In re MERRILL LYNCH

 
 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 101158 / September 25, 2024 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6727 / September 25, 2024 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-22173 
 
 
 
 
In the Matter of 
 
MERRILL LYNCH, PIERCE, 
FENNER & SMITH 
INCORPORATED, 
 
Respondent. 
 
 
 
 
 
 
ORDER INSTITUTING 
ADMINISTRATIVE AND CEASE-AND-
DESIST PROCEEDINGS, PURSUANT 
TO SECTION 15(b) OF THE 
SECURITIES EXCHANGE ACT OF 
1934 AND 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 Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and 
Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against Merrill 
Lynch, Pierce, Fenner & Smith Incorporated (“Merrill” 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 Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) 

 
2 
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.   
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”),  Merrill,  a  registered 
broker-dealer and investment adviser, failed adequately to inform certain clients that a third-party 
investment  adviser,  Harvest  Volatility  Management  LLC  (“Harvest”),  materially exceeded 
investment  exposure  levels  specifically  designated  by  such  clients  in  a  strategy  that  Harvest 
managed. During the Relevant Period, Merrill knew or reasonably should have known that certain 
clients’ actual investment levels exceeded the dollar amounts designated and agreed upon between 
the clients and Harvest, which caused certain clients to pay higher fees, to be subject to increased 
market exposure and, ultimately, to incur investment losses. By failing adequately to notify certain 
clients  of  their  over-exposure  to an  options  overlay  strategy relative  to  what  those  clients had 
contractually  agreed  to  with  Harvest,  Merrill  breached  its  fiduciary  duties  to  those  clients  and 
willfully violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 
RESPONDENT 
2. 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. 
OTHER RELEVANT PARTY 
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. 
FACTS 
4. In or about August 2011, Merrill approved Harvest’s Collateral Yield Enhancement 
Strategy  (“CYES”)  for  investment  by  eligible  ultra-high  net  worth  investors.  CYES  was  an 
“options overlay” strategy through which enrolled participants pledged existing cash or investment 
assets held in their Merrill accounts as collateral. Cash or investment assets held at Merrill (whether 
in  brokerage  accounts  and/or  investment  advisory  accounts)  were  eligible  to  be  pledged  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. 

 
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collateral. In general terms, Harvest used the collateral as the basis for an options trading strategy 
on the S&P 500 Index (“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.    
5. For purposes of this Order, the relevant CYES investors introduced by Merrill are 
generally those who enrolled in CYES before January 1, 2017. The investors introduced by Merrill 
enrolled in CYES through a written investment management agreement (“IMA”).  Harvest created 
the form of the IMA, which Merrill approved for  use with investors it introduced.  In the  IMA, 
investors  instructed  Harvest  regarding  their  desired  level  of  exposure  to  CYES  by  specifying  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 investor’s account.  The  IMA 
employed  by  Harvest  before  January  2017  (“pre-2017  IMA”)  also  provided  that,  “on  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. 
6. “Notional Amount” indicates the amount of money represented by a position on a 
particular financial instrument, including options contracts.  For CYES, 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 (contracts × SPX value × 100).  Thus, if a client designated a 
Notional Amount of $6 million and the SPX was at 2,000, Harvest would purchase 30 contracts 
(30 × 2,000 × 100 = 6,000,000), even though the market price of the underlying contracts was 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. 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 
would be required periodically to adjust the number of options contracts representing the strategy 
based on changes in the SPX. 
7. Pursuant  to  the  pre-2017  IMA,  Harvest  charged  an  annualized  fee  of  50  bps  of 
clients’  actual  Notional  Amounts—i.e.,  the  actual  notional  level  of  the  account,  and  not  the 
Notional Amount specified in Schedule A to the IMA—for managing CYES.  Pursuant to a written 
Solicitation  Agreement  between  Harvest  and  Merrill,  Harvest  paid  Merrill  30%  of  Harvest’s 
management fees (i.e., 15 basis points annualized) and incentive fees in consideration for Merrill 
introducing Harvest to eligible investors. The IMA also required Harvest to execute options trades 
through Merrill, for which Merrill received the associated trading commissions. According to the 
terms of the IMA for investors introduced by Merrill, Harvest was the investment adviser for the 
strategy  and  Merrill  was  the  custodian.  In  numerous  instances during  the  Relevant  Period, 
however, Merrill financial  advisors discussed  CYES  with  investors  and  advised  investors 
regarding, among other things, whether to invest in CYES, the designation of Notional Amount 
levels for CYES relative to investors’ overall Merrill portfolios and their ongoing overall exposure 
to CYES.  Many  investors  who  were  introduced  to  CYES  by Merrill  had  existing  investment 
advisory account relationships with the firm, many of which were pledged as collateral for CYES. 

