Welcome to Extreme Investor Network, where we bring you the latest news in the world of finance and investing. Today, we have an interesting story about the U.S. Securities and Exchange Commission charging Harvest Volatility Management and Merrill Lynch for exceeding clients’ predesignated investment limits over a two-year period.
Merrill Lynch, owned by Bank of America, and Harvest have agreed in separate settlements to pay a combined $9.3 million in penalties to resolve the claims. Harvest was the primary investment advisor for the Collateral Yield Enhancement Strategy, which traded options in a volatility index for incremental returns. Unfortunately, Harvest allowed numerous accounts to exceed exposure levels set by investors, with some surpassing the limit by 50% or more.
The SEC found that Merrill connected its clients to Harvest despite knowing that investors’ accounts were exceeding the set exposure levels. Merrill also received a portion of Harvest’s trading commissions and management fees. This led to both Merrill and Harvest receiving higher management fees while investors faced greater financial risks.
The SEC noted that both companies neglected to implement policies and procedures that could have alerted investors of exposure exceeding designated limits. This case highlights the importance of investment advisors following basic client instructions and adhering to appropriate policies and procedures.
“In this case, two investment advisers 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,” said Mark Cave, associate director of the SEC’s enforcement division. “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.”
As a result of this investigation, Bank of America has ceased all new enrollments with Harvest and recommended that existing clients unwind their positions.
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