SEC charges Merrill Lynch and Harvest for ignoring client instructions

The U.S. Securities and Exchange Commission on Wednesday filed charges against Harvest Volatility Management and Merrill Lynch for exceeding clients' prespecified investment limits over a two-year period.

Merrill Lynch, owner Bank of Americaand Harvest agreed in separate settlements to pay penalties totaling $9.3 million to resolve claims.

Harvest is the lead investment advisor and portfolio manager of collateral yield enhancement strategies, which trade options on a volatility index and aim to achieve incremental returns. According to the SEC order, beginning in 2016, Harvest allowed a large number of accounts to exceed the risk exposure levels that investors had designated when signing up for the enhanced strategy, with dozens of accounts exceeding by 50% or more.

The SEC said Merrill Lynch linked its clients to Harvest while it was aware that investors' accounts exceeded risk levels established under Harvest's management. Merrill Lynch also received a cut of Harvest's trading commissions as well as management and incentive fees, according to the agency.

The SEC said both Merrill Lynch and Harvest received higher management fees and investors faced greater financial risks. Both companies were found to have ignored policies and procedures that could have been used to alert investors that risk exposure exceeded specified limits.

“In this case, two investment advisers allegedly sold complex options trading strategies to their clients but failed to follow basic client instructions or implement them,” said Mark Cave, deputy director of the SEC's Enforcement Division. and adhere to appropriate policies and procedures. “Today’s action holds Merrill Lynch and Harvest accountable for failings in performing these basic duties to their clients, even though their clients’ financial exposure far exceeded predetermined limits. “

Representatives for Bank of America did not immediately respond to CNBC's request for comment on the charges or settlement.