BMO Capital Markets Faces $40 Million Reckoning for Supervisory Failures

The Securities and Exchange Commission (SEC) recently announced that BMO Capital Markets Corp. would pay over $40 million to settle charges related to supervisory lapses. The case centers on misleading sales of mortgage-backed securities, leaving a trail of misinformed investors and a $3 billion problem.

Between December 2020 and May 2023, BMO’s Agency Bond Desk sold mortgage-backed bonds—Agency CMO Bonds—using offering sheets and metrics that painted an inaccurate picture of the collateral backing these securities. The issue? A small percentage of high-interest mortgages skewed the data, misleading third-party systems and, ultimately, BMO’s customers.

The SEC found that these misleading metrics were not accidental oversights. BMO’s representatives should have known the information was inaccurate. Yet, they continued to sell the bonds, reaping billions in sales. Compounding the problem, the firm lacked basic supervisory structures to catch and correct these practices.

A Compliance Breakdown

At the heart of the SEC’s charges lies a fundamental failure of oversight. BMO’s supervisory policies and procedures were glaringly insufficient. The firm had no guidelines for structuring and selling Agency CMO Bonds, no review process for the information being sent to clients, and no system for ensuring the bond structures matched their 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.”

To settle the charges, BMO agreed to a hefty financial penalty:

• $19.4 million in disgorgement,
• $2.2 million in prejudgment interest, and
• $19 million in a civil penalty.

The SEC will channel these funds into a fair fund to compensate harmed investors, offering a measure of restitution for the misleading practices that occurred.

Setting the Standard for Accountability

While BMO has settled the case without admitting or denying the SEC’s findings, the broader implications remain significant. Investors depend on accurate, transparent information to make informed decisions, and the SEC’s enforcement actions underscore its commitment to upholding that standard.

The financial sector would do well to take note—because when oversight fails, the cost is steep, both financially and reputationally. As for BMO, the firm now carries the weight of this misstep as a cautionary example of what happens when compliance becomes an afterthought.

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