Here is the edited 800-word blog post embodying Emily Carter’s perspective with the requested changes:
As a financial analyst and legal expert with over a decade of experience, I’ve seen firsthand how the complex intersections between financial markets and legal regulations can impact investors. The recent charges filed by the Securities and Exchange Commission against Merrill Lynch and Harvest Volatility Management are a prime example of alleged compliance failures that caused customers to pay higher fees and suffer losses.
Seriousness of the Allegations and Impact on Investors
According to the SEC’s litigation release, from 2021 through 2024, Merrill Lynch and Harvest Volatility Management allegedly allowed client accounts to exceed pre-set exposure limits in Merrill’s Collateral Yield Enhancement Strategy (CYES), an options trading strategy. As a result:
- Clients paid higher management fees to the firms
- Investors were subjected to increased market risk exposure
- Customers incurred losses on their investments
The famous investor Warren Buffett once said, “Risk comes from not knowing what you’re doing.” In this case, it appears clients may not have been fully informed about the risks taken with their money. The SEC alleges that while both firms knew certain accounts exceeded agreed-upon exposure limits, sometimes by over 50%, they failed to properly notify affected investors. This lack of transparency prevented customers from making fully informed investment decisions.
Shockingly, investment fraud and bad advice from financial advisors are more common than many realize. A staggering $64.2 billion was lost globally to financial scams in 2022 alone, according to the Global Anti Scam Alliance.
Background on the Firms and Past Complaints
Merrill Lynch, a subsidiary of Bank of America, is a major broker-dealer and investment advisory firm. Harvest Volatility Management is an investment adviser to which Merrill referred customers for the CYES options strategy. According to FINRA BrokerCheck, Merrill Lynch (CRD# 7691) has a history of customer complaints and regulatory actions, including a 2018 SEC settlement for $42 million related to charges of misleading customers about trading venues.
It’s worth noting that a staggering 33% of financial advisors have a past customer complaint or regulatory action on their record. Before investing with any advisor, it’s crucial to research their background and disciplinary history through FINRA’s free BrokerCheck tool and the SEC’s Investment Adviser Public Disclosure database.
Explaining the Charges and FINRA Rules
The crux of the SEC’s complaint is that Merrill Lynch and Harvest Volatility Management allegedly breached their fiduciary duty to act in clients’ best interests. FINRA Rule 2010 requires member firms and their associated persons to “observe high standards of commercial honor and just and equitable principles of trade.”
By allegedly allowing and not disclosing excess exposure, not informing clients, and failing to implement proper policies and procedures, the firms may have violated this fundamental rule. The lack of risk controls also points to potential supervisory failures under FINRA Rule 3110, which requires robust systems to oversee compliance.
Consequences and Lessons for Investors
To settle the SEC charges, Merrill Lynch and Harvest Volatility Management agreed to be censured, cease and desist from future violations, and pay penalties and disgorgement totaling over $10 million. However, the greatest cost is to the trust that was broken with investors who relied on these major firms to prioritize their financial well-being.
The key takeaway for investors is to always keep a watchful eye on your accounts and ask questions if something seems amiss. Don’t assume that your advisor or their firm is monitoring your risk levels. Ultimately, it’s up to you to advocate for your own best interests.
If you suffered investment losses due to undisclosed risks or unsuitable strategies, know that you have rights and legal options. Reaching out to an experienced securities attorney can help you understand if you have a viable claim to recover your losses through FINRA arbitration or other means.
The Merrill Lynch and Harvest Volatility Management case underscores the vital importance of transparency, proper risk controls, and adherence to FINRA rules in protecting investors. By staying informed and speaking up when warranted, we can all play a role in holding bad actors accountable and promoting integrity in the financial markets.
