Merrill Lynch and Harvest Volatility Management will collectively pay $9.3 million to settle SEC charges that the firms pocketed excess fees when Harvest exceeded clients’ “designated investment limits” after being referred by Merrill.
In a statement, SEC Enforcement Division Associate Director Mark Cave accused both firms of “dropping the ball” in overseeing their clients’ accounts, even as their financial exposure “grew well beyond predetermined limits.”
“In this case, two investment advisors allegedly sold a complex options trading strategy to their clients but failed to abide by basic client instructions or implement and adhere to appropriate policies and procedures,” Cave said.
Harvest, founded in April 2008, is a New York-based asset management firm providing overlay strategies and portfolio options. It targets family offices and wealthy individuals with more than $5 million in liquid assets.
According to the SEC orders, in 2011, Merrill approved Harvest’s Collateral Yield Enhancement Strategy for investment by certain ultra-high-net-worth clients. The strategy was an “Iron Condor” approach in which the firm would trade options in a volatility index to create incremental yield to benefit clients.
However, according to the commission, in 2016, Harvest began letting “scores” of client accounts exceed the exposure limits that clients chose when signing up for the Harvest strategy, including more than 70 that surpassed the limit by 50% or more.
Merrill and Harvest both benefitted from Harvest’s management and incentive fees when this occurred, and boosted trading commissions, according to the SEC.
“During the relevant period, 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 settlement with Merrill stated.
By January 2017, Merrill had “actual or constructive knowledge” that more than 100 of their investors’ accounts exceeded the investment limits they asked for when introduced to the Harvest strategy.
Harvest didn’t change its strategy until 2018, but the damage was already done for some Merrill investors; according to the commission, Harvest charged clients about $4 million in excess management fees during that time, some of which was shared with the wirehouse. Additionally, Merrill pocketed about $1 million in excessive commissions.
Executives for Harvest could not be reached as of press time. A Bank of America/Merrill spokesperson told WealthManagement.com that the firm “ended all new enrollments with Harvest in 2019 and recommended that existing clients unwind their positions.”
Though the firms did not admit nor deny the findings, Merrill and Harvest agreed to a censure and cease-and-desist order. Harvest agreed to pay $3.5 million in disgorgement and prejudgment interest as well as a $2 million penalty, while Merrill agreed to pay $2.8 million in disgorgement and interest, as well as a $1 million penalty.
