The U.S. Securities and Exchange Commission (SEC) filed charges against Harvest Volatility Management and Merrill Lynch on Wednesday for allowing clients to exceed their preset investment thresholds over a span of two years. The two firms reached individual settlements and will collectively pay $9.3 million to settle the allegations. The SEC determined that Harvest placed investors at a higher financial risk, while Merrill facilitated client connections to Harvest, despite knowing that their accounts surpassed the established limits.
Harvest acted as the main investment advisor and portfolio manager for the Collateral Yield Enhancement Strategy, which involved trading options in a volatility index to secure incremental returns. Starting in 2016, Harvest permitted multiple accounts to exceed the agreed-upon exposure levels, with several clients exceeding the limit by over 50%, as indicated by the SEC’s findings.
Merrill’s oversight of client exposure
Merrill facilitated its clients’ access to Harvest, despite being aware that their accounts were surpassing the designated exposure levels under Harvest’s management. The SEC further highlighted that Merrill earned a portion of Harvest’s trading commissions, management, and incentive fees. Both Merrill and Harvest failed to follow policies and procedures that could have warned investors about the exposure exceeding the designated thresholds.
“In this matter, two investment advisors reportedly marketed a complex options trading strategy to their clients but did not adhere to fundamental client instructions or implement and follow suitable policies and procedures,” stated Mark Cave, associate director of the SEC’s enforcement division. “Today’s action holds Merrill and Harvest responsible for neglecting their fundamental responsibilities to their clients, even as their clients’ financial exposure escalated well beyond agreed-upon limits.”
A spokesperson from Bank of America stated that the company “terminated all new enrollments with Harvest in 2019 and advised existing clients to liquidate their positions.”
