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) -- Proposed legislation in the House of Representatives aimed at making Wall Street pay for the bailout of financial firms could have unforeseen consequences -- even for mom-and-pop investors. That's why lawmakers need to think long and hard before they decide to vote on it.

The proposed bill (H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009) would put a damper on banks like

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report


Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report


Morgan Stanley

(MS) - Get Morgan Stanley Report

, whose results have benefited from trading operations.

Its passage, which would add a 25-basis point tax on securities transactions, could cripple the high-frequency trading market that has sprung up in place of human market makers since the decimalization of trading. That would cause spreads to widen, and money would move to less-regulated forums. This would result in lower liquidity for average investors in markets with the new regulation and increased risks for those who venture outside.

When taxes or restrictions are placed on certain securities transactions, Wall Street finds new ways to trade. This is a trend that has played out recently in the exchange-traded fund industry, exposing investors to new types of credit risk and overseas contracts.

Need an example of how regulation can unintentionally result in more risk to the consumer? A

TheStreet Recommends

war is being fought

over futures-based commodity ETFs, and as the Commodities Futures Trading Commission places new "safety limits" on New York Mercantile Exchange-traded futures contracts, ETF managers are shifting toward alternatives.


United States Natural Gas

(UNG) - Get United States Natural Gas Fund LP Report

, a popular futures-based fund that

saw premiums soar

during the more than two months when the creation of new shares was halted. As the

Securities and Exchange Commission

took its time in allowing additional shares, and as new position limits from the CFTC seemed imminent, UNG managers

began selling

their to-be-regulated futures and buying swaps, adding to the ETF's risk.

Managers of the UNG reiterated today that they could allocate fund assets to interests other than futures contracts in order to stay within position limits and abide by accountability levels. In August, a representative of UNG confirmed to me that the fund was selling futures contracts and buying other investments such as swaps.

More recently, position limits have caused a restructuring of

Deutsche Bank's

(DB) - Get Deutsche Bank AG Report

PowerShares DB Agriculture

(DBA) - Get Invesco DB Agriculture Fund Report


PowerShares DB Commodity

(DBC) - Get Invesco DB Commodity Index Tracking Fund Report

ETFs. New "safety position limits" placed on the underlying contracts have caused the latter fund to


U.S.-regulated oil holdings to British-traded Brent Crude contracts.

Smarter regulation, not overregulation, is the order of the day for financial markets. Our alphabet soup of regulators needs to coordinate their efforts to produce regulation that will not unintentionally expose investors to greater risk or push business abroad.

In the wake of the financial crisis, it may seem tempting for Congress to exact revenge on Wall Street firms that have profitable trading departments such as Goldman Sachs and


(C) - Get Citigroup Inc. Report

. But lawmakers and regulators should first take a moment to consider who will ultimately pay. An old Chinese proverb warns, "The person who seeks revenge should dig two graves."

-- Written by Don Dion in Williamstown, Mass


At the time of publication, Dion had no holdings in stocks mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.