdrew.

But later that year, the SEC changed course slightly.

People familiar with the matter say Becker was involved in advocating a change which would benefit longer-term Madoff investors by adjusting the payments to account for inflation.

That refined method was a source of internal dissent within SEC staff. When it came time to vote on it, however, there was no mention of Becker's conflict, sources said, and the SEC commissioners voted to accept the new recommendation.

The change was never put into practice, and a federal court last year upheld Picard's net equity method. Madoff victims are still fighting to get it changed.

Becker left the SEC at the end of February, as previously planned, but has submitted letters to lawmakers saying he was advised by the agency's ethics counsel that he could participate in Madoff matters.

He and his two brothers are being sued by Picard to claw back $1.5 million in phony profits from his mother's estate.

(Reporting by Sarah N. Lynch and Kevin Drawbaugh; Editing by Tim Dobbyn)

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