BMO agreed to pay more than $40.6 million to settle allegations that its capital-markets unit failed to supervise employees who sold mortgage-backed bonds with a misleading composition, the Securities and Exchange Commission said this week.
Between December 2020 and May 2023, BMO sold roughly $3 billion in Agency CMO bonds, which are backed by pools of residential mortgages and issued by government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae, so they’re considered low-risk.
But BMO employees structured the bonds such that they included a sliver – often $1,000 or so – of higher-interest mortgages. That portion, however, was small enough that third-party data providers’ systems generated inaccurate information about the bonds’ makeup, and BMO employees sent offering sheets with misleading metrics to customers, the SEC said.
BMO’s policies did not include guidance on the structure and sale of these bonds, the SEC found. Nor did the bank have a process for reviewing the type of information firm representatives shared with customers about the bonds or a process for reviewing bond structures against marketing communications, the agency said.
“It is critical that firms have supervisory processes that are customized to their business units,” Sanjay Wadhwa, acting director of the SEC’s division of enforcement, said in a statement Monday. “Had BMO appropriately tailored its supervision of the Agency CMO desk’s marketing of new-issue mortgage-backed securities, it might have stopped its employees from continuing to use these misleading practices.”
BMO bankers spoke about changing the bonds' "cosmetics" to boost sales, the SEC alleged. The agency’s order highlighted a complaint one market participant made to a BMO banker in June 2022 – namely, that the bank was "not selling what is advertised."
"We hold ourselves to the highest standards of fair and ethical conduct, and continuously review and enhance our controls and supervisory framework,” BMO said in a statement seen by Reuters. “We're pleased to have this matter behind us."
BMO’s penalty breaks down to roughly $19.4 million in disgorgement, about $2.2 million in pre-judgment interest, and a $19 million fine.
The bank neither admitted nor denied wrongdoing but agreed to a censure.
