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September 25, 2024 at 02:06 PM
What You Need to Know
- Merrill failed adequately to inform certain clients that a portfolio manager, Harvest Volatility Management, exceeded their planned investment exposure levels, the SEC says.
- This resulted in clients paying higher fees, being subjected to increased market exposure and incurring investment losses.
- Harvest and Merrill have agreed to pay a combined $9.3 million in penalties and disgorgement.
The Securities and Exchange Commission said Wednesday that it has charged Harvest Volatility Management LLC and Merrill Lynch, Pierce, Fenner & Smith Inc. for exceeding clients’ designated investment limits related to a complex options trading strategy.
The activity occured over a two-year period beginning in March 2016, which resulted in clients paying higher fees, being subjected to increased market exposure and incurring investment losses, the SEC said.
According to the SEC’s orders, Harvest was the primary investment advisor and portfolio manager for the Collateral Yield Enhancement Strategy (CYES), which traded options in a volatility index with the aim of generating incremental returns.
From March 2016 to April 2018, Merrill, a registered broker-dealer and investment advisor, failed adequately to inform certain clients that Harvest “materially exceeded investment exposure levels specifically designated by such clients in a strategy that Harvest managed,” the SEC order states.
“Merrill knew or reasonably should have known that certain clients’ actual investment levels exceeded the dollar amounts designated and agreed upon between the clients and Harvest, which caused certain clients to pay higher fees, to be subject to increased market exposure and, ultimately, to incur investment losses,” the SEC order against Merrill states.
Merrill said Wednesday in a statement shared with ThinkAdvisor that it “ended all new enrollments with Harvest in 2019 and recommended that existing clients unwind their positions.”
As part of the separate settlements, Harvest and Merrill have agreed to pay a combined $9.3 million in penalties and disgorgement.
The SEC’s orders find that, starting in 2016, “Harvest allowed scores of accounts to exceed the exposure levels that investors designated when they signed up to the CYES strategy, including dozens of accounts that exceeded the limit by 50% or more.”
Merrill and Harvest received larger management fees when investors’ exposure levels climbed above pre-set levels and exposed investors to greater financial risks, the SEC said.
