Merrill Lynch and Harvest Volatility Management Fined $9.3 Million for Exceeding Client Investment Limits
From the desk of Jim Eccleston at Eccleston Law
According to SEC.gov, the Securities and Exchange Commission (SEC) has charged Merrill Lynch, Pierce, Fenner & Smith Inc., and Harvest Volatility Management LLC for exceeding clients’ designated investment limits, resulting in higher fees, increased market exposure, and financial losses. Both firms have agreed to pay a combined $9.3 million in penalties and disgorgement to settle the SEC's claims.
Harvest, the primary adviser for the Collateral Yield Enhancement Strategy (CYES), was responsible for managing accounts that traded options in a volatility index. Starting in 2016, Harvest allowed numerous accounts to surpass exposure limits pre-set by investors, with dozens exceeding their designated levels by 50% or more. This exposed clients to higher risks, while Harvest and Merrill earned larger management fees.
Merrill Lynch, which introduced clients to Harvest, received a portion of Harvest’s management and incentive fees, as well as trading commissions.
The SEC found that Merrill was aware of the excessive exposure but failed to notify affected clients, many of whom had existing advisory relationships with the firm.
Without admitting or denying the SEC’s findings, Harvest and Merrill agreed to cease-and-desist orders and censure. Harvest will pay $2 million in penalties, $3.5 million in disgorgement and interest, while Merrill will pay $1 million in penalties and $2.8 million in disgorgement and interest.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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