This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

As President Obama gearsng financial regulatory bill, one little discussed but important potential provision that did not survive the final version would have provided for self-funding by the Securities and Exchange Commission.

This is a policy advocated by people like New York Senator Chuck Schumer and Representative Barney Frank as well as SEC chairman Mary Schapiro. It would enable the agency to use some or all of the fees and/or fines it collects to pay its bills.

In fact, other financial regulators are currently self-funded, including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Wachtell Lipton Rosen & Katz points out that a proposal that the SEC should be able to fund itself based on the fees it collects was ultimately rejected. Instead, the conferees agreed that the SEC should continue to be subject to the Congressional appropriations process, and provided for certain baseline appropriations through 2015, according to the law firm. It adds that the proposed Act also requires the White House to submit unaltered to Congress the SEC’s annual budget, and establishes a $100 million reserve fund.

This is a controversial issue and current and past commissioners are divided over whether this is a good idea.

Opponents say self-funding would create a conflict of interest because it would increase the SEC’s incentive to seek the largest possible fines. Former commissioner Luis Aguilar, who supports self-funding, is sensitive to these concerns. So, he supported self funding, but only based on fees and registrations, not fines.

He had pointed out that the 2010 budget of slightly more than $1 billion is well below the $1.4 billion or so the SEC figures to bring in from those fee sources. Self-funding could also enable the SEC to attract better candidates by increasing the pay scale, something Representative Frank says he supports.

One former chairman told me last year he doubts Congress would go along with self-funding. He asserts the system of campaign finance has given the business community leverage over Congress, whose main lever of control over the SEC is its budget. “When big patrons come to see them and say stop the SEC, the power of the purse is critical to them,” the former chairman insists.

Back in June, 40 prominent securities lawyers fired off a letter asserting that a self-financed SEC “is one of the most important parts of the financial services reform legislation presently before you.”

They pointed out that from 2005 to 2009, the SEC collected about $7.4 billion from transaction and registration fees, which were turned over to the government, but Congress appropriated just $4.5 billion for the agency’s budget during that period. “The chronic under-funding of the SEC has severely impeded the SEC’s ability to keep pace with market and technology changes,” the lawyers stated. “After shrinking in size for a number of years, the SEC is only now beginning to grow again. Meanwhile, the securities industry and corporate activities it regulates have grown tremendously in size and sophistication over the last two decades.”

They noted that between 2004 and 2007 SEC enforcement and examination staff declined 10 percent and its information technology initiatives plunged 50 percent, while at the same time, trading volume doubled, the number of investment advisers jumped 50 percent and the funds they manage grew almost 60 percent.

In a speech in June, Schapiro insisted that self funding ensures independence, facilitates long-term planning, and closes the resource gap between the agency and the entities the SEC regulate. “In the process, it allows the SEC to better protect millions of investors whose savings are at stake,” she added.

Self funding also ensures an SEC that is more effective at identifying and addressing the kinds of risk that dealt a significant blow to the American economy, she told her audience.

Schapiro pointed out that in the immediate post-Enron era, the SEC saw significant increases in its budget. But funding dropped just as markets were growing in size and complexity. At the height of the pre-financial crisis frenzy, Schapiro added, the SEC was actually forced to reduce staff. “Only now can we afford to begin to develop the new technology that will allow us to evaluate, store and retrieve the kind of tip information that might stop the next major fraud,” she said.

Schapiro said self funding would have many benefits for investors: It would allow the SEC to increase its professional and technical capacity, to keep up with the financial industry’s rapid growth; It would enhance our long-term planning process, allowing the SEC to address the increasingly sophisticated technologies, products, and trading strategies adopted by the financial services industry; and, It would provide the flexibility to react to developing risks in the same way that our domestic and foreign counterparts did during the recent financial crisis, with rapid staffing and strategic responses that help control systemic damage.

She added: “To truly protect investors to the best of their abilities, they need the independence, planning ability and resources that self funding provides.”