Whatever Senators’ alliances, regulatory overhaul of the financial services industry is likely to be the election issue of 2010, according to a new report by Boston’s Aite Group called “Smart Regulation: Is It Possible?”

At issue is President Barack Obama’s need to generate political momentum after flubbing healthcare reform and losing the 60-vote advantage in the Senate following the election of Republican candidate Scott Brown to the seat left vacant by Democrat Senator Edward Kennedy’s death.

Republicans have been successful in embarrassing the President by stymieing his efforts to accomplish hardly anything while in office. But media furor over Wall Street’s chutzpah has made regulating the financial services industry a political hot potato, so they’ll have to participate to some extent, argues Paul Zubulake, senior analyst and author of the report.

But that doesn’t mean every proposal is guaranteed safe passage through the Senate, which is where proposed changes to financial services regulation now sit. Here is a rundown of proposals up for debate and which ones are likely to become law.

HOT

• The resolution mechanism, or the “Too Big to Fail” provision, is the most likely part of legislation to pass the Senate. The law would allow the government to break apart any institution large enough to be a systemic risk to be broken apart in an orderly manner, just as banking regulators now can do to failing banks. The current plan is that large financial firms, those with more than $10 billion in assets, would collectively foot the bill for such collapses.

HOT

• The creation of a systemic regulator, which would put the power to determine which super-sized institutions are teetering on the brink of collapse, is part of that plan. But creating the legislation necessary to grant the Financial Services Oversight Council the power it needs to break apart complex companies is likely to prove contentious.

NOT

• The Over-the-Counter Derivatives Market Act of 2010 will prove difficult to pass, as the Treasury, the House Financial Services Committee and the House Committee on Agriculture are finding it difficult to reach a consensus on their proposals, clouding its future.

LUKEWARM

• Centralized clearing is the centerpiece of all proposed derivatives legislation. Zubulake’s main concern is that the complex job of deciding margin requirements and daily pricing settlements should remain with the clearinghouse, not regulators. The credit derivatives market is already shifting toward the clearinghouse model, he notes.

NOT

• The consumer protection agency, which was meant to make sure consumers got enough clear information before committing themselves to credit cards, mortgages and some other financial products but not investments, is looking pretty weak thanks to zero Republican support. Zubulake says that while creating a bureaucracy to combat financial illiteracy may not be the best way to go about it, the educational system should pick up the reins.

LUKEWARM

• The Senate’s proposed Financial Institutions Regulatory Administration would combine the Office of the Comptroller of the Currency, the Office of Thrift Savings, the Federal Deposit Insurance Corp. and the Federal Reserve Bank into one streamlined regulator. It might happen, although the Fed is against the idea. Its sway is somewhat stayed by the delay in Fed Chairman Ben Bernanke’s renomination.

HOT

• Hedge fund registration requirements will likely go through, not least because most hedge funds already register with the Securities and Exchange Commission. The threshold for registration will likely be $100 million in assets and funds will have to register as investment advisors.

HOT

• The Office of Credit Rating Agencies within the Securities and Exchange Commission is likely, enforcing greater disclosure of methodology, the use of credible outside information in rating companies, disclosing conflicts of interest, allowing investors to sue ratings agencies who are negligent in their duties, deregistering errant ratings agencies and requiring ratings analysts to seek continuing education.

HOT

• One area that no career politician is likely to fight in the current climate of Main Street rage is curbing executive compensation practices at public companies. Shareholders are likely to have a lot more say on the details of C-suite pay deals and will have an easier time nominating directors to the board. Zubulake suspects some companies will go private as a result of a potential assault on executive pay.