Securities lobbyists are hustling this week to protect a little-noticed provision in the bankruptcy bill that would allow their firms to counsel companies in bankruptcy even if their previous advice contributed to the companies’ demise.

The provision aroused the ire of some Senate Democrats, who invoked the corporate meltdowns at Enron and WorldCom in pointing to the risks of changing the 70-year-old law.

Sens. Patrick Leahy (D-Vt.) and Paul Sarbanes (D-Md.) planned to introduce an amendment to strike the measure, while lobbyists representing Wall Street, led by the Securities Industry Association, shored up support among Members to block the Leahy-Sarbanes language.

Meanwhile, consumer advocates said that while they opposed the provision, they were too busy addressing other parts of the bill to help marshal support for the amendment.

“The whole concept of the bankruptcy bill is so horrible, we have not been following this piece that closely,” said Celia Wexler, of Common Cause.

The provision, which passed in earlier versions of the bill, removes a longstanding restriction designed to ensure that firms who advise a company through a bankruptcy have no conflicts of interest.

If the law is changed, critics say, such conflicts could become commonplace, because post-bankruptcy firms often review the company’s old transactions. As such, firms could be faced with making judgments in hindsight about the work they themselves did prior to the bankruptcy — a scenario that would provide a temptation to downplay their own mistakes.

“This is a step backward from all the recent developments in Congress preventing conflicts of interest,” said Travis Plunkett, legislative director for the Consumer Federation of America.

Lobbyists for investment firms argue the change does not weaken conflict-of-interest standards, since any firm hoping to participate in a bankruptcy would still have to win a bankruptcy court judge’s approval.

They also say that changing the law could provide substantial benefits. They argue that the provision promotes competition by widening the field of potential firms bidding for companies’ business and submits investment firms to the same process that already applies to the bankrupt company’s lawyers, accountants and management consultants.

John Anderson, an SIA lobbyist, said the industry has been discussing the issue with Members on two Senate committees: Banking, Housing and Urban Affairs and Judiciary.

“It’s our highest priority” in the bankruptcy bill, he said.

Speaking privately, several lobbyists said that in addition to the consumer groups, opposition to the measure was being led by the Blackstone Group and Lazard Freres, two smaller investment houses. Because those firms do not underwrite securities, they are not barred under current rules from advising bankrupt companies, lobbyists said. Ending the ban, they said, would end those companies’ strong advantage for winning the business of advising companies through their restructuring.

Lobbyists for Blackstone and Lazard could not be reached for comment.

In a letter to Senators last week, Leahy and Sarbanes noted that if the bankruptcy bill passes with the provision, “investment banks that advised or underwrote securities for companies such as Enron or WorldCom prior to bankruptcy could be hired to represent the interests of defrauded creditors during the bankruptcy proceeding.”

“Firms that had a part in those companies’ demise could stay on the payroll and profit handsomely from their own failures,” they wrote.

Lobbyists for the American Bankers Association and the Financial Services Roundtable said they would pitch in to help scuttle the Leahy-Sarbanes amendment. The two groups said they are responding to the Senate Republican leadership’s call to defeat any attempts to change the bill and get it passed as quickly as possible.

Lisa McGreevy, a lobbyist for the Financial Services Roundtable, said that while her group takes all the amendments “very seriously, I don’t believe there’s very much support for this.”

“The Senate defeated all the other amendments [offered last week], and I expect this will go the same way,” she said.