Ill-considered rules worse than none

It’s increasingly evident that the business of buying and selling stocks is going through a major transformation. So much so, that it’s beginning to crash up against existing federal regulations, which in many cases have been rendered obsolete by the Internet.

In a sense, that’s a good thing. It shows that competition is healthy and the market is innovating. Out of that, customers are reaping rewards. They’re getting better services at lower cost as firms adapt to the popularity of online trading. But there is also a danger that swamped bureaucrats in Washington are losing sight of the big picture. That could quickly turn a good thing into a bad thing.

As it now stands, Congress and the administration are taking a piecemeal approach to modifying regulations in an attempt to keep up with the market. When that happens, the process can quickly become prey to special interests.

The last thing regulators want is to create new rules that tip the playing field and end up stifling fair and open competition. But judging by recent events, the danger of that is real and present.

Two weeks ago, InvestmentNews Washington correspondent Sara Hansard detailed the battle between full-service brokerages and independent investment advisers over the so-called “Merrill Lynch rule.” The Securities and Exchange Commission drafted the proposal after Merrill Lynch launched its online asset-based fee program. But the fingerprints of Merrill’s lobbyists are all over this one.

Current SEC regulations require fee-based brokers to register with the agency and to comply with strict fiduciary standards. The Merrill rule would waive that for full-service brokers, regardless of how they are paid, as long as they do not have discretion over their clients’ money. But advisers believe that puts them — and the pubic — at a disadvantage. When you take fees, they argue, you strongly suggest that you are in a fiduciary relationship, and we’re inclined to agree.

In another arena, Congress is considering a bill to give online signatures the same legal weight as a signed document. This is another obvious bow to the rising power of the Internet, but consumer advocates have raised a number of legitimate concerns that have yet to be addressed.

And, this week InvestmentNews reveals in a front page story another looming battle on Capitol Hill over the relationship between brokerage firms and companies that operate online portals like America Online Inc., Compuserve and Microsoft.

This isn’t to say no change is needed. To the contrary, Congress and federal regulators need to cut away the red tape with all reasonable speed. But this process needs to be more comprehensive with far more oversight and public scrutiny.

Even those on the cutting edge of the Internet revolution can’t predict with any certainty where the market is heading.

We hardly need new federal regulations that do more harm than good in the name of progress.