Ryan Grim has the latest from the FinReg negotiations:

The insurance industry is poised to rip a gaping loophole in financial reform’s investor protections, working to insert a provision in the conference committee report that was passed by neither the House nor the Senate.

The measure would exempt securities products created by insurance companies from regulation, leaving the job instead to state insurance commissioners. Insurance companies do a lucrative business in selling annuities that guarantee a return to investors but limit the upside and often come with exorbitant commissions and high surrender fees that make access to the money difficult in times of financial need.

The insertion is being pushed by Sen. Tom Harkin of Iowa, a state with a heavily-concentrated insurance industry. His House ally is Rep. Greg Meeks (D-N.Y.), who often represents corporate interests despite having a heavy trade union presence in his district.

At least no harm has even come from an insurance company selling financial products and benefiting from light regulation. What, Joseph Cassano? Never heard of him. Actually, this has nothing to do with insurance companies selling derivatives or credit default swaps, or at least that’s what the likes of Harkin and Meeks will tell you. But these things have a way of evolving.

This annuities amendment almost got into the bill on the floor of the Senate before Daniel Akaka blocked it. Remember how we were told that measures have to be present in the House or Senate bill, or else by the “rules” of the conference committee, they cannot get inserted? Well, that’s just not true, as you can see. And I agree with Barbara Roper of the Consumer Federation of America, that’s the real crime here:

The last-minute insertion of the provision is particularly galling, said Roper, because it hasn’t been approved by either chamber and has been the subject of little congressional deliberation.

“Beyond the substance, which is really horrible, the idea that a handful of members of Congress are going to decide this issue with no legislative hearing and no answer to the basic questions… that’s just an appalling violation of the integrity of the legislative process,” she said.

The entire House offer on prudential regulation is here. The investor protection piece looks shot full of holes at this point. Beyond this annuities amendment, companies under $75 million will be able to wiggle out of Sarbanes-Oxley requirements, and shareholders will not have “proxy access,” the ability to weigh in on corporate governance, without a 5% holding in a company.

Meanwhile, the heavy-hitter pieces should come at the end of the week. Scott Brown is working like crazy to give a gift to Massachusetts banks and insurance companies, which would almost render meaningless the Volcker rule. Carl Levin told reporters that such a move would be a “fundamental mistake,” and that there are Senate votes available such that Brown’s would not be necessary for cloture. One of those votes, Russ Feingold, doesn’t sound like he could be swayed without significant reforms included; but liberal amendments, you see, cannot come back in conference because “those are the rules.” Feingold may accept the bill if it doesn’t eviscerate the Volcker rule, but I’d doubt it. Maria Cantwell, who also voted against the bill, is more likely to be swayed if the derivatives loophole on enforcement gets fixed, so Brown could be outpointed. But I don’t think votes are necessarily the driving consideration.

The Volcker rule debate was scheduled for today, but got put off to Thursday, the same day as the derivatives debate in conference. That’s probably not by accident; I’d expect some kind of compromise involving both of the controversial parts.