In re HARVEST VOLATILITY

 
 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6726 / September 25, 2024 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-22174 
 
 
 
 
In the Matter of 
 
HARVEST VOLATILITY 
MANAGEMENT LLC, 
 
Respondent. 
 
 
 
 
 
 
ORDER INSTITUTING 
ADMINISTRATIVE AND CEASE-AND-
DESIST PROCEEDINGS, PURSUANT 
TO SECTIONS 203(e) AND 203(k) OF 
THE INVESTMENT ADVISERS ACT 
OF 1940, MAKING FINDINGS, AND 
IMPOSING REMEDIAL SANCTIONS 
AND A CEASE-AND-DESIST ORDER 
   
 
I. 
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public  interest  that  public  administrative  and  cease-and-desist  proceedings  be,  and  hereby  are, 
instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers 
Act”) against Harvest Volatility Management LLC (“Harvest” or “Respondent”). 
II. 
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of 
Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of 
these proceedings and any other proceedings brought by or on behalf of the Commission, or to which 
the Commission is a party, and without admitting or denying the findings herein, except as to the 
Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, 
Respondent  consents  to  the  entry  of  this  Order  Instituting  Administrative  and  Cease-and-Desist 
Proceedings,  Pursuant  to Sections  203(e)  and  203(k)  of  the  Investment  Advisers  Act  of  1940, 
Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set 
forth below.   

 
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III. 
On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that: 
INTRODUCTION 
1. From  March  2016  to  April  2018  (the  “Relevant  Period”),  Harvest,  a  registered 
investment adviser, failed to follow the terms of the Investment Management Agreement (“IMA”) 
in managing an options overlay strategy for certain clients referred by Merrill Lynch, Pierce, Fenner 
&  Smith  (“Merrill”).    Specifically,  in  its  Collateral  Yield  Enhancement  Strategy,  or  “CYES,” 
Harvest purchased and sold options contracts at levels materially above the levels clients authorized 
in  the  IMA.  By  failing  to  comply  with  the  IMA,  Harvest  caused  hundreds  of  clients  to  be  over-
exposed to the strategy, resulting in higher fees and, during certain periods, financial losses.  As a 
result, Harvest willfully violated Section 206(2) of the Advisers Act. 
2. Harvest  also  failed  to  adopt  and  implement  written  compliance  policies  and 
procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder 
in connection with its execution of CYES with respect to authorized notional amounts.  As a result, 
Harvest willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 
RESPONDENT 
3. Harvest is  a  privately-owned  investment  adviser  registered  with  the  Commission 
since 2008, when it was founded.  Harvest is a Delaware limited liability company with its principal 
place of business in Norwalk, Connecticut.  Harvest provides advisory services to high-net worth 
individuals, registered investment companies, private funds, pension and profit-sharing plans, and 
corporations. 
OTHER RELEVANT PARTY 
4. Merrill is a Delaware company headquartered in New York, New York.  Merrill has 
been  registered with the  Commission  as  an investment  adviser since 1978  and as a broker-dealer 
since 1959.  Since 2009, Merrill has been an indirect wholly-owned subsidiary of Bank of America 
Corporation. 
FACTS 
5. In  2008,  Harvest  developed  CYES,  an  options  overlay  “Iron  Condor”  strategy.  
CYES  sought  to  generate  returns  by  collecting  option  premiums  from  a  portfolio  of  short-dated 
option  spreads  on  the  S&P  500  index  (“SPX”):  selling  options  to  generate  premium  while 
simultaneously purchasing further out-of-the-money options to manage risk.  CYES was an “options 
overlay” strategy through which enrolled participants pledged existing cash or investment assets as 
 
1
 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other person 
or entity in this or any other proceeding. 
 

