Merrill Lynch and Harvest Volatility paying $9.3 million in fines for derivatives trades

By Steve Gelsi

Fines follow probe of Harvest's Collateral Yield Enhancement Strategy (CYES)

The U.S. Securities and Exchange Commission said Wednesday that Bank of America Corp.'s Merrill Lynch unit and derivatives specialist Harvest Volatility Management LLC agreed to pay a combined $9.3 million in penalties for allegedly exceeding clients' designated investment limits on options trades.

The SEC said over a two-year period beginning in March, 2016 clients allegedly paid higher fees and were reportedly subjected to investment losses and increased market exposure overall.

"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.

Harvest and Merrill Lynch did not admit or deny the SEC's findings.

The SEC focused its comments on the Collateral Yield Enhancement Strategy, which traded options in a volatility index with a goal of generating incremental returns.

Harvest was the primary investment adviser and portfolio manager for the Collateral Yield Enhancement Strategy (CYES).

"Harvest allowed scores of accounts to exceed the exposure levels that investors designated when they signed up to the CYES strategy, including dozens of accounts that exceeded the limit by 50% or more," The SEC said.

The two firms received larger management fees when this took place and allegedly exposed investors to greater risks, the SEC said.

Merrill introduced its clients to Harvest and received trading commissions, along with part of the management and incentive fees.

"Merrill was aware that investors' exposure to CYES was exceeding pre-set exposure levels and failed adequately to inform affected CYES investors, most of whom had existing advisory relationships with Merrill," the SEC said.

Harvest agreed to a $2 million penalty plus $3.5 million in disgorgement and prejudgment interest. Merrill agreed to a $1 million penalty plus $2.8 million in disgorgement and prejudgment interest, the SEC said.

-Steve Gelsi

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09-25-24 1016ET

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