Seven Questions with Mercer Bullard
We spoke with Fund Democracy's founder on how to fix mutual fund regulation.
With a new SEC chairman on the way and no doubt a new approach in regulating funds, I asked Mercer Bullard about the state of fund regulation and how it can be improved. Bullard is the founder of Fund Democracy, a professor at the University of Mississippi Law School, and a former SEC staffer.
Q. What should be at the top of Mary Schapiro's agenda for investment management?
A. First, Schapiro should re-establish the risk-assessment office created by chairman Donaldson that conducts ongoing strategic assessment of systemic risk in the financial-services industry. Second, she should become an active participant in the debate about the future structure of America's retirement system. Third, she should see that the Division of Investment Management clears its backlog of pending issues (e.g., 12b-1 fees) or replace its senior ranks. Fourth, she should implement a plan to reduce mutual fund costs through regulatory reform. Lastly, she should reverse her longstanding opposition to a fiduciary standard for those who provide personalized investment advice. She has preferred instead a suitability standard under which there is no requirement, for example, that a broker tell a client that the funds recommended by the broker are paying him more compensation than other funds.
Q. Opponents of the independent chairman rule argued that it was unnecessary as hedge funds and European funds were doing just fine without them. Does the Madoff scandal and other hedge fund debacles put an end to that argument?
A. The Madoff fraud and hedge fund collapses provide two excellent illustrations of the primary advantage of mutual funds. They provide an investment vehicle with a simple set of default rules that minimize the likelihood of disappearing assets and complete failures (although some of Bill Miller's funds have lost more than 60% of their value). Board oversight is certainly one of those rules, and an independent chair can only strengthen such oversight, so in this sense Madoff and hedge funds have bolstered the case for an independent chair. Unfortunately, they haven't put an end to that argument.