SEC charges BMO US$40 million for selling"misleading" mortgage-backed bonds
A regulator in the United States has charged a unit of the Bank of Montreal (BMO) more than US$40 million for selling mortgage-backed bonds that it says offered misleading metrics and did not accurately describe the characteristics of the collateral backing the bonds.
To settle the charges, BMO Capital Markets Corp. agreed to pay to settle the “disgorgement, prejudgment interest and a civil penalty,” the Securities and Exchange Commission (SEC) said in a statement on Monday.
“It is critical that firms have supervisory processes that are customized to their business units,” Sanjay Wadhwa, the agency’s acting director of the Division of Enforcement, said. “Had BMO appropriately tailored its supervision … it might have stopped its employees from continuing to use these misleading practices.”
BMO said it was “pleased to have this matter behind us,” that it held itself to the “highest standards of fair and ethical conduct” and it continuously reviews and enhances its controls and supervisory framework.
The SEC’s order said BMO representatives structured mixed collateral bonds backed by pools of residential mortgages, using a small sliver of higher-interest mortgages, in a way that caused third-party data provider systems to generate inaccurate information about the bonds’ overall composition.
The bank then sent “misleading metrics about the bonds to customers, even though its representatives should have known they were misleading,” the agency said.
Between December 2020 and May 2023, BMO sold $3-billion worth of these bonds. The SEC said BMO failed to “reasonably supervise its registered representatives” involved in the offer and sale of these bonds. It also said the bank did not have a process to review the type of
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