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Bullard Calls for Fund Industry Change

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?