Merrill Lynch and Harvest Volatility Management will collectively pay $9.3 million to settle SEC allegations that the firms received excessive fees when Harvest exceeded clients' “specified investment limits” after being referred by Merrill.
In a statement, the associate director of the SEC's Division of Enforcement, Mark Cave, accused the two firms of “dropping the ball” in overseeing their clients' accounts, even as their financial exposure “grew far beyond predetermined limits.” “.
“In this case, two investment advisers allegedly sold their clients a complex options trading strategy but failed to adhere to basic client instructions or implement and comply with appropriate policies and procedures,” Cave said.
Harvest, founded in April 2008, is a New York-based asset management firm that offers overlapping strategies and portfolio options. It targets family offices and high net worth individuals with more than $5 million in liquid assets. (In September 2018, the firm was acquired from asset management firm Victory Capital.)
Pursuant to SEC orders, in 2011, Merrill adopted the Harvest Collateral Yield Enhancement Strategy for investments by certain ultra-high net worth clients. The strategy was an “Iron Condor” approach in which the firm would trade options on a volatility index to create incremental yield to benefit clients.
However, according to the commission, in 2016 Harvest began allowing “points” in client accounts to exceed the exposure limits that clients chose when they signed up for the Harvest strategy, including more than 70 that exceeded the limit by 50% or more. a lot.
Merrill and Harvest both benefited from Harvest's management and incentive fees when that happened, and increased trading commissions, according to the SEC.
“During the relevant period, Merrill knew or reasonably should have known that the actual investment levels of certain clients exceeded the dollar amounts established and agreed upon between the clients and Harvest, which caused certain clients to pay higher fees high, to be subject to increased market exposure. and, ultimately, suffer investment losses,” the agreement with Merrill states.
By January 2017, Merrill had “actual or constructive knowledge” that more than 100 of their investor accounts exceeded the investment limits they requested when they were 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 customers about $4 million in excessive management fees during that time, some of which was shared by wire. In addition, Merrill racked up about $1 million in excess commissions.
Harvest executives could not be reached at press time. A Bank of America/Merrill spokesman said WealthManagement.com that the firm “ended all new enrollments with Harvest in 2019 and recommended that existing clients unwind their positions.”
Although the firms neither admitted nor denied the findings, Merrill and Harvest agreed to a cease and desist order. Harvest agreed to pay $3.5 million in disgorgement and prejudgment interest and a $2 million penalty, while Merrill agreed to pay $2.8 million in disgorgement and interest and a $1 million penalty.