Investors Worried Over Weakening Financial Reforms

Investor concerns abound over weakening financial system reforms. In an effort to win bipartisan support for his bill, Senate Banking Chairman Christopher Dodd is toning down plans to create an independent agency to regulate consumer financial products like mortgages and credit cards.

The latest proposal under consideration will place the consumer division in the Federal Reserve, even though lawmakers are accusing the Fed for not aggressively cracking down on lax lending and for fueling the housing bubble by keeping interest rates at low levels for a lengthy period. As a result, investors and consumer advocates are not impressed.

In November, Dodd introduced legislation to avert future financial crises and better protect investors. But Republicans did not support the draft bill and Dodd started afresh with lawmakers from both parties.

Now reforms such as higher standards for broker-dealers, regulation of the $450 trillion over-the-counter derivatives market and rules to make corporate boards more accountable are in danger of being diluted.

The committee may do away with a measure that would have forced brokers to adhere to a higher fiduciary standard if they provide financial advice to clients. Advisers to private equity funds and venture capital funds may escape federal oversight. In addition, Republicans and Democrats disagree over whether shareholders should have more say on corporate executive pay and greater power in electing corporate boards.

Ann Yerger, executive director of the Council of Institutional Investors, which represents investors holding more than $3 trillion in assets , said, "We have many concerns about the direction this bill may take, and the stakes are huge for investors, both large and small.”

The House of Representatives passed a bill in December to create an independent agency (the Consumer Financial Protection Agency) that has the authority to write its own rules and enforce them. However, U.S. businesses, which fear loss of business after the formation of CFPA, are using all resources to kill the proposal of the independent consumer agency.

"What's at stake is creating the possibility of another financial crisis," said Heather Booth, the director of consumer lobbying group Americans for Financial Reform.