 
3 
collateral.  In general terms, Harvest used the collateral as the basis for an options trading strategy 
on the SPX.  The stated objective of CYES was to generate incremental returns for enrolled investors 
from the “harvesting” of options premiums, without requiring the investors to commit new money 
to  participate  in  the  strategy.  Typically,  every  six  to  eight  weeks,  Harvest  created  a  structure  of 
options contracts for CYES, and then adjusted the strategy during the ensuing weeks based on market 
conditions.   
6. In  or  about  August  2011,  Merrill  approved  Harvest’s  CYES  for  investment  by 
eligible ultra-high net worth investors.  Merrill and Harvest entered into a Solicitation Agreement, 
under  which  Harvest  paid  Merrill  30%  of  CYES  management  and  incentive  fees  for  all  clients 
introduced  by  Merrill.    For  such  clients,  Harvest  created—and  Merrill  approved—an  Investment 
Management Agreement (“IMA”).  The IMA, which Merrill also signed, required Harvest to place 
all  orders  for  the  execution  of  CYES  options  trades  through Merrill,  for  which  Merrill  charged 
associated trading commissions to the clients. 
7. This matter generally pertains to CYES clients introduced to Harvest by Merrill prior 
to 2017.  The investors introduced by Merrill enrolled in CYES through the IMA, in which investors 
instructed Harvest of their desired level of exposure to CYES by specifying, in writing, a “Notional 
Amount” in dollars in Schedule A of the IMA.  Harvest used this Notional Amount to determine the 
initial number of index options to purchase for the investors’ accounts.  The  IMA  employed  by 
Harvest before January 2017 (“pre-2017 IMA”) provided that, “[o]n each successive initiating trade 
in  the  Account,  the  Notional  Amount  may  temporarily  exceed  the  Notional  Capacity  or  initial 
Notional Amount as a result of changes in the index level.”  Investors could increase or decrease 
their designated Notional Amount by providing Harvest with an amended Schedule A to their IMAs.  
The IMA specified that Harvest was the “investment advisor,” and Merrill Lynch the “custodian.”  
8. “Notional Amount” indicates the amount of money controlled by a position on a 
particular financial instrument, including options contracts.  For Harvest, the Notional Amount of a 
client’s account was based on the number of options contracts multiplied by the current market value 
of the SPX multiplied by 100 (number of contracts x SPX value x 100).  Thus, if a client wanted a 
Notional Amount of $6 million and the SPX was at 2,000, Harvest would purchase 30 contracts (30 
x 2,000 x 100 = 6,000,000), even though the market price of the underlying contracts might be a 
small fraction of the Notional Amount.  If the SPX moved to 2,200, then the same 30 contracts would 
have a Notional Amount value of $6.6 million.  
9. Because the SPX generally changes every trading day, the actual Notional Amount 
of clients’ accounts generally also changed each trading day.  Accordingly, to allow only temporary 
deviations to investors’ Notional Amounts, Harvest needed to adjust the number of contracts it 
purchased  after  each  six-to-eight-week  period.  However,  during  the  Relevant  Period,  instead  of 
adjusting  the  number  of  contracts  it  purchased  for  clients  with  pre-2017  IMAs  every  six  to  eight 
weeks, Harvest kept the number of contracts constant – that is, Harvest continued to purchase the 
same number of contracts in each successive period – despite increases or decreases in the SPX. 
10. Pursuant  to  the  pre-2017  IMA  for  investors  introduced  by  Merrill,  Harvest’s 
management fees were based on clients’ actual Notional Amounts, as estimated at the beginning of 

 
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a quarter and then trued-up at quarter-end, and not their authorized Notional Amounts.  Thus, a client 
who directed a Notional Amount of $6 million, but whose account had an actual Notional Amount 
of $6.6 million, would pay 10% more in fees than if the actual Notional Amount were $6 million.  
Similarly, a client would pay proportionally less in fees if the actual Notional Amount were to decline 
because of a decline in the market value of the SPX.   
11. In the Relevant Period, although the SPX fluctuated up and down, it trended upward.  
Consequently, clients’ exposure to gains and losses on CYES rose, as did Harvest’s fees, which were 
calculated as a percentage of Notional Amounts.  
12. By March 2016, Harvest’s management was aware that increasing Notional Amounts 
in  CYES  accounts  had  caused  102  accounts  introduced  by  Merrill  to  exceed  the  client-directed 
amounts by 20% or more.  Despite the accounts with elevated Notional Amounts being identified in 
a Harvest firm-wide email, Harvest failed to adjust the accounts to lower the Notional Amounts or 
to adopt a plan to notify all the clients and obtain their consent to trade at the higher levels. 
13. Between early March 2016 and the end of April 2016, the SPX increased.  On May 
4, 2016, another Harvest firm-wide email showed that 115 CYES accounts of clients introduced by 
Merrill  were  now  20%  or  more  over  the  client-directed  Notional  Amounts.  One  of  the  Harvest 
executives who received the email correctly suggested this was, in part, because “the number of 
contracts  has  remained  constant  but  notional  has  crept  higher  as  the  [SPX]  surged  from  2012  to 
current.”  The executive wrote that “[i]t would be great to start shrinking this list” and suggested that 
another executive and a junior employee “come up with a plan.” 
14. Harvest did not enact a plan to address the elevated Notional Amounts in mid-2016. 
Instead, by September 14, 2016, Harvest had allowed 166 CYES accounts of clients introduced by 
Merrill to drift at least 20% over the client-directed Notional Amounts.  The Harvest executive who 
had previously suggested developing a plan now proposed that “we should identify the biggest 
Notional versus Target gaps (from largest gap to smallest; only real care [sic] the difference is >30%) 
and start to address them (in batches 10 at a time).” 
15. Throughout  2016,  the  SPX  gained  roughly  10%,  causing  the  already-elevated 
Notional  Amounts  to  increase  further.  Although  Harvest  could  have  adjusted  the  number  of 
contracts it purchased for CYES clients to align the Notional Amounts with client directions, in many 
cases, Harvest did not make such adjustments.  
16. By the end of 2016, Harvest had begun taking steps to address the elevated Notional 
Amounts.  Executives decided to inform Merrill of accounts with Notional Amounts greater than the 
client had directed.  Harvest planned to either to “rebalance” Notional Amounts – that is, to reduce 
the number of contracts in each account to place the account back in line with the client-specified 
Notional Amount – or to obtain client authorization to increase their Notional Amount to reflect the 
rise  in  the  SPX.  In  numerous  instances,  Harvest  informed  Merrill  of  the  notional  overage  and 
suggested the option of  continuing to trade at that level  by  providing  a client consent form.  The 
alternative, as expressed by a Harvest representative, was that “we should probably bring the notional 
back down to their target, which would not require any paperwork.”    

