The SEC announced that BMO Capital Markets has agreed to pay more than $40m to settle charges brought by the securities regulator for failing to supervise employees involved in the sale of mortgage-backed securities.
In a settlement agreement unveiled Monday, the securities watchdog alleged that between December 2020 and May 2023, BMO representatives sold bonds using misleading offering sheets and metrics that misrepresented the characteristics of the underlying collateral.
Inaccurate portrayal of bonds
Agency CMO Bonds are a type of multi-class mortgage-backed security that are created by pooling residential mortgages into trusts and issuing collateralized mortgage obligation (CMO) bonds that pay a rate of return to investors based on principal and/or interest payments made on the mortgages.
The SEC alleged that BMO’s Agency CMO desk structured bonds backed by residential mortgage pools in a way that caused third-party data providers to inaccurately portray the bonds’ composition. Employees at the unit then shared misleading metrics with customers about these bonds, referred to in the order as “sliver bonds,” which exceeded $3 billion in sales over the two-and-a-half-year period, the SEC said in its order.
The [bond] division has also “enhanced the lexicons it employs to monitor communications by registered representatives to detect potential misrepresentations.”
From the SEC’s administrative order in this case
The SEC said BMO’s policies lacked specific guidance for supervising the sale and structuring of these bonds and did not include processes to review bond structures or marketing communications.
As a result of the conduct described above, the SEC said CMC failed reasonably to supervise its registered representatives so as to avoid committing violations of securities laws and regulations as required by Section 15(b)(4)(E) of the Securities Exchange Act of 1934. And the settlement requires BMO to pay $19.4m in disgorgement, $2.2m in prejudgment interest, and a $19m civil penalty.
Fixing lexicons, refining policies, training
According to the SEC’s order, BMO Capital Markets has already made several improvements to its supervisory processes, including strengthening its policies and procedures around the offering and sale of Agency CMO bonds, including a pre-approval process for certain collateral blends, with the help of an outside consultant.
The division has also “enhanced the lexicons it employs to monitor communications by registered representatives to detect potential misrepresentations concerning Agency CMO Bonds or potential customer complaints or dissatisfaction.”
CMC has also implemented enhanced scenario-based training for its registered representatives focused on novel bond structures and escalation of complaints and potential issues.
