Merrill Lynch and Harvest Volatility to Pay $9.3 Million Settlement
Major Settlement Announced for Merrill Lynch and Harvest Volatility
Merrill Lynch, Pierce, Fenner & Smith Inc. and Harvest Volatility Management LLC are facing significant consequences as they agree to pay a total of $9.3 million to settle charges from the U.S. Securities and Exchange Commission (SEC). This settlement stems from allegations that the firms violated client investment limits, resulting in higher fees and increased exposure to market risks.
Background on Charges Against the Firms
According to the SEC's findings, Merrill Lynch and Harvest Volatility exceeded clients' designated investment limits over a two-year period starting from March 2016. This breach of trust not only led clients to incur larger fees but also exposed them to unexpected market fluctuations and investment losses.
Complex Investment Strategies
The firms marketed a sophisticated options trading strategy that unfortunately did not adhere to the fundamental instructions provided by customers. Mark Cave, the Associate Director of the SEC’s Enforcement Division, emphasized how critical it is for investment advisers to respect the limitations set by their clients.
No Admission of Fault
Interestingly, neither firm officially admitted to any wrongdoing in relation to the SEC's conclusions. Representatives from both organizations, including those from Merrill Lynch, which is now a division of Bank of America, and Harvest Volatility, were not immediately available for comments.
Financial Implications of the Settlement
The settlement comprises a hefty penalty, with Harvest Volatility agreeing to pay $2 million along with an additional $3.5 million for disgorgement and interest. Meanwhile, Merrill Lynch will contribute $1 million alongside $2.8 million for disgorgement and interest. These figures illustrate the high stakes involved in failing to comply with regulatory requirements.
Understanding Investment Strategies and Disclosures
Harvest Volatility acted as the primary investment adviser and portfolio manager for a strategy focused on options trading linked to a volatility index. The SEC noted that from 2016 onwards, the advisory firm permitted certain client accounts to surpass their established exposure thresholds.
Merrill Lynch's Role in the Agreement
Merrill Lynch played an integral role in introducing clients to Harvest Volatility, receiving a fraction of Harvest's management and incentive fees in return. The SEC's findings suggest that Merrill was aware of the situation in which investors' exposure exceeded the prearranged limits—an oversight that has now led to serious financial repercussions.
Frequently Asked Questions
What prompted the settlement between Merrill Lynch and Harvest Volatility?
The settlement arose from charges that both firms exceeded client investment limits, leading to higher fees and significant market exposure for investors.
Were any admissions of wrongdoing made by the firms?
No, neither Merrill Lynch nor Harvest Volatility admitted to any wrongdoing regarding the SEC's findings.
How will the funds from the settlement be allocated?
The settlement funds include penalties for both firms, along with disgorgement and interest payments to address the financial implications for clients.
What investment strategy did Harvest Volatility primarily manage?
Harvest Volatility managed an options trading strategy linked to a volatility index, which saw clients exceeding their designated exposure levels.
How did the violation affect the clients involved?
Clients faced heightened fees, increased market risk exposure, and potential investment losses due to the firms not adhering to client-defined investment limits.
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