 
5 
17. Although Harvest had a plan at the start of 2017 to address CYES accounts at Merrill 
that  had  elevated  Notional  Amounts,  Harvest  failed  to  execute  the  plan,  and  relied  on  ad  hoc 
communications from Harvest personnel to Merrill.  Some Merrill personnel responded to Harvest, 
while  others  did  not,  and,  for  some  CYES  accounts,  Harvest  failed  to  contact  Merrill  entirely. 
Harvest did not consistently track their communications with Merrill and whether client consent had 
been obtained to trade at higher Notional Amounts.  Additionally, for most of the accounts where 
Harvest did not obtain authorization from the client to increase a client’s Notional Amount, Harvest 
continued to trade the same number of contracts. 
18. During  2017,  Harvest  not  only  failed  to  adjust  certain  Merrill  CYES  accounts  to 
conform with clients’ existing instructions, but also failed to modify its internal processes and trading 
system.  Harvest had originally designed its systems and options trading process to reduce the odds 
of making a trading or allocation error by holding the number of contracts constant in clients’ 
accounts.  To comply with the client-directed Notional Amounts, Harvest’s trading system required 
Harvest to adjust the number of contracts before a new trade after the options contract expired or 
was sold.  Harvest failed to do this. 
19. As  a  result,  and  because  the  SPX  increased  by  over  21%  in  2017,  hundreds  of 
accounts continued climbing above the client-specified Notional Amounts without authorization.  By 
the end of 2017, approximately 186 accounts for clients introduced by Merrill were 30% or more 
over client-specified Notional Amounts, and 74 accounts were 50% or more above client-specified 
Notional Amounts.   
20. As a result of having greater exposure to the CYES strategy, some Harvest clients 
experienced  elevated  losses  when  the  strategy  had  negative  returns  and  elevated  gains  when  the 
strategy had positive returns.  Between the first quarter  of 2016  and the  first quarter of 2018, the 
CYES strategy experienced a net loss of approximately 1.05% on total notional exposure.  Clients 
experienced investment losses greater than if Harvest had maintained the  client-directed Notional 
Amounts in their pre-2017 IMAs.   
21. In the second quarter of 2018, Harvest changed its trading process to regularly adjust 
the number of CYES options contracts to correspond with clients’ designated Notional Amounts in 
pre-2017 IMAs.  However, the consequences of the nine-quarter run up in Notional Amounts were 
significant. As a result of Harvest’s failure to adjust contracts for certain clients introduced by Merrill 
during the Relevant Period, Harvest charged clients excessive management fees of approximately 
$4  million,  which  were  shared  with  Merrill.  Additionally,  Merrill  collected  approximately  $1 
million in excessive commissions. 
22. During the Relevant Period, the Notional Amounts in hundreds of CYES accounts at 
Merrill  materially  exceeded  the  client-directed  amounts.  When  Harvest’s  returns  were  slightly 
positive  in  2016  and  much  of  2017,  many  clients  received  incremental  gains  as  a  result  of  the 
increased exposure (to loss/gain) from higher-than-authorized Notional Amounts—though they also 
paid higher fees.  However, when Notional Amounts in client accounts peaked in late 2017 and early 
2018,  CYES  had  poor  returns,  resulting  in  clients  with  excessive  Notional  Amounts  losing  more 
money than they had gained in the earlier part of the Relevant Period.  In sum, clients whose accounts 

