What Obama's reforms might mean for investors

Even as President Barack Obama unveils his financial regulatory reform proposals, critics are hammering the weaknesses in his plan—everything from continued reliance on ineffective federal agencies to setting up a dubious council of regulators to the too-big-to-fail bank problem.

Still, there is some praise for one of Obama's proposed reforms — the creation of a consumer financial product safety commission that would monitor the marketing of mortgages, credit cards and other loan products. The agency would take power away from bank regulators, who have proven to be more focused on keeping banks running than protecting consumers. The notion of a financial product safety commission was first proposed by Elizabeth Warren, a former Harvard law professor and now chair of the TARP Congressional Oversight Panel.

Sounds good. But there's a crucial element missing: some form of protection for small investors, not just borrowers. After all, the victims of the financial meltdown included millions of middle-class Americans who were trying to save for retirement and the children's college educations. Many were poorly informed about the risks in their investments by their brokers, insurance agents and fund companies.

As first conceived, the financial products safety commission would have played an investor protection role by regulating a wide range of financial products, including mutual funds and possibly annuities. Along the way, however, the idea of giving the new agency authority over investments was scrapped. Pressure from financial services lobbyists was clearly one reason. But mostly, the Obama administration has kept its focus on the causes of the market meltdown, which include too much consumer borrowing.

That leaves the chief responsibility for investor protection with the Securities and Exchange Commission, which has famously been asleep at the switch. Just ask anyone who invested with Bernie Madoff.

Still, buried deep in the 89-page White House proposals are several intriguing investor protection reforms. The most important: requiring financial advisers and brokers to follow the same strict "fiduciary" standards.

To understand why this notion is so revolutionary, you have to realize that brokers and financial advisers don't follow the same rules right now. Financial advisers are regulated by the SEC, as well as as the states. And they must meet tough fiduciary standards, which require them to put the client's interest first. Brokers are regulated by FINRA, a self-regulatory agency funded by brokerages, which only requires them to offer products that are "suitable" for the clients, without mentioning conflicts of interest. Most investors don't know the difference.

Question is, will the SEC really follow through on the White House reforms? Since becoming SEC chair earlier this year, Mary Schapiro has promised that the agency will take a more active role in watching out for investors. But the record is mixed. On Thursday June 18, for example, the SEC will hold joint hearings with the Labor Department on problems with target-date retirement funds, many of which shocked investors with their losses in the meltdown. Schapiro has said she favors improved disclosure of target fund risks.

But the SEC shelved reforms of mutual fund 12(b)-1 fees, which were designed to pay for marketing for small funds but have become de facto sales loads. And efforts to ensure brokers and financial advisers follow the same standards have been bogged down for years, with many brokers lobbying to remain under the FINRA.

Still, Barbara Roper, a longtime investor advocate with the Consumer Federation of America, is hopeful. "For decades it's gotten worse and worse for investor protection." she says. "This is the first time I've seen signs that it may move in the other direction."

What do you think Obama should do to help protect investors?