WM Exclusive Interview with Mercer Bullard

In part, the gap is due to inadequate funding for the SEC, which must turn over all the fees it currently receives to Congress, which then makes an appropriation of a portion of those fees back to the SEC. In recent years, the SEC has received an appropriation of about two/thirds of the funds it raises. That missing funding could go a long way toward more frequent investment advisor exams. Reforms legislation that the House passed in December contained a mandate to double SEC funding; that was also contained in the draft of pending Senate legislation on reforms.

FINRA–the Financial Industry Regulatory Authority–the self-regulator for brokers, is one possibility and certainly has made a play to be the regulator or RIA firms; many broker/dealers that FINRA regulates have RIA arms. But an effort to put that into an earlier version of the House legislation was defeated.

Since RIA firms with under $25 million in assets can be regulated by their state rather than register as RIAs with the SEC, one possibility is to raise that limit to $100 million for state regulation.

Fixing the retirement system

Bullard is also a proponent of fixing the retirement system, due to the "inadequacy of the 401-(k) as the sole retirement vehicle," In a joint letter from his Fund Democracy, The Consumer Federation of America, and Consumer action, to the Department of Labor, Bullard advocates provision of "standardized Simple Annuities," for retirement accounts; that the 401-(k) account choices, "reflect generally accepted investment theories;" and that they further, "reflect the needs of less sophisticated, low income plan participants are most susceptible to sales abuses, are at greater risk of committing planning errors, and are most vulnerable to losses that leave them unprepared for retirement."

The letter cautions on the use of variable annuities to fund 401-(k)s however, saying, "Variable annuities are more frequently the subject of abusive sales practice than any other investment. They impose higher fees and provide additional benefits of questionable value. We strongly encourage the Department to require heightened scrutiny by employers and/or product providers of variable annuity investment options."

Later, the letter notes that, "One analyst estimates that variable annuities transfer approximately $25.6 billion a year "of spendable investment returns" from vulnerable investors to the insurance industry and its sales force," [citing Scott Burns, in the blog "Variable Annuity Watch, 2008," on the AssetBuilder-Registered Investment Adviser Web site.] To be frank, we were stunned by the Department's request for comments on whether 404(c) regulations should "be amended to encourage use for these products…"

"If anything, the Department should take steps to discourage the rampant overuse of variable annuities."

Instead, Bullard suggests use of low cost, low fee "lifetime income annuities," or "fixed annuities." He also says Congress should "prohibit employer stock or limit it to 20%" in retirement accounts, acknowledging the number of employees burned by holding high allocations to employer stock if the company runs into problems.

The Goldman Sachs saga

When asked about his opinion on the SEC's fraud suit against Goldman Sachs, in which the firm allegedly didn't inform the buyers of a Goldman-created synthetic mortgage backed security, that a third party–hedge fund manager John Paulson, who allegedly planned to short the same security–helped select the underlying portfolio of mortgage securities. Did Goldman Sachs have a fiduciary duty to those clients? Were they operating under suitability? Well, even under suitability, Bullard says, "indirectly, suitability requires they disclose Paulson's role."

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.