 
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were not adjusted cumulatively lost money during the Relevant Period due to trading in Notional 
Amounts greater than those authorized in their IMAs.  
23. During  the  Relevant  Period,  Harvest  rarely  communicated  directly  with  CYES 
clients  who  signed  up  for  the  Harvest  strategy  through  Merrill.    Harvest  did  not  send  account 
statements to the clients.  Instead, Merrill generated and distributed account statements for the CYES 
accounts at Merrill.  These monthly statements did not include the actual Notional Amount of the 
clients’ accounts.  Harvest offered clients and Merrill personnel access  to  an  online  portal  that 
disclosed the Notional Amount of each client’s account and tracked the level of the Notional Amount 
over the life of the account.  In actuality, however, few clients requested or obtained credentials to 
the portal.  As a result, many clients did not know that their instructions had not been followed and 
that they had greater exposure to the CYES strategy. 
24. Harvest failed to adopt and implement policies and procedures to ensure that trading 
in clients’ accounts was done consistently with the clients’ instructions and that Harvest recorded or 
documented clients’ instructions.  In 2017, Harvest updated its IMA to authorize Harvest to trade 
the number of index option contracts initially selected by clients without the need to rebalance the 
number of contracts based on fluctuations in the value of the SPX.  However, Harvest employed the 
new IMA only in establishing relationships with new clients and did not modify the IMAs of those 
clients introduced by Merrill before 2017.  For many clients introduced before 2017, Harvest set the 
number of contracts when it began trading for those clients, and then did not adjust the number of 
contracts until early 2018.  In 2018, after clients sustained losses as a result of excessive Notional 
Amounts  in  their  accounts,  Harvest  modified  its  trading  platform  and  adopted  policies  and 
procedures to trade consistent with clients’ instructions. 
VIOLATIONS 
25. Section  206(2)  of  the  Advisers  Act  makes  it  unlawful  for  an investment adviser, 
directly or indirectly, to engage in any transaction, practice, or course of business that operates as a 
fraud or deceit upon any client or prospective client.  As a result of the conduct described above, 
Harvest willfully violated Section 206(2).  
26. Section 206(4) of the Advisers Act prohibits any investment adviser from engaging 
in “any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and 
authorizes the Commission to prescribe rules designed to prevent such conduct.  Rule 206(4)-7 under 
the  Advisers  Act  requires,  among  other  things, a  registered  investment  adviser  to  adopt  and 
implement written compliance policies and procedures reasonably designed to prevent violations of 
the  Advisers  Act  and  the  rules  thereunder.    As  a  result  of  the  conduct  described  above,  Harvest 
willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.
2
  
 
2
 “Willfully,” for purposes of imposing relief under Section 203(e) of the Advisers Act, “‘means no more than that the 
person charged with the duty knows what he is doing.’”  Wonsover v.  SEC,  205  F.3d  408,  414  (D.C.  Cir.  2000) 
(quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor “also be aware 
that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).  The decision in The Robare 
Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory provision, 

 
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DISGORGEMENT AND CIVIL PENALTIES 
27. The disgorgement and prejudgment interest ordered in Section IV is consistent with 
equitable principles and does not exceed Respondent’s net profits from its violations, and will be 
distributed to harmed investors to the extent feasible.  The Commission will hold funds paid pursuant 
to section IV in an account at the United States Treasury pending distribution.  Upon approval of the 
distribution final accounting by the Commission, any amounts remaining that are infeasible to return 
to investors, and any amounts returned to the Commission in the future that are infeasible to return 
to investors, may be transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) 
of  the Securities Exchange  Act of  1934. In  connection  with  such  assistance,  Respondents  will 
produce,  without  service  or  notice  of  subpoena,  all  documents  and  other  information  reasonably 
requested by the Commission staff. 
IV. 
In view of the foregoing, the Commission deems it appropriate and in the public interest to 
impose the sanctions agreed to in Respondent’s Offer. 
Accordingly,  pursuant  to  Sections  203(e)  and  203(k)  of  the  Advisers  Act  it  is  hereby 
ORDERED that: 
A. Respondent shall cease and desist from committing or causing any violations and any 
future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 promulgated 
thereunder. 
B. Respondent Harvest is censured. 
C. Respondent Harvest shall, within 14 days of the entry of this Order, pay disgorgement 
of $2,500,000 and prejudgment interest of $1,000,000, to the Securities and Exchange Commission.  
If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. 
Respondent Harvest shall also, within 14 days of the entry of this Order, pay a civil money penalty in 
the  amount of  $2,000,000,  to the Securities  and  Exchange  Commission.  If  timely  payment  is  not 
made, additional interest shall accrue pursuant to 31 U.S.C. §3717. 
Payment must be made in one of the following ways:   
1. Respondent may transmit payment electronically to the Commission, which will provide 
detailed ACH transfer/Fedwire instructions upon request;  
 
2. Respondent may make direct payment from a bank account via Pay.gov through the SEC 
website at http://www.sec.gov/about/offices/ofm.htm; or  
 
 
does not alter that standard.  922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish 
that a person has “willfully omit[ted]” material information from a required disclosure in violation of Section 207 of 
the Advisers Act). 

