BMO settled with the SEC for $40.6 million over allegations of misleading information in the sale of mortgage-backed securities.
The SEC found BMO employees altered bond compositions to misrepresent their makeup, leading to inaccurate investor information.
The investigation revealed inadequate supervisory processes at BMO, emphasizing the need for tailored oversight in financial institutions.
The case underscores the importance of transparency and ethical practices in capital markets to maintain investor trust and compliance.
Bank of Montreal (BMO) has agreed to a $40.6 million settlement with the Securities and Exchange Commission (SEC) amid allegations that its capital markets unit failed to properly supervise employees who sold mortgage-backed securities with misleading information about their composition.
The SEC’s investigation focused on BMO’s sale of approximately $3 billion in Agency Collateralized Mortgage Obligation (CMO) bonds between December 2020 and May 2023.
These bonds, backed by residential mortgages and issued by government-sponsored entities such as Fannie Mae, Freddie Mac, and Ginnie Mae, are typically considered low-risk investments.
However, according to the SEC, BMO employees altered the bonds to include a small portion—often as little as $1,000—of higher-interest mortgages.
While the inclusion was minimal, it was enough to skew the metrics provided by third-party data systems, resulting in inaccurate information about the bonds' overall makeup. BMO employees also distributed offering sheets to customers containing these misleading metrics, the SEC said.
Insufficient Oversight
The SEC found that BMO lacked proper guidance and supervisory processes for structuring and selling these bonds. The bank also failed to establish a mechanism for reviewing the information provided to customers or for comparing bond structures against marketing materials.
“It is critical that firms have supervisory processes that are customized to their business units,” said Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement. “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.”
The SEC’s order highlighted internal discussions among BMO employees, who referred to altering the bonds’ composition as changing their “cosmetics” to make them more appealing to buyers. One market participant even complained to a BMO banker in June 2022, alleging that the bank was “not selling what is advertised.”
Settlement and Penalty
BMO’s settlement includes $19.4 million in disgorgement, $2.2 million in pre-judgment interest, and a $19 million civil penalty. While the bank neither admitted nor denied the allegations, it agreed to a censure as part of the settlement.
In a statement, BMO acknowledged the resolution of the matter and reiterated its commitment to ethical practices. “We hold ourselves to the highest standards of fair and ethical conduct and continuously review and enhance our controls and supervisory framework,” the bank said. “We’re pleased to have this matter behind us.”
Lessons for the Industry
The SEC’s case against BMO underscores the importance of tailored supervision and robust compliance measures in financial institutions. The agency emphasized that firms must closely monitor their business units to prevent misleading practices and maintain transparency with customers.
For BMO, the settlement brings an end to a high-profile investigation but also serves as a reminder of the risks associated with insufficient oversight in complex financial transactions. By addressing gaps in its supervisory framework, the bank aims to rebuild trust and reinforce its commitment to ethical conduct in the capital markets.
