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Jane Bryant Quinn tells it like it is in her post today, “Investor protection gets knocked out of financial reform law.” Lawmakers blew a chance to force stockbrokers and insurance agents to put their clients’ interests ahead of their own.

[Update: Jane's post was based on some language that was actually changed in the final version. More on that in a moment.]

You may not realize this, but these financial advisors are only required to make sure investments are “suitable”–which is a pretty flexible (let’s call it saggy) term. As Jane puts it,

For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.

Consumer advocates were trying to get the rules changed to hold these advisors to a higher, “fiduciary” standard. But Sen. Tim Johnson, a Democrat from South Dakota that Jane calls “the senator from Citibank,” put the kibosh on that. [Update: He tried to, by calling for the SEC to study the issue and not giving it the authority to act on its conclusions. The final language shortens the study period and gives the SEC the power, although not the requirement, to change the rules based on its findings.]

The fiduciary standard is important, and I’m kicking myself for not writing more about it–especially after Rep. Barney Frank’s comments about the importance of the media shining the light on issues where Big Money would otherwise rule. But that’s a fight for another day.

[Update: Indeed. From Knut A. Rostad, chairman of the Committee for the Fiduciary Standard: "The final language's greatest weakness is it allows the SEC discretion in whether it will initiate rule-making. This is where the efforts of the Consumer Federation of America, ourselves and others can make a difference." In other words, we'll have a chance to put the SEC's feet to the fire.]

Here’s what the compromise bill does include for consumers:

  • A new consumer protection bureau to be housed within the Federal Reserve. Congressman Frank predicted the bureau would be so independent that the Fed wouldn’t be allowed to “open its mail.”
  • States would be allowed to impose stricter consumer protection laws on banks if they wish, reversing the “pre-emption” standard that allowed banks to follow weaker federal laws instead.
  • FDIC insurance limits are permanently increased to $250,000, retroactive to Jan. 1, 2008.
  • Sets new minimum standards for home lending and requires lenders to verify income, credit history and employment status to ensure borrowers have the ability to repay loans. The fees that induced many brokers to steer borrowers to higher-cost loans would be banned.
  • A provision known as the “Volcker” rule would prohibit banks from making risky bets with their own funds, and limit their ability to trade derivatives. The derivative market would be regulated for the first time. The bill also gives federal regulators the power to seize and dissolve troubled financial companies. FDIC chairman Sheila Bair has characterized these powers as designed to prevent future taxpayer-funded bailouts.

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