 
8 
3. Respondent may pay by certified check, bank cashier’s check, or United States postal 
money  order,  made  payable  to  the  Securities  and  Exchange  Commission  and  hand-
delivered or mailed to:  
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments  by  check  or  money order must be  accompanied  by  a  cover  letter  identifying the 
Respondent in these proceedings, and the file number of these proceedings; a copy of the cover letter 
and  check  or  money  order  must  be  sent  to  D.  Mark  Cave,  Associate  Director,  Division  of 
Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549.   
D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created 
for the disgorgement, prejudgment interest, and penalty referenced in Section IV.C. above.  The Fair 
Fund may be added to or combined with any other fund established in any related action arising out 
of  the  same  facts  that  are  the  subject  of  this  Order.   Amounts  ordered  to  be  paid  as  civil  money 
penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, 
including all tax purposes.  To preserve the deterrent effect of the civil penalty, Respondent agrees 
that in any Related  Investor  Action, it shall not argue that it is entitled to,  nor shall it benefit by, 
offset  or  reduction  of  any  award  of  compensatory  damages  by  the  amount  of  any  part  of 
Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  If the court in any Related 
Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 days after 
entry of a final order granting the Penalty Offset, notify the Commission's counsel in this action and 
pay the amount of the Penalty Offset to the Securities and Exchange Commission.  Such a payment 
shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the 
civil penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 
means a private damages action brought against Respondent by or on behalf of one or more investors 
based on substantially the same facts as alleged in the Order instituted by the Commission in this 
proceeding. 
 
 By the Commission. 
 
Vanessa A. Countryman 
Secretary 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6726 / September 25, 2024 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-22174 

 

 

 

 

In the Matter of 

 

HARVEST VOLATILITY 

MANAGEMENT LLC, 

 

Respondent. 

 

 

 

 

 

 

ORDER INSTITUTING 

ADMINISTRATIVE AND CEASE-AND-

DESIST PROCEEDINGS, PURSUANT 

TO SECTIONS 203(e) AND 203(k) OF 

THE INVESTMENT ADVISERS ACT 

OF 1940, MAKING FINDINGS, AND 

IMPOSING REMEDIAL SANCTIONS 

AND A CEASE-AND-DESIST ORDER 

   

 

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers 

Act”) against Harvest Volatility Management LLC (“Harvest” or “Respondent”). 

II. 

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of 

Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of 

these proceedings and any other proceedings brought by or on behalf of the Commission, or to which 

the Commission is a party, and without admitting or denying the findings herein, except as to the 

Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, 

Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist 

Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, 

Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set 

forth below.   



 

2 

III. 

On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 

INTRODUCTION 

1. From March 2016 to April 2018 (the “Relevant Period”), Harvest, a registered 

investment adviser, failed to follow the terms of the Investment Management Agreement (“IMA”) 

in managing an options overlay strategy for certain clients referred by Merrill Lynch, Pierce, Fenner 

& Smith (“Merrill”).  Specifically, in its Collateral Yield Enhancement Strategy, or “CYES,” 

Harvest purchased and sold options contracts at levels materially above the levels clients authorized 

in the IMA.  By failing to comply with the IMA, Harvest caused hundreds of clients to be over-

exposed to the strategy, resulting in higher fees and, during certain periods, financial losses.  As a 

result, Harvest willfully violated Section 206(2) of the Advisers Act. 

2. Harvest also failed to adopt and implement written compliance policies and 

procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder 

in connection with its execution of CYES with respect to authorized notional amounts.  As a result, 

Harvest willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 

RESPONDENT 

3. Harvest is a privately-owned investment adviser registered with the Commission 

since 2008, when it was founded.  Harvest is a Delaware limited liability company with its principal 

place of business in Norwalk, Connecticut.  Harvest provides advisory services to high-net worth 

individuals, registered investment companies, private funds, pension and profit-sharing plans, and 

corporations. 

OTHER RELEVANT PARTY 

4. Merrill is a Delaware company headquartered in New York, New York.  Merrill has 

been registered with the Commission as an investment adviser since 1978 and as a broker-dealer 

since 1959.  Since 2009, Merrill has been an indirect wholly-owned subsidiary of Bank of America 

Corporation. 

FACTS 

5. In 2008, Harvest developed CYES, an options overlay “Iron Condor” strategy.  

CYES sought to generate returns by collecting option premiums from a portfolio of short-dated 

option spreads on the S&P 500 index (“SPX”): selling options to generate premium while 

simultaneously purchasing further out-of-the-money options to manage risk.  CYES was an “options 

overlay” strategy through which enrolled participants pledged existing cash or investment assets as 

 
1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other person 

or entity in this or any other proceeding. 

 



 

3 

collateral.  In general terms, Harvest used the collateral as the basis for an options trading strategy 

on the SPX.  The stated objective of CYES was to generate incremental returns for enrolled investors 

from the “harvesting” of options premiums, without requiring the investors to commit new money 

to participate in the strategy.  Typically, every six to eight weeks, Harvest created a structure of 

options contracts for CYES, and then adjusted the strategy during the ensuing weeks based on market 

conditions.   

