NEW YORK (Reuters) - Some of the biggest U.S. investors and two former top securities regulators warned that a “tarnished” Federal Reserve should not be put in charge of preventing systemic risk in the financial system, a central plank of the administration’s response to the credit crisis.

The Investors’ Working Group, representing some big money manager firms and led by former Securities and Exchange Commission Chairmen William Donaldson and Arthur Levitt, said on Wednesday the United States should instead create an independent body to serve as watchdog of risk management across the financial sector.

The body proposed by the investors -- the Systemic Risk Oversight Board, or SROB -- would have full-time staff and independent of government agencies and financial institutions.

The SROB would appointed by the President and confirmed by the Senate, and would be accountable to Congress.

The Investors’ Working Group said the United States should consider limiting banks’ proprietary trading, regulating derivatives more, boosting capital requirements, subjecting insurers to federal supervision, and forcing credit rating agencies to submit to more “meaningful” oversight.

While calling reforms proposed June 17 by President Barack Obama “a start,” the group said “bolder” measures are needed to extricate markets from the worst financial crisis since the Great Depression. It rejected as “disastrous” the idea that agencies should use a “light touch” in policing markets.

“The lack of sufficient authority, resources and will on the part of regulators helped fuel the financial meltdown at least as much as the absence of systemic risk oversight,” the report said.

The Fed’s “credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitized products,” it added.

Since September, the government has bailed out several companies, some more than once, including American International Group Inc AIG.N, Bank of America Corp BAC.N, Citigroup Inc C.N, mortgage financiers Fannie Mae FNM.P and Freddie Mac FRE.P and General Motors Corp MTLQQ.PK.

The investor group said creating a systemic risk oversight board is a short-term solution, although the board could later evolve into a full-fledged regulator.

It said the administration’s proposal to give the Fed more oversight of systemically important companies has “serious drawbacks” because the central bank already has “competing responsibilities” to oversee monetary policy and manage the U.S. payments system.

The group also faulted a proposal by some lawmakers to create a council of regulators, citing the potential for jurisdictional disputes and “blurred lines of authority” where ultimately no one would be held accountable.

Obama’s plan also envisions the creation of a consumer finance protection agency, which is generating strong opposition from banks.

The report was sponsored by the CFA Institute Center for Financial Market Integrity and the Council of Institutional Investors.

Among the investor group's members are Brooksley Born, a former chair of the Commodity Futures Trading Commission; Harvey Goldschmid, a former SEC commissioner; Bill Miller, chief investment officer of Legg Mason Capital Management Inc LM.N and personal finance columnist Jane Bryant Quinn.