 
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8. During the Relevant Period, the SPX increased by more than 25%. As a result, for 
accounts in which Harvest did not reduce the number of options contracts representing the strategy 
in corresponding fashion, actual Notional Amounts increased by more than 25%. In many cases, 
Notional Amounts materially exceeded the dollar amounts that investors introduced by Merrill had 
specified in their pre-2017 IMAs. 
9. By the end of 2016, numerous accounts for CYES investors introduced by Merrill 
with pre-2017 IMAs had actual Notional Amounts that exceeded contractually-designated levels. 
By January 2017, Merrill had actual or constructive knowledge that over 100 accounts of investors 
introduced by Merrill were materially over the Notional Amounts directed by those clients. 
10. The SPX increased by over 21% during 2017. Because Harvest did not adjust the 
number of contracts for many CYES investor accounts introduced by Merrill, the actual Notional 
Amounts  in  those  accounts  grew  by  over  21%,  further  increasing  Notional  Amount  overages 
during 2017. By the end of 2017, 186 pre-2017 CYES accounts introduced by Merrill were 30% 
or more above the client-specified Notional Amounts, and 74 of those accounts were 50% or more 
above client-specified Notional Amounts. 
11. In  the  fourth  quarter  of  2017  and  first  quarter  of  2018,  the  CYES  had  negative 
returns. Because certain Merrill clients were subject to actual Notional Amounts that materially 
exceeded their contractually-designated levels, they experienced investment losses greater than if 
Harvest had maintained the client-directed Notional Amounts in their pre-2017 IMAs. 
12. 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. As a result of Harvest’s failure to adjust contracts for certain clients 
introduced  by  Merrill  during  the  Relevant  Period,  Harvest  charged those clients  excessive 
management fees, of which Harvest paid approximately $2 million to Merrill under the Solicitation 
Agreement.  Merrill  also  received  approximately  $1  million  in  excess  commissions  to  execute 
options transactions directed by Harvest. 
13. By early 2017, Harvest had communicated to certain Merrill personnel that actual 
Notional  Amounts  in  some  CYES  accounts  were  materially  above  client-directed  amounts.  For 
example, throughout the  Relevant Period, Harvest provided Merrill sales and product personnel 
with monthly reports showing, for certain accounts, that Notional Amounts in accounts introduced 
by Merrill were increasing and that Harvest was not systematically adjusting the number of options 
contracts  for  pre-2017  IMA  clients  in  response  to  changes  in  the  SPX.  Similarly,  for  numerous 
Merrill clients who also had investment advisory accounts at Merrill, Harvest communicated with 
designated account representatives who serviced those accounts in addition to product and sales 
personnel.  In  late  2016  and  early  2017,  Harvest  informed  certain Merrill financial  advisors in 
writing that accounts for some clients they serviced were 20% or more above client-directed levels.  
In  some  cases,  representatives  worked  with  investors  to  reduce  Notional  Amount  exposure  or 
execute new Schedule As to their IMAs. In other cases, investors remained subject to continuing 
Notional Amount deviations. 

 
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14. Through  those  communications,  Merrill  knew  or  should  reasonably  have  known 
that Harvest was not systematically managing CYES for Merrill clients who enrolled under pre-
2017  IMAs  so  that  their  Notional  Amounts  would  only  exceed  contractually-designated  levels 
“temporarily.” As a result of that actual or constructive notice and the firm’s relationship with 
affected clients, Merrill was subject to a fiduciary duty to reasonably and adequately notify them 
that  Harvest  was  not  managing  Notional  Amounts  in  a  manner  consistent  with  pre-2017  IMA 
terms.  While  some  Merrill financial  advisors did  so,  the  firm  did  not  adequately  and  uniformly 
notify all affected pre-2017  IMA  clients of the Notional Amount deviations caused by Harvest, 
along with the resulting impact on fees and transactional costs.   
15. Merrill failed to adopt and implement policies and procedures reasonably designed 
to ensure that it  communicated  to  clients  the  material  information  it  received  from  Harvest 
regarding potential mismanagement and trading beyond contractual limits.  During the Relevant 
Period, Merrill personnel became aware that Harvest was not systematically adjusting the number 
of options contracts that Harvest purchased in numerous accounts with pre-2017 IMAs, but Merrill 
failed to communicate such information to clients with whom it had a fiduciary relationship.   
VIOLATIONS 
16. 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, 
Merrill willfully violated Section 206(2).
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17. 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, Merrill 
willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 
DISGORGEMENT AND CIVIL PENALTIES 
18. 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 
 
2
 “Willfully,” for purposes of imposing relief under Section 15(b) of the Exchange Act and 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, 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). 