6. In or about August 2011, Merrill approved Harvest’s CYES for investment by 

eligible ultra-high net worth investors.  Merrill and Harvest entered into a Solicitation Agreement, 

under which Harvest paid Merrill 30% of CYES management and incentive fees for all clients 

introduced by Merrill.  For such clients, Harvest created—and Merrill approved—an Investment 

Management Agreement (“IMA”).  The IMA, which Merrill also signed, required Harvest to place 

all orders for the execution of CYES options trades through Merrill, for which Merrill charged 

associated trading commissions to the clients. 

7. This matter generally pertains to CYES clients introduced to Harvest by Merrill prior 

to 2017.  The investors introduced by Merrill enrolled in CYES through the IMA, in which investors 

instructed Harvest of their desired level of exposure to CYES by specifying, in writing, a “Notional 

Amount” in dollars in Schedule A of the IMA.  Harvest used this Notional Amount to determine the 

initial number of index options to purchase for the investors’ accounts.  The IMA employed by 

Harvest before January 2017 (“pre-2017 IMA”) provided that, “[o]n each successive initiating trade 

in the Account, the Notional Amount may temporarily exceed the Notional Capacity or initial 

Notional Amount as a result of changes in the index level.”  Investors could increase or decrease 

their designated Notional Amount by providing Harvest with an amended Schedule A to their IMAs.  

The IMA specified that Harvest was the “investment advisor,” and Merrill Lynch the “custodian.”  

8. “Notional Amount” indicates the amount of money controlled by a position on a 

particular financial instrument, including options contracts.  For Harvest, the Notional Amount of a 

client’s account was based on the number of options contracts multiplied by the current market value 

of the SPX multiplied by 100 (number of contracts x SPX value x 100).  Thus, if a client wanted a 

Notional Amount of $6 million and the SPX was at 2,000, Harvest would purchase 30 contracts (30 

x 2,000 x 100 = 6,000,000), even though the market price of the underlying contracts might be a 

small fraction of the Notional Amount.  If the SPX moved to 2,200, then the same 30 contracts would 

have a Notional Amount value of $6.6 million.  

9. Because the SPX generally changes every trading day, the actual Notional Amount 

of clients’ accounts generally also changed each trading day.  Accordingly, to allow only temporary 

deviations to investors’ Notional Amounts, Harvest needed to adjust the number of contracts it 

purchased after each six-to-eight-week period.  However, during the Relevant Period, instead of 

adjusting the number of contracts it purchased for clients with pre-2017 IMAs every six to eight 

weeks, Harvest kept the number of contracts constant – that is, Harvest continued to purchase the 

same number of contracts in each successive period – despite increases or decreases in the SPX. 

10. Pursuant to the pre-2017 IMA for investors introduced by Merrill, Harvest’s 

management fees were based on clients’ actual Notional Amounts, as estimated at the beginning of 



 

4 

a quarter and then trued-up at quarter-end, and not their authorized Notional Amounts.  Thus, a client 

who directed a Notional Amount of $6 million, but whose account had an actual Notional Amount 

of $6.6 million, would pay 10% more in fees than if the actual Notional Amount were $6 million.  

Similarly, a client would pay proportionally less in fees if the actual Notional Amount were to decline 

because of a decline in the market value of the SPX.   

11. In the Relevant Period, although the SPX fluctuated up and down, it trended upward.  

Consequently, clients’ exposure to gains and losses on CYES rose, as did Harvest’s fees, which were 

calculated as a percentage of Notional Amounts.  

12. By March 2016, Harvest’s management was aware that increasing Notional Amounts 

in CYES accounts had caused 102 accounts introduced by Merrill to exceed the client-directed 

amounts by 20% or more.  Despite the accounts with elevated Notional Amounts being identified in 

a Harvest firm-wide email, Harvest failed to adjust the accounts to lower the Notional Amounts or 

to adopt a plan to notify all the clients and obtain their consent to trade at the higher levels. 

13. Between early March 2016 and the end of April 2016, the SPX increased.  On May 

4, 2016, another Harvest firm-wide email showed that 115 CYES accounts of clients introduced by 

Merrill were now 20% or more over the client-directed Notional Amounts.  One of the Harvest 

executives who received the email correctly suggested this was, in part, because “the number of 

contracts has remained constant but notional has crept higher as the [SPX] surged from 2012 to 

current.”  The executive wrote that “[i]t would be great to start shrinking this list” and suggested that 

another executive and a junior employee “come up with a plan.” 

14. Harvest did not enact a plan to address the elevated Notional Amounts in mid-2016. 

Instead, by September 14, 2016, Harvest had allowed 166 CYES accounts of clients introduced by 

Merrill to drift at least 20% over the client-directed Notional Amounts.  The Harvest executive who 

had previously suggested developing a plan now proposed that “we should identify the biggest 

Notional versus Target gaps (from largest gap to smallest; only real care [sic] the difference is >30%) 

and start to address them (in batches 10 at a time).” 

15. Throughout 2016, the SPX gained roughly 10%, causing the already-elevated 

Notional Amounts to increase further.  Although Harvest could have adjusted the number of 

contracts it purchased for CYES clients to align the Notional Amounts with client directions, in many 

cases, Harvest did not make such adjustments.  

