Mercer Bullard is the founder of Fund Democracy, a shareholder advocacy group that he started last year. Bullard is a former assistant chief counsel in the SEC's division of investment management and worked in the investment management practice of Wilmer, Cutler & Pickering, a law firm in Washington D.C. Bullard's group has aligned with the AFL-CIO, the Consumer Federation of America and other groups in an effort to increase portfolio disclosure. In an interview with Mutual Fund Market News reporter Andrew Greene Bullard discussed the industry and his plans for Fund Democracy. An edited version of their conversation follows.
MFMN: What inspired you to begin a shareholder advocacy group?
BULLARD: I see it as a business opportunity in that there was a convergence of factors in the industry that exposed a vacuum in the industry for mutual fund shareholder-oriented analysis, commentary and advocacy. And when I was at the SEC, I saw basically two people quoted representing shareholder interests - Don Phillips and Jack Bogle. That just doesn't make any sense in a $7.5 trillion dollar industry.
I also saw that mutual funds had really reached saturation levels in the market place, that their profit margins on domestically-sold funds were dropping. And this was happening at the same time competing products that were less expensive, more flexible and more tax efficient, were beginning to eat a piece of the mutual fund pie. This all added up to a couple of things. One, consumers are going to be much more in the driver's seat than they were in the 90's. That means they are going to demand and receive lower fees and more and better services. Control is going to shift from mutual funds to shareholders' personal advisors. And the numbers bear all of this out. The financial planning industry is going to be where there is the strongest growth going forward. And that will increase the demand for my kind of advocacy and my kind of content and analysis that I'm going to provide. I'm planning on limiting myself to issues where there is a high likelihood of success. I'm not going to take on anything until, not only do I have the merits in my favor, but there is very specific leverage that I will be able to apply to accomplish Fund Democracy's goals. And that could be hearing requests on an application, it could be getting injunctive relief in the courts, it could be through popular opinion. There are a lot of different ways you can force issues and create an initiative that is highly likely to succeed.
MFMN: You mentioned that on some issues you might go to court and sue fund companies. In what situations might you do that?
BULLARD: That would be a case where Fund Democracy was pretty certain the SEC agreed with its position, but because of industry pressure and political limitations, it wasn't able or willing to stake it out on its own. So, one way to accomplish that is if it involves what I believe is a violation of the 40 Act, but currently there isn't strong enough positions by the (SEC) staff on it, then you can sue for injunctive relief to get a court to find that a fund has violated the Act. And if (the fund companies) argue, you simply ask the court to ask the SEC to provide (it) with its views. And the SEC will always respond to that request. So that would essentially be using the court to either get the SEC to take a position, or you simply win an injunctive action and change the law.
MFMN: Any issues that you might be targeting?
BULLARD: A prime target would be what's been known as the Gartenberg Standard, which is the standard under which directors review a fund's fees.
MFMN: Can you clarify what the Gartenberg Standard is and how you feel it is not sufficient for today's industry?
BULLARD: The context for it is there was a big debate in the sixties leading up to the 1970 amendments of the Investment Company Act. One of the key debated issues was, Should mutual fund fees have to be reasonable?' The SEC said they have to be reasonable (and) it should be in the statute. And the industry and the Investment Company Institute said no and the industry won that debate. So what came out of that was the legal standard that probably reflects what is probably a pretty meaningless standard that is applied by directors in evaluating fees. I can't do a better job at illustrating how meaningless it is than by reading you the key statement from Gartenberg itself. Reading from the text of the opinion: To be guilty of a violation ... the advisor-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining.'
I actually used that in a recent presentation to a bunch of mutual fund industry people. I just put that up on the screen and I said, If you were on your death bed and you wanted to establish a trust for your six children and the trustee walked in and showed you this and said, "This is the standard by which my fees will be charged," would any of you agree to that?' Not one person in this room of 70 people raised their hands because no one in their right minds would agree to that standard. It's a meaningless standard and I think that there are courts, there are judges that would be willing to overrule it. And if they don't overrule it, I think that their failure would spur a Congress, given the right facts, to change the law.
