The U.S. Securities and Exchange Commission (SEC) has taken action against Harvest Volatility Management LLC and Merrill Lynch, Pierce, Fenner & Smith Inc. over violations related to excessive client exposure in investment accounts. These breaches, which occurred between 2016 and 2018, led to increased fees, heightened financial risks for clients, and significant investment losses.
Both Harvest and Merrill Lynch have agreed to pay a total of $9.3 million in penalties and restitution to settle the charges brought by the SEC.
Investor Risk Exposure and Increased Fees
According to the SEC’s findings, Harvest Volatility Management acted as the investment adviser and portfolio manager for the Collateral Yield Enhancement Strategy (CYES), which involved trading options in a volatility index to boost returns. However, starting in 2016, Harvest permitted many client accounts to exceed their predetermined exposure limits—some by over 50%. This resulted in higher management fees for both Harvest and Merrill Lynch, while exposing investors to greater financial risks.
Merrill Lynch introduced clients to the CYES strategy through Harvest, earning a share of the management and incentive fees, along with trading commissions. Despite being aware that client exposure levels had surpassed the limits, Merrill Lynch failed to inform its clients, many of whom had pre-existing advisory relationships with the firm.
Mark Cave, Associate Director of the SEC’s Enforcement Division, remarked: “Merrill and Harvest neglected their basic responsibilities to their clients, allowing financial exposure to grow well beyond what was agreed upon, and today’s actions hold them accountable.”
SEC Penalties and Restitution
The SEC also found that neither Harvest nor Merrill Lynch had adequate policies in place to inform clients about the risks of exceeding exposure limits. Furthermore, they failed to properly disclose the resulting financial impact on clients.
As part of the settlement, Harvest agreed to pay a $2 million penalty, while Merrill Lynch will pay $1 million. Additionally, Harvest will return $3.5 million in improperly gained profits and interest, and Merrill Lynch will return $2.8 million. Both companies have been ordered to cease their improper practices, though neither admitted nor denied the SEC’s findings.