 
6 
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 Exchange Act.  In connection with this distribution, Respondent will produce, without service 
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 Section 15(b) of the Exchange Act and 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 Merrill is censured. 
C. Respondent Merrill shall, within 14 days of the entry of this Order, pay disgorgement 
of $2,000,000, and prejudgment interest of $800,000, to the Securities and Exchange Commission.  
If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. 
Respondent Merrill shall also, within 14 days of the entry of this Order, pay a civil money penalty in 
the  amount of  $1,000,000,  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  
 
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 

 
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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 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 101158 / September 25, 2024 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6727 / September 25, 2024 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-22173 

 

 

 

 

In the Matter of 

 

MERRILL LYNCH, PIERCE, 

FENNER & SMITH 

INCORPORATED, 

 

Respondent. 

 

 

 

 

 

 

ORDER INSTITUTING 

ADMINISTRATIVE AND CEASE-AND-

DESIST PROCEEDINGS, PURSUANT 

TO SECTION 15(b) OF THE 

SECURITIES EXCHANGE ACT OF 

1934 AND 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 Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and 

Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against Merrill 

Lynch, Pierce, Fenner & Smith Incorporated (“Merrill” 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 Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) 



 

2 

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.   

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”), Merrill, a registered 

broker-dealer and investment adviser, failed adequately to inform certain clients that a third-party 

investment adviser, Harvest Volatility Management LLC (“Harvest”), materially exceeded 

investment exposure levels specifically designated by such clients in a strategy that Harvest 

managed. During the Relevant Period, Merrill knew or reasonably should have known that certain 

clients’ actual investment levels exceeded the dollar amounts designated and agreed upon between 

the clients and Harvest, which caused certain clients to pay higher fees, to be subject to increased 

market exposure and, ultimately, to incur investment losses. By failing adequately to notify certain 

clients of their over-exposure to an options overlay strategy relative to what those clients had 

contractually agreed to with Harvest, Merrill breached its fiduciary duties to those clients and 

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

RESPONDENT 

2. 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. 

OTHER RELEVANT PARTY 

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. 

FACTS 

4. In or about August 2011, Merrill approved Harvest’s Collateral Yield Enhancement 

Strategy (“CYES”) for investment by eligible ultra-high net worth investors. CYES was an 

“options overlay” strategy through which enrolled participants pledged existing cash or investment 

assets held in their Merrill accounts as collateral. Cash or investment assets held at Merrill (whether 

in brokerage accounts and/or investment advisory accounts) were eligible to be pledged 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 S&P 500 Index (“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.    

5. For purposes of this Order, the relevant CYES investors introduced by Merrill are 

generally those who enrolled in CYES before January 1, 2017. The investors introduced by Merrill 

enrolled in CYES through a written investment management agreement (“IMA”).  Harvest created 

the form of the IMA, which Merrill approved for use with investors it introduced.  In the IMA, 

investors instructed Harvest regarding their desired level of exposure to CYES by specifying 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 investor’s account.  The IMA 

employed by Harvest before January 2017 (“pre-2017 IMA”) also provided that, “on 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. 

6. “Notional Amount” indicates the amount of money represented by a position on a 

particular financial instrument, including options contracts.  For CYES, 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 (contracts × SPX value × 100).  Thus, if a client designated a 

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

(30 × 2,000 × 100 = 6,000,000), even though the market price of the underlying contracts was 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. 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 

would be required periodically to adjust the number of options contracts representing the strategy 

based on changes in the SPX. 

7. Pursuant to the pre-2017 IMA, Harvest charged an annualized fee of 50 bps of 

clients’ actual Notional Amounts—i.e., the actual notional level of the account, and not the 

Notional Amount specified in Schedule A to the IMA—for managing CYES.  Pursuant to a written 

Solicitation Agreement between Harvest and Merrill, Harvest paid Merrill 30% of Harvest’s 

management fees (i.e., 15 basis points annualized) and incentive fees in consideration for Merrill 

introducing Harvest to eligible investors. The IMA also required Harvest to execute options trades 

through Merrill, for which Merrill received the associated trading commissions. According to the 

terms of the IMA for investors introduced by Merrill, Harvest was the investment adviser for the 

strategy and Merrill was the custodian. In numerous instances during the Relevant Period, 

however, Merrill financial advisors discussed CYES with investors and advised investors 

regarding, among other things, whether to invest in CYES, the designation of Notional Amount 

levels for CYES relative to investors’ overall Merrill portfolios and their ongoing overall exposure 

to CYES. Many investors who were introduced to CYES by Merrill had existing investment 

advisory account relationships with the firm, many of which were pledged as collateral for CYES. 



