A logo of the financial services provider Merrill Lynch can be seen in New York.
Emmanuel Dunand | Episode | Getty Images
The U.S. Securities and Exchange Commission charged Harvest Volatility Management and Merrill Lynch on Wednesday with exceeding clients’ pre-set investment limits over a two-year period.
Merrill, owned by Bank of Americaand Harvest have agreed in separate settlements to pay a total of $9.3 million in penalties to resolve the claims.
Harvest was the lead investment advisor and portfolio manager for the Collateral Yield Enhancement Strategy, which traded options in a volatility index focused on increasing returns. Beginning in 2016, Harvest allowed a plethora of accounts to exceed the exposure levels that investors had already declared when they signed up for the enhancement strategy, with dozens exceeding the limit by 50% or more, according to the SEC’s orders.
The SEC said Merrill connected its clients to Harvest knowing that investors’ accounts exceeded established exposure levels under Harvest’s management. Merrill also received a reduction in trading commissions and management and incentive compensation from Harvest, according to the agency.
Both Merrill and Harvest received higher management fees while exposing investors to greater financial risks, the SEC said. Both companies were found to have ignored policies and procedures that could have been adopted to alert investors to exposures in excess of established limits.
“In this case, two investment advisors allegedly sold a complex options trading strategy to their clients but failed to adhere to the client’s basic instructions or implement and adhere to the appropriate policies and procedures,” said Mark Cave , deputy director of the SEC’s Enforcement Division. “Today’s action holds Merrill and Harvest accountable for dropping the ball on these basic duties to their customers, even as their customers’ financial exposure grew far beyond predetermined limits.”
A Bank of America representative said the company “terminated all new enrollments at Harvest in 2019 and recommended that existing customers unwind their positions.”