MFMN: And you would be willing to take some cases all the way to Capitol Hill?
BULLARD: Absolutely. I think that after this election, Congress is going to recognize that mutual funds have arrived on the political scene. What this saturation of the marketplace means is that you have 88 million shareholders which means 88 million voters. It's a bi-partisan issue because it goes to peoples' wallets. And it's not strictly an investor protection issue. My goal is not investor protection as such. It is getting the mutual fund rules to be what people would want them to be. These issues are going to attract a lot of bi-partisan support because the nature of the issues is not going to fall on one side of the political spectrum or the other. And the industry so far has failed to recognize that they are now living on a new stage, if you will, and having to operate with a higher level of accountability that they've ever had. They can't work their issues in the back office of the SEC anymore. They are going to have to work out these issues in the public, political forum. And they are failing to do this.
MFMN: Are issues like these at the forefront of the average investor's mind and what is Fund Democracy going to do to draw their attention to these issues?
BULLARD: These issues are never going to be at the forefront of the average investor's mind. That's not what I see driving regulations in the securities context or any context. Do we have fee tables in the prospectus because shareholders kept writing the SEC saying they really needed this information? It is not realistic to think that every regulatory reform should only be pushed forward if it survives some populist test of the average shareholder standing up and demanding it. That's never been the test that has been applied to regulation in any context and the securities industry is not alone there.
MFMN: Do you feel the SEC is as strong an advocate of the individual shareholder as it has been in the past?
BULLARD: The SEC is working in a political context heavily influenced, unfortunately, by Congress that controls the purse strings which control its budget. Essentially the message Congress is sending is not, we want less government, it's we want less effective government. We are going to take the most effective agency in the federal government - which most people acknowledge is the SEC - and we are going to pay them less than the lawyers working for other financial service regulators. The other problem is every year you get a very strong sense that Congress is looking to use the SEC's budget as a cudgel to limit its enforcement of the securities laws and its ability to adopt rules that are in the best interest of investors. The only voice that the SEC hears on the mutual fund industry issues is from fund management companies. It's very hard to stand up against all of that pressure and say, We're going to require portfolio disclosure.'
The SEC is always fighting to do what's best for investors, but it's a real battle. You only have so much political capital and the fact is Levitt has decided to use most or all of it on non-mutual fund issues. Overall, I give him a great grade, but on mutual funds, he's not doing a great job.
MFMN: How has Fund Democracy been received?
BULLARD: There's been criticism in public forums, forums limited to industry people. That's probably where it's been harshest. But no one is really taking a shot at Fund Democracy because I think their current view is that I'm just some guy in the basement. That's exactly what has enabled me to lead this portfolio disclosure initiative. But there are also people in the industry that are totally behind what I'm doing.
MFMN: What corners of the industry have been critical?
BULLARD: They're not just criticizing fund democracy, they are criticizing portfolio disclosure. That's coming from (John) Brennan and (Robert) Pozen and high level executives at big fund complexes. They've even mischaracterized the (portfolio disclosure) movement. Brennan at an SEC celebration of the 40 Act characterized the movement as asking for daily disclosure. He knows perfectly well that is not what we are asking for and that we understand that it would harm shareholders to have daily disclosure. But if their approach is to simply mischaracterize what we are asking for, that's just a sign that they are not ready to deal with the issue.
MFMN: One of the hallmarks of the fund industry's reputation has been its diligence in serving and protecting investors' trust and confidence. Do you feel the industry is moving away from that reputation and standard?
BULLARD: Well, I have to compliment the ICI in generally taking positions that are much more aligned with mutual fund shareholder interests than other lobbying groups. You have to give them a lot of credit. They have created a product brand standing for integrity and trust and I think they will probably be able to do that going forward. It's inherently a cleaner industry and I'm not making mutual funds my issue because there are more problems there. I'm doing it, one, because that's what I do best and, two, that's where the money is.