The Derivative Project

Wall Street’s “Investor Advocate” Misrepresents Money Market Reform

Wall Street’s “Investor Advocate” Misrepresents Money Market Reform

The issue of money market reform is a crucial issue for our nation’s financial system.  The problem is now exacerbated by articles by Wall Street, presenting information that is not factual and distorting the issues to benefit the securities industry.  This is no more evident than this shocking “Commentary” published a few hours ago by Morningstar, “Money Market Funds on Life Support.”

Wall Street has its own investor advocate, that pretends to be the retail investor’s advocate.  He is once again manipulating the media on behalf of Wall Street.  The most critical issue is money market reform and the fact that trillions of dollars of retirement savings are in money market accounts despite the Federal Reserve Bank of New York declaring that many money market funds carry significant systemic risk and must be reformed.  Further, many retail investors are actually losing money in money market funds or will in the near future due to “voluntary recapture” programs such as in Charles Schwab’s money funds.  (See two previous The Derivative Project blog posts that explain “voluntary capture”.)

Mercer Bullard, who founded Fund Democracy, following his position at the Securities and Exchange Commission, is an outward “retail investor advocate” in conjunction with Barbara Roper, Consumer Federation of America, but they are ostensibly the mouth piece of Wall Street. The crucial money market reform issue and substantive financial reform is the most clear example of the Consumer Federation of America and Fund Democracy working against retail investors.
Here is the description of Mr. Bullard in his Morningstar article from this morning:
“About the Author:  Mercer Bullard is president and founder of Fund Democracy, a mutual fund shareholder advocacy organization, an associate professor of law at the University of Mississippi School of Law, a senior adviser for financial planning firm Plancorp Inc., and a former assistant chief counsel at the Securities and Exchange Commission. He has testified frequently before Congress on regulatory issues. He can be reached at bullardm@funddemocracy.com.”
In sum, retail investor advocates work for Wall Street and are the “mouth pieces” in the media and Congress for retail investors.  This goes beyond “regulatory capture.”  Mr. Bullard is not just a “Senior Adviser” for Plancorp he is an investment adviser, registered with the SEC.  That must be disclosed in this article.  He receives income from mutual funds, including money market mutual funds.
Here are Mr. Bullard’s material conflicts of interest:
  • Mr. Bullard is a Vice President of Plancorp.  He is currently a SEC registered investment adviser.  That is not disclosed on his Fund Democracy website, nor in the Morningstar article.  In other words, you cannot be an advocate for the retail investor and also be receiving salary from Wall Street, one is clearly conflicted.
  • Mr. Bullard has testified before the Senate Banking Committee on money market reform and a hearing on Investor Protection. He presents the view of Wall Street, not a neutral, unbiased position, yet testifies as an “advocate” for the retail investor, as founder of Fund Democracy, without disclosing he is registered with the SEC to sell product.  One will note in this Senate testimony, linked to above, Mr. Bullard does not disclose he works for a Wall Street firm and is a SEC registered investment adviser.  He only discloses he is the founder of Fund Democracy and a law professor.
Here are the misleading facts in Mr. Bullard’s Morningstar commentary from today, that must be addressed by the media to ensure they can be a return to stability in our global financial markets:
“The MMF battle embodies the central ideological divide in financial-services regulation. Banking regulation promotes the socialization of risk and thrives on secrecy. Securities regulation promotes the decentralization of risk and thrives on disclosure.”
This is the fundamental flaw of Mr. Bullard’s thesis.  There is no disclosure in money market funds. One can read a bank financial statement and assess the risks, with the exception of the off-balance sheet VIE’s (variable interest entities.) Money market funds are stuffed full of asset-backed securities, where the underlying assets cannot be determined and variable interest entity guarantees that makes it beyond impossible for a retail investor to understand what one is investing in or the inter-locking systemic risks presented by the guarantees.
Mr. Bullard receives income personally from mutual funds.  Thus he is a fierce advocate for keeping the Wall Street gravy train going, by charging fees for investment management for retirement savers, when the saver has negative returns in today’s money market funds, with more risk.  
The solution is for the Department of Labor to take immediate steps to require all ERISA fiduciaries to move funds out of the systemically risky money market funds, that now provide a lower return and greater risk, than FDIC insured CD’s. To do otherwise, is to choose Wall Street profits over the safety and returns of retirement investors.  Once the yield curves in short term markets return to more normal, historical levels and if the returns after expenses warrant such, the DOL may allow fiduciaries to then return retirement funds to money market funds.
SEC Commissioner Aguilar is correct.  A comprehensive study is an urgent priority on both short and long term capital markets and the role of our FDIC, OCC and Federal Reserve Banks are critical. The re-transfer of short term assets from money funds to the commercial banking sector must be addressed. The role of shadow banking in capital markets, non-transparency for the retail investor, must be addressed.  However, Mr. Bullard is blatantly misrepresenting there is more transparency in money market funds, than in commercial banks.  
 
What one does know is that the capital markets were relatively smooth functioning until the introduction of securitized assets, false ratings by otherwise trusted ratings agencies, use of structured vehicles (derivatives) that made certain risks impossible for one to see.  The securitization was the ongoing search for yield by Wall Street.  The commercial banks followed suit to compete,  with regulatory allowances to do so with the Commodity Modernization Act of 2000.   However, Mr. Bullard is lacking the traditional training in money and banking 101 to represent there is less risk and transparency in securitization than in traditional commercial banking.  He does not want his own personal income stream from money market funds to come to an end, despite the systemic risk determined by the Federal Reserve Bank of New York.
The bulk of money market fund assets are in the form of retirement savings.  Mr. Bullard, our nation’s retirement savings will not be moved to hedge funds with non-transparent public filings. If accredited investors seek to mover their cash to hedge funds, that is a risk that they have chosen to accept.  This argument holds no impact and is an idle threat, since the bulk of money market fund assets are held by retirement savers.
Retail investors now can see clearly how
they have been duped for so many years.  Their “advocates” work for Wall Street and do not even disclose when they testify before Congress on how to protect investors, that they actually earn their living from Wall Street.
What happens next?  Planet Money, New York Times and Wall Street Journal and the Senate Banking Committee, the next time you quote an “investor advocate” verify who they work for. If your source receives income from Wall Street and is registered with the SEC they cannot also be an “investor advocate”.  Your Wall Street bias is thus self-evident and if this charade continues a more trust-worthy, unbiased media publication will soon replace you.