Merrill Lynch and Harvest Volatility Management have agreed to pay over $9 million to settle charges brought by the SEC, which claims that both firms pushed clients' investments in a complex options strategy beyond agreed-upon limits, resulting in significant fees and trading losses for investors.
The SEC's findings state that around mid-2011, Merrill, a unit of Bank of America, greenlit Harvest’s Collateral Yield Enhancement Strategy (CYES) for a select group of ultrahigh-net-worth clients. Harvest promoted this strategy as an "options overlay" tactic where clients could leverage their existing assets—without needing to commit additional capital—to potentially generate extra income from options premiums.
According to the SEC, the premise of CYES was to offer incremental returns by “harvesting” options premiums. However, the real issues began to surface in early 2016. At that time, Harvest is alleged to have bought and sold options contracts at levels that far exceeded the risk tolerance authorized by clients. In some cases, the SEC notes, client accounts were overexposed by more than 50%.
The SEC’s investigation found that as the exposure increased, so did the fees Merrill and Harvest collected, all while clients unknowingly faced heightened risk levels. Merrill Lynch, the SEC alleges, was aware of these excessive exposures but failed, alongside Harvest, to implement appropriate disclosure practices. As a result, clients were left uninformed about the scale of their positions and the associated risks.
“This case involves two investment advisors who sold a complex options strategy, but they neglected fundamental client instructions and failed to enforce adequate policies and procedures,” said Mark Cave, associate director of the SEC’s Enforcement Division.
Neither Merrill nor Harvest admitted or denied the findings, yet both have agreed to settle the charges. A Merrill Lynch spokesperson said the firm had ceased steering clients towards Harvest’s strategies several years ago. “We discontinued new enrollments with Harvest in 2019 and advised clients to unwind their positions,” the spokesperson said.
Harvest, which once managed this strategy, now seems to have faded from the marketplace. Its websites no longer function, and attempts to reach the firm through listed contact numbers result in automated recordings offering unrelated promotions. Rick Salvala, Harvest’s co-founder and CEO, has not responded to inquiries.
In the settlement, Harvest was ordered to return $3.5 million in fees and interest to impacted clients, while Merrill was hit with a $2.8 million repayment. In addition, Harvest agreed to a $2 million civil penalty, and Merrill will pay an additional $1 million in penalties.
