The U.S. Securities and Exchange Commission (SEC) charged Harvest Volatility Management and Merrill Lynch on Wednesday for exceeding clients’ predesignated investment limits over two years. The two companies settled separately and will pay a combined $9.3 million to resolve the claims. The SEC found that Harvest exposed investors to more significant financial risks, and Merrill connected clients to Harvest while aware that accounts exceeded designated limits.
Harvest was the primary investment advisor and portfolio manager for the Collateral Yield Enhancement Strategy, which traded options in a volatility index aimed at incremental returns. Beginning in 2016, Harvest allowed numerous accounts to exceed the exposure levels that investors had designated when they signed up for the enhancement strategy, with dozens surpassing the limit by 50% or more, according to the SEC’s orders.
Merrill’s client exposure oversight
Merrill connected its clients to Harvest, knowing that investors’ accounts exceeded the set exposure levels under Harvest’s management. The SEC also noted that Merrill received a cut of Harvest’s trading commissions, management, and incentive fees. Merrill and Harvest neglected policies and procedures that could have alerted investors to exposure exceeding the designated limits.
“In this case, two investment advisers allegedly sold a complex options trading strategy to their clients but failed to abide by basic client instructions or implement and adhere to appropriate policies and procedures,” said Mark Cave, associate director of the SEC’s enforcement division. “Today’s action holds Merrill and Harvest accountable for dropping the ball in executing these basic duties to their clients, even as their clients’ financial exposure grew well beyond predetermined limits.”
A representative from Bank of America said the company “ended all new enrollments with Harvest in 2019 and recommended that existing clients unwind their positions.
