(MONEY Magazine) – In MONEY's December issue, we explained how the system for regulating investment advisers is flawed ("The Big Bad News About Fee-Only Financial Planners"). Now legislation sponsored by Sen. Phil Gramm (R-Texas), a relentless critic of the Securities and Exchange Commission, may make the situation even worse. Gramm claims that his plan, which is tucked into the Senate version of a securities deregulation bill, will boost investor protection by splitting oversight of planners among the SEC and the states. But the proposal would actually lead to even less policing of financial advisers, consumer advocates warn. The House and Senate versions of the securities bills (HR 3005 and S 1815) are now before a joint conference committee that must iron out their differences.

One key problem: Crooked financial planners working for large firms could go undetected. Under the bill, the SEC would regulate only the largest investment advisory firms--those with more than $25 million in assets--while the states would oversee the smaller fry. Trouble is, the SEC lacks the resources to regularly inspect branch offices of large firms. And unlike most states, the SEC does not have the authority to license individual advisers, so it can't ensure that planners have clean disciplinary records.

Moreover, giving the states sole responsibility for small advisers could put investors at risk, since some state agencies already fail to provide adequate oversight. MONEY found that 18 of the 44 states that responded to a survey we conducted do not routinely inspect advisers.

Some of the bill's backers concede its shortcomings. "The investor protections don't go far enough," says Sen. Richard Bryan (D-Nev.), a co-sponsor. "But Sen. Gramm has resisted any changes." Gramm says: "If someone has a way of improving the bill, I'm willing to listen." You can offer your opinion to Sens. Bryan, Gramm and Alfonse D'Amato (R-N.Y.), c/o U.S. Senate Finance Committee, 219 Dirksen Senate Bldg., Washington, D.C. 20510.

--Ruth Simon and Jennifer Zajac