The 1,600-page financial reform bill passed by the Senate in May-which, as this issue goes to press, is being reconciled with the House version before being signed by President Obama-greatly expands regulation of financial firms but still doesn't do enough to enhance consumer protections for individual investors, some industry observers say. The bill contains some provisions that are intended to address the Security and Exchange Commission's [SEC] dismal record of failure in its mission to protect individual investors, such as a provision to provide more funding for the agency, and another that reduces the number of small advisory firms it would be responsible for supervising.

But it's far from clear that these measures will do enough to better shield consumers from the types of investment losses so many suffered in the financial downturn. In some cases, the provisions seem to be doing the bare minimum, such as calling for further study of aspects of consumer protection, rather than taking real substantive action.

The Senate version of the bill calls for numerous studies of the financial services industry, such as a report on ways to improve investors' access to information about any disciplinary actions, regulatory, judicial and arbitration proceedings faced by their registered investment advisors or broker-dealers. It also calls for a study of financial planners, their professional designations and the level of regulatory oversight they are subject to. Another provision requires a study of what the appropriate fiduciary responsibilities of broker-dealers and investment advisors should be. However, some say that the studies are a mere substitute for action-a stonewall-and that much of what is risky for consumers about the financial services industry is already well known. Negotiations between the House and Senate were ongoing as this story went to press.

FUNDING IMPROVEMENTS

Both the House and the Senate versions of the bill seek to improve the SEC's oversight of investment advisory firms through increased funding. Specifically, the Senate bill would create a self-funding mechanism for the SEC-allowing it to collect new user fees that could bankroll improved inspection and examination of investment advisors-rather than continue to be solely dependent on Congressional appropriations. The House bill would double SEC funding over the next five years.

But simply throwing money at the problem may not be enough to improve protections for consumers, sources say. "These government entities are not really motivated to detect fraud. If the SEC screws up, they are berated and a few people have to resign, but they don't really suffer any consequences," says Phil Goldstein, principal of Bulldog Investors in Saddle Brook, N. J., who takes a generally dim view of financial reform efforts. "The bigger problem is that it gives a false sense of security to the consumer who then says, 'I don't have to worry because the government is looking out for me.' That's a big mistake."

Still, others in the industry contend that the SEC simply hasn't caught up with the growth and increased complexity in the financial services industry in the past decade, which is why consumers have been left so vulnerable. "There's been continued steady growth in the number of investment advisors over the last five to seven years, but the SEC's resources have remained steady or fallen slightly since 2006, so we believe the SEC needs more resources to do its job of regulating and examining investment advisors," says David Tittsworth, executive director of the Investment Adviser Association, "Our preferred method is in the Senate bill, which is self-funding, or allowing the SEC to keep fees they collect from registration and transactional activities."

Jim Roumell, CEO of Roumell Asset Management in Chevy Chase, Md., is generally supportive of the bill, and argues that the SEC needs just a bit of bolstering to be able to fulfill its mission rather than a complete overhaul. "As someone who was audited by the SEC for three weeks in 2006, I would say they did a fine job," he says. "Did they go overboard at times looking at files? Sure. But was it onerous? No. In fact, to be honest, I walked away from that process more confident that there was a system in place to make sure fellow advisors were held to a fiduciary standard and there was some level of oversight."

But he acknowledges that, post-Madoff, many view the SEC unfavorably. Roumell says the Senate bill probably doesn't go far enough to protect consumers. He notes, for example, that banks will still be allowed to take advantage of proprietary trading using FDIC-secured deposits-which are ultimately secured by taxpayer dollars. "The bill is taking some important steps, but it could go further. As a pragmatist, this may be the best bill that could be had, and it is better than nothing," Roumell says.