BMO Capital Markets agreed to pay over $40 million this week to settle allegations from a Securities and Exchange Commission investigation into whether it failed to properly supervise employees involved in sales of collateralized mortgage obligations.
The commission's investigation had centered on data and offering materials related to $3 billion in sales of agency securities between December 2020 and May 2023, which were found to have misrepresented information.
The settlement comes as current federal leaders make efforts to square away their work ahead of
President-elect Trump's nominee to head the SEC,
Deregulation could have a profound impact on the agency securities market, especially as plans take shape to release key players that back those mortgage bonds
The BMO investigation highlights agency market risk involving high-level mortgage securities data, which in this case was allegedly presented without transparency into the discrete variations behind it.
The SEC found employees at the bank's broker-dealer unit "mixed collateral bonds backed by pools of residential mortgages using a small sliver of higher-interest in a way that caused the systems of third-party data providers to generate inaccurate information about the bonds' overall composition."
In its settlement, the SEC said it held the bank responsible for failing to "reasonably supervise its registered representatives involved in the offer and sale of agency CMO bonds" in violation of the Securities and Exchange Commission Act.
"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," said Sanjay Wadhwa, acting director of the SEC's enforcement division, in a press release.
The commission's investigation found BMO's broker-dealer unit specifically lacked "guidance concerning the structure and sale" of the bonds, and "a process for reviewing the type of information firm representatives shared with customers."
The SEC also showed concern that the financial institution did not have "a process for reviewing bond structures against marketing communications."
"It is critical that firms have supervisory processes that are customized to their business units," Wadhwa said.
BMO, which the commission said did not admit or deny its findings, issued a statement in response to the settlement.
"We hold ourselves to the highest standards of fair and ethical conduct, and continuously review and enhance our controls and supervisory framework. We're pleased to have this matter behind us," the bank said.
The company's settlement payment includes more than $19 million in disgorgement or legal remedy for improper gains, over $2 million in pre-judgment interest designed to compensate for the time passed since injury, and a $19 million civil penalty.
The SEC's order also includes the establishment of a vehicle for transmitting funds to investors who bought agency collateralized mortgage obligations from the broker-dealer during the period the commission investigated.
CMOs are securities that distribute the cash flows from underlying mortgages into segments with different maturities and varying levels of risk.
The SEC's division of economic and risk analysis and its complex financial instruments unit, which is part of its enforcement division, participated in the investigation.
