Politics are colliding with exchange-traded funds and index funds in a major way, for both good and bad.

First, the bad news: U.S. Senator Tim Johnson (D-South Dakota) appears to have scuttled reform efforts that would have forced brokers selling investments to act in the best interests of their clients.

Currently, broker/dealers are required only to recommend investments that are “suitable” for their clients. That’s a far cry from the fiduciary standards that apply to true registered investment advisers, who are required by law to put their clients’ interests first.

The move to apply “fiduciary standards” to brokers grew out of the financials scandals of 2008, which created a climate for investor-friendly reform. Early drafts of reform bills currently working their way through the Senate Finance Committee had language that would apply fiduciary standards to brokers. But late last month, Senator Johnson inserted an amendment that would delay any decision for 18 months while the Securities and Exchange Commission studies the matter further.

The move is a clear delaying tactic aimed at postponing the discussion to a point where consumer anger over the scandals has subsided. As has been reported in many locations, the question of the fiduciary standard has already been studied to death.

I would submit that no study was needed in the first place: Should people providing investment advice be able to act against the best interests of their clients? The question is absurd on its face.

There are plenty of good brokers out there, and I doubt they are worried. If they’re good, they’re already acting according to a fiduciary standard (or would like to if their firm allowed it). The only folks who are worried about a fiduciary standard (and the ones who are lobbying Senator Johnson with huge money) are the folks who want to sell products like PHYS at a 5 percent commission.

On the flip side, a news piece from Pensions & Investments shows that there’s still hope in the political system. According to P&I, a new Department of Labor proposal about what kind of investment advice can be delivered to direct contribution retirement plans could heavily favor index funds.

I’ll quote directly from the piece: “The proposal, released by Vice President Joe Biden at a Feb. 26 White House briefing would bar the use of performance data from computer models that generate advice, placing greater reliance on fees, which favor index funds.”

It goes on to quote from the proposed rule:

“While some differences between investment options within a single asset class, such as differences in fees and expenses or management style, are likely to persist in the future and therefore to constitute appropriate criteria for asset allocation, other differences, such as differences in historical performance, are less likely to persist and therefore less likely to constitute appropriate criteria for asset allocation.”

That’s music to my ears …