 

4 

8. During the Relevant Period, the SPX increased by more than 25%. As a result, for 

accounts in which Harvest did not reduce the number of options contracts representing the strategy 

in corresponding fashion, actual Notional Amounts increased by more than 25%. In many cases, 

Notional Amounts materially exceeded the dollar amounts that investors introduced by Merrill had 

specified in their pre-2017 IMAs. 

9. By the end of 2016, numerous accounts for CYES investors introduced by Merrill 

with pre-2017 IMAs had actual Notional Amounts that exceeded contractually-designated levels. 

By January 2017, Merrill had actual or constructive knowledge that over 100 accounts of investors 

introduced by Merrill were materially over the Notional Amounts directed by those clients. 

10. The SPX increased by over 21% during 2017. Because Harvest did not adjust the 

number of contracts for many CYES investor accounts introduced by Merrill, the actual Notional 

Amounts in those accounts grew by over 21%, further increasing Notional Amount overages 

during 2017. By the end of 2017, 186 pre-2017 CYES accounts introduced by Merrill were 30% 

or more above the client-specified Notional Amounts, and 74 of those accounts were 50% or more 

above client-specified Notional Amounts. 

11. In the fourth quarter of 2017 and first quarter of 2018, the CYES had negative 

returns. Because certain Merrill clients were subject to actual Notional Amounts that materially 

exceeded their contractually-designated levels, they experienced investment losses greater than if 

Harvest had maintained the client-directed Notional Amounts in their pre-2017 IMAs. 

12. 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. As a result of Harvest’s failure to adjust contracts for certain clients 

introduced by Merrill during the Relevant Period, Harvest charged those clients excessive 

management fees, of which Harvest paid approximately $2 million to Merrill under the Solicitation 

Agreement. Merrill also received approximately $1 million in excess commissions to execute 

options transactions directed by Harvest. 

13. By early 2017, Harvest had communicated to certain Merrill personnel that actual 

Notional Amounts in some CYES accounts were materially above client-directed amounts. For 

example, throughout the Relevant Period, Harvest provided Merrill sales and product personnel 

with monthly reports showing, for certain accounts, that Notional Amounts in accounts introduced 

by Merrill were increasing and that Harvest was not systematically adjusting the number of options 

contracts for pre-2017 IMA clients in response to changes in the SPX. Similarly, for numerous 

Merrill clients who also had investment advisory accounts at Merrill, Harvest communicated with 

designated account representatives who serviced those accounts in addition to product and sales 

personnel. In late 2016 and early 2017, Harvest informed certain Merrill financial advisors in 

writing that accounts for some clients they serviced were 20% or more above client-directed levels.  

In some cases, representatives worked with investors to reduce Notional Amount exposure or 

execute new Schedule As to their IMAs. In other cases, investors remained subject to continuing 

Notional Amount deviations. 



 

5 

14. Through those communications, Merrill knew or should reasonably have known 

that Harvest was not systematically managing CYES for Merrill clients who enrolled under pre-

2017 IMAs so that their Notional Amounts would only exceed contractually-designated levels 

“temporarily.” As a result of that actual or constructive notice and the firm’s relationship with 

affected clients, Merrill was subject to a fiduciary duty to reasonably and adequately notify them 

that Harvest was not managing Notional Amounts in a manner consistent with pre-2017 IMA 

terms. While some Merrill financial advisors did so, the firm did not adequately and uniformly 

notify all affected pre-2017 IMA clients of the Notional Amount deviations caused by Harvest, 

along with the resulting impact on fees and transactional costs.   

15. Merrill failed to adopt and implement policies and procedures reasonably designed 

to ensure that it communicated to clients the material information it received from Harvest 

regarding potential mismanagement and trading beyond contractual limits.  During the Relevant 

Period, Merrill personnel became aware that Harvest was not systematically adjusting the number 

of options contracts that Harvest purchased in numerous accounts with pre-2017 IMAs, but Merrill 

failed to communicate such information to clients with whom it had a fiduciary relationship.   

VIOLATIONS 

16. 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, 

Merrill willfully violated Section 206(2).2  

17. 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, Merrill 

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

DISGORGEMENT AND CIVIL PENALTIES 

18. 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 

 
2 “Willfully,” for purposes of imposing relief under Section 15(b) of the Exchange Act and 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, 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). 



 

6 

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 Exchange Act.  In connection with this distribution, Respondent will produce, without service 

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 Section 15(b) of the Exchange Act and 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 Merrill is censured. 

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

of $2,000,000, and prejudgment interest of $800,000, to the Securities and Exchange Commission.  

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

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

the amount of $1,000,000, 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  

 

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 



 

7 

 

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