16. By the end of 2016, Harvest had begun taking steps to address the elevated Notional 

Amounts.  Executives decided to inform Merrill of accounts with Notional Amounts greater than the 

client had directed.  Harvest planned to either to “rebalance” Notional Amounts – that is, to reduce 

the number of contracts in each account to place the account back in line with the client-specified 

Notional Amount – or to obtain client authorization to increase their Notional Amount to reflect the 

rise in the SPX.  In numerous instances, Harvest informed Merrill of the notional overage and 

suggested the option of continuing to trade at that level by providing a client consent form.  The 

alternative, as expressed by a Harvest representative, was that “we should probably bring the notional 

back down to their target, which would not require any paperwork.”    



 

5 

17. Although Harvest had a plan at the start of 2017 to address CYES accounts at Merrill 

that had elevated Notional Amounts, Harvest failed to execute the plan, and relied on ad hoc 

communications from Harvest personnel to Merrill.  Some Merrill personnel responded to Harvest, 

while others did not, and, for some CYES accounts, Harvest failed to contact Merrill entirely. 

Harvest did not consistently track their communications with Merrill and whether client consent had 

been obtained to trade at higher Notional Amounts.  Additionally, for most of the accounts where 

Harvest did not obtain authorization from the client to increase a client’s Notional Amount, Harvest 

continued to trade the same number of contracts. 

18. During 2017, Harvest not only failed to adjust certain Merrill CYES accounts to 

conform with clients’ existing instructions, but also failed to modify its internal processes and trading 

system.  Harvest had originally designed its systems and options trading process to reduce the odds 

of making a trading or allocation error by holding the number of contracts constant in clients’ 

accounts.  To comply with the client-directed Notional Amounts, Harvest’s trading system required 

Harvest to adjust the number of contracts before a new trade after the options contract expired or 

was sold.  Harvest failed to do this. 

19. As a result, and because the SPX increased by over 21% in 2017, hundreds of 

accounts continued climbing above the client-specified Notional Amounts without authorization.  By 

the end of 2017, approximately 186 accounts for clients introduced by Merrill were 30% or more 

over client-specified Notional Amounts, and 74 accounts were 50% or more above client-specified 

Notional Amounts.   

20. As a result of having greater exposure to the CYES strategy, some Harvest clients 

experienced elevated losses when the strategy had negative returns and elevated gains when the 

strategy had positive returns.  Between the first quarter of 2016 and the first quarter of 2018, the 

CYES strategy experienced a net loss of approximately 1.05% on total notional exposure.  Clients 

experienced investment losses greater than if Harvest had maintained the client-directed Notional 

Amounts in their pre-2017 IMAs.   

21. In the second quarter of 2018, Harvest changed its trading process to regularly adjust 

the number of CYES options contracts to correspond with clients’ designated Notional Amounts in 

pre-2017 IMAs.  However, the consequences of the nine-quarter run up in Notional Amounts were 

significant. As a result of Harvest’s failure to adjust contracts for certain clients introduced by Merrill 

during the Relevant Period, Harvest charged clients excessive management fees of approximately 

$4 million, which were shared with Merrill.  Additionally, Merrill collected approximately $1 

million in excessive commissions. 

22. During the Relevant Period, the Notional Amounts in hundreds of CYES accounts at 

Merrill materially exceeded the client-directed amounts. When Harvest’s returns were slightly 

positive in 2016 and much of 2017, many clients received incremental gains as a result of the 

increased exposure (to loss/gain) from higher-than-authorized Notional Amounts—though they also 

paid higher fees.  However, when Notional Amounts in client accounts peaked in late 2017 and early 

2018, CYES had poor returns, resulting in clients with excessive Notional Amounts losing more 

money than they had gained in the earlier part of the Relevant Period.  In sum, clients whose accounts 



 

6 

were not adjusted cumulatively lost money during the Relevant Period due to trading in Notional 

Amounts greater than those authorized in their IMAs.  

23. During the Relevant Period, Harvest rarely communicated directly with CYES 

clients who signed up for the Harvest strategy through Merrill.  Harvest did not send account 

statements to the clients.  Instead, Merrill generated and distributed account statements for the CYES 

accounts at Merrill.  These monthly statements did not include the actual Notional Amount of the 

clients’ accounts.  Harvest offered clients and Merrill personnel access to an online portal that 

disclosed the Notional Amount of each client’s account and tracked the level of the Notional Amount 

over the life of the account.  In actuality, however, few clients requested or obtained credentials to 

the portal.  As a result, many clients did not know that their instructions had not been followed and 

that they had greater exposure to the CYES strategy. 

