The Securities and Exchange Commission (SEC) announced
charges against Harvest Volatility Management LLC and Merrill Lynch, Pierce,
Fenner & Smith Inc. These charges arise from violations related to
exceeding clients’ designated investment limits over a two-year period,
beginning in March 2016.
This resulted in clients paying higher fees, facing
increased market exposure, and incurring investment losses. Both companies have
agreed to pay a total of $9.3 million in penalties and disgorgement to resolve
the SEC’s claims.
Investors Face Increased Risks
According to the SEC’s findings, Harvest served as the
primary investment adviser and portfolio manager for the Collateral Yield
Enhancement Strategy (CYES). The strategy involved trading options in a
volatility index to generate additional returns.
Starting in 2016, Harvest allowed numerous accounts to
exceed the exposure limits set by investors when they initially signed up for
the CYES strategy. Some accounts exceeded the limits by 50 percent or more.
This led to larger management fees for both Merrill and Harvest, while
investors were subjected to greater financial risks.
Merrill introduced its clients to Harvest and received a
share of the management and incentive fees, along with trading commissions. The
SEC found that Merrill was aware of the exposure levels surpassing pre-set
limits but failed to adequately inform its clients, most of whom had existing
advisory relationships with Merrill.
Mark Cave, Associate Director of the SEC’s Enforcement
Division, said: “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.”
SEC Charges Merrill Lynch and Harvest Volatility Management for Ignoring Client Instructions #Banking #FinancialServices https://t.co/FYGjUwDh6L
— Newsfile (@newsfile_corp) September 25, 2024
SEC Penalizes Harvest, Merrill
The SEC further found that both Harvest and Merrill failed
to adopt and implement sufficient policies to disclose these facts to clients
and inform them of the excessive exposure.
The SEC found that both Harvest and Merrill Lynch broke
investment rules. Without admitting or denying this, Harvest agreed to pay a $2
million penalty, while Merrill Lynch will pay $1 million.
Harvest will also return $3.5 million in ill-gotten gains
and interest, and Merrill Lynch will return $2.8 million. Both companies will
be officially reprimanded and ordered to stop their improper practices.
This article was written by Tareq Sikder at www.financemagnates.com.
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