A logo of financial services company Merrill Lynch is seen in New York.
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The U.S. Securities and Exchange Commission on Wednesday charged Harvest Volatility Management and Merrill Lynch with exceeding investment limits previously designated by their clients over a two-year period.
Merrill, owned by Bank of Americaand Harvest agreed in separate settlements to pay a combined $9.3 million in penalties to resolve the claims.
Harvest was the principal investment adviser and portfolio manager for the collateral yield enhancement strategy, which traded options on a volatility index intended to earn incremental returns. Beginning in 2016, Harvest allowed a large number of accounts to exceed the exposure levels that investors had already designated when they enrolled in the enhancement strategy, with dozens of them exceeding the limit by 50% or more, according to the SEC orders.
The SEC said Merrill connected its clients to Harvest despite knowing that the investors' accounts exceeded exposure levels set under Harvest's management. Merrill also received a portion of Harvest's trading commissions and management and incentive fees, according to the agency.
The SEC alleged that both Merrill and Harvest received higher management fees while investors were exposed to greater financial risks. Both firms were found to have neglected policies and procedures that could have been adopted to alert investors about exposure to risks that exceeded established limits.
“In this case, two investment advisers allegedly sold a complex options trading strategy to their clients but failed to follow basic client instructions and 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 failing to meet these basic obligations to their clients, even as their clients' financial exposure increased far beyond predetermined limits.”
A Bank of America representative said the company “terminated all new enrollments with Harvest in 2019 and recommended that existing clients liquidate their positions.”