24. Harvest failed to adopt and implement policies and procedures to ensure that trading 

in clients’ accounts was done consistently with the clients’ instructions and that Harvest recorded or 

documented clients’ instructions.  In 2017, Harvest updated its IMA to authorize Harvest to trade 

the number of index option contracts initially selected by clients without the need to rebalance the 

number of contracts based on fluctuations in the value of the SPX.  However, Harvest employed the 

new IMA only in establishing relationships with new clients and did not modify the IMAs of those 

clients introduced by Merrill before 2017.  For many clients introduced before 2017, Harvest set the 

number of contracts when it began trading for those clients, and then did not adjust the number of 

contracts until early 2018.  In 2018, after clients sustained losses as a result of excessive Notional 

Amounts in their accounts, Harvest modified its trading platform and adopted policies and 

procedures to trade consistent with clients’ instructions. 

VIOLATIONS 

25. Section 206(2) of the Advisers Act makes it unlawful for an investment adviser, 

directly or indirectly, to engage in any transaction, practice, or course of business that operates as a 

fraud or deceit upon any client or prospective client.  As a result of the conduct described above, 

Harvest willfully violated Section 206(2).  

26. Section 206(4) of the Advisers Act prohibits any investment adviser from engaging 

in “any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and 

authorizes the Commission to prescribe rules designed to prevent such conduct.  Rule 206(4)-7 under 

the Advisers Act requires, among other things, a registered investment adviser to adopt and 

implement written compliance policies and procedures reasonably designed to prevent violations of 

the Advisers Act and the rules thereunder.  As a result of the conduct described above, Harvest 

willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.2  

 
2 “Willfully,” for purposes of imposing relief under Section 203(e) of the Advisers Act, “‘means no more than that the 

person charged with the duty knows what he is doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) 

(quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor “also be aware 

that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).  The decision in The Robare 

Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory provision, 



 

7 

DISGORGEMENT AND CIVIL PENALTIES 

27. The disgorgement and prejudgment interest ordered in Section IV is consistent with 

equitable principles and does not exceed Respondent’s net profits from its violations, and will be 

distributed to harmed investors to the extent feasible.  The Commission will hold funds paid pursuant 

to section IV in an account at the United States Treasury pending distribution.  Upon approval of the 

distribution final accounting by the Commission, any amounts remaining that are infeasible to return 

to investors, and any amounts returned to the Commission in the future that are infeasible to return 

to investors, may be transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) 

of the Securities Exchange Act of 1934. In connection with such assistance, Respondents will 

produce, without service or notice of subpoena, all documents and other information reasonably 

requested by the Commission staff. 

IV. 

In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Respondent’s Offer. 

Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act it is hereby 

ORDERED that: 

A. Respondent shall cease and desist from committing or causing any violations and any 

future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 promulgated 

thereunder. 

B. Respondent Harvest is censured. 

C. Respondent Harvest shall, within 14 days of the entry of this Order, pay disgorgement 

of $2,500,000 and prejudgment interest of $1,000,000, to the Securities and Exchange Commission.  

If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. 

Respondent Harvest shall also, within 14 days of the entry of this Order, pay a civil money penalty in 

the amount of $2,000,000, to the Securities and Exchange Commission.  If timely payment is not 

made, additional interest shall accrue pursuant to 31 U.S.C. §3717. 

Payment must be made in one of the following ways:   

1. Respondent may transmit payment electronically to the Commission, which will provide 

detailed ACH transfer/Fedwire instructions upon request;  

 

2. Respondent may make direct payment from a bank account via Pay.gov through the SEC 

website at http://www.sec.gov/about/offices/ofm.htm; or  

 

 
does not alter that standard.  922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish 

that a person has “willfully omit[ted]” material information from a required disclosure in violation of Section 207 of 

the Advisers Act). 



 

8 

3. Respondent may pay by certified check, bank cashier’s check, or United States postal 

money order, made payable to the Securities and Exchange Commission and hand-

delivered or mailed to:  

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter identifying the 

Respondent in these proceedings, and the file number of these proceedings; a copy of the cover letter 

and check or money order must be sent to D. Mark Cave, Associate Director, Division of 

Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549.   

D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created 

for the disgorgement, prejudgment interest, and penalty referenced in Section IV.C. above.  The Fair 

Fund may be added to or combined with any other fund established in any related action arising out 

of the same facts that are the subject of this Order.  Amounts ordered to be paid as civil money 

penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, 

including all tax purposes.  To preserve the deterrent effect of the civil penalty, Respondent agrees 

that in any Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, 

offset or reduction of any award of compensatory damages by the amount of any part of 

Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  If the court in any Related 

Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 days after 

entry of a final order granting the Penalty Offset, notify the Commission's counsel in this action and 

pay the amount of the Penalty Offset to the Securities and Exchange Commission.  Such a payment 

shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the 

civil penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 

means a private damages action brought against Respondent by or on behalf of one or more investors 

based on substantially the same facts as alleged in the Order instituted by the Commission in this 

proceeding. 

 

 By the Commission. 

 

Vanessa A. Countryman 

Secretary