BMO Capital Markets Agrees to $40 Million Settlement with SEC

BMO Capital Markets Faces SEC Charges Over Bond Sales

The Securities and Exchange Commission (SEC) has taken action against BMO Capital Markets Corp., a registered broker-dealer, for failing to provide proper supervision over its employees who sold misleading mortgage-backed bonds. This case centers around the agency's findings from December 2020 to May 2023, which revealed significant deficiencies in BMO's practices.

Uncovering the Misleading Practices

According to the SEC, BMO's representatives engaged in practices that caused customer confusion regarding the true composition of mortgage-backed securities. The representatives structured mixed collateral bonds backed by residential mortgages, leading to the generation of inaccurate information disseminated via third-party data systems. Despite being aware of the misleading nature of this information, BMO continued to communicate metrics related to these bonds to clients.

A Large Volume of Misleading Sales

Over the span of around two and a half years, BMO sold approximately $3 billion worth of these securities, labeled as Agency CMO Bonds. The SEC determined that the existing supervisory policies and procedures at BMO inadequately addressed the intricacies involved in structuring and selling these bonds. Furthermore, BMO had no robust system in place for reviewing the information shared by their representatives with customers, nor did they evaluate bond structures in the context of marketing communications.

SEC's Reaction to Lax Supervision

Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, underscored the critical need for firms to establish tailored supervisory practices that truly reflect their business operations. Wadhwa indicated that had BMO appropriately overseen the marketing of new-issue mortgage-backed securities, the misleading practices could potentially have been mitigated or avoided entirely.

Financial Implications of the Settlement

The SEC's investigation concluded that BMO failed to reasonably supervise its registered representatives, violating Section 15(b)(4)(E) of the Securities Exchange Act of 1934. Without admitting or denying the findings from the SEC, BMO agreed to a settlement that includes a total payment of $40 million, which breaks down to approximately $19.4 million in disgorgement, $2.2 million in pre-judgment interest, and a civil penalty of $19 million. The SEC established a fair fund to ensure that the affected investors receive compensation.

Key Players in the Investigation

The investigation by the SEC was meticulously conducted by a team within the Enforcement Division’s Complex Financial Instruments Unit, including Eric S. Berelovich leading the efforts. He was supported by a professional team comprising Harry Roback, Melissa Armstrong, Gregory Smolar, Sharon Bryant, and Joshua Brodsky, with supervision provided by Armita Cohen. Collaboration also occurred with Eugene Canjels and Jason Lee from the agency’s Division of Economic and Risk Analysis.

Frequently Asked Questions

What was the main issue with BMO Capital Markets?

BMO Capital Markets faced charges from the SEC for failing to supervise employees adequately selling misleading mortgage-backed bonds.

How much is BMO paying to settle the SEC charges?

BMO agreed to pay a total of over $40 million, which includes disgorgement, interest, and civil penalties.

What are Agency CMO Bonds?

Agency CMO Bonds are a type of mortgage-backed security structured with mixed collateral, which BMO inaccurately marketed to clients.

How long did the misleading practices continue?

The misleading practices reportedly took place from December 2020 to May 2023.

Who led the SEC investigation into BMO Capital Markets?

The SEC’s investigation was led by Eric S. Berelovich from the Enforcement Division’s Complex Financial Instruments Unit.

About Investors Hangout

Investors Hangout is a leading online stock forum for financial discussion and learning, offering a wide range of free tools and resources. It draws in traders of all levels, who exchange market knowledge, investigate trading tactics, and keep an eye on industry developments in real time. Featuring financial articles, stock message boards, quotes, charts, company profiles, and live news updates. Through cooperative learning and a wealth of informational resources, it helps users from novices creating their first portfolios to experts honing their techniques. Join Investors Hangout today: https://investorshangout.com/

Disclaimer: The content of this article is solely for general informational purposes only; it does not represent legal, financial, or investment advice. Investors Hangout does not offer financial advice; the author is not a licensed financial advisor. Consult a qualified advisor before making any financial or investment decisions based on this article. The author's interpretation of publicly available data shapes the opinions presented here; as a result, they should not be taken as advice to purchase, sell, or hold any securities mentioned or any other investments. The author does not guarantee the accuracy, completeness, or timeliness of any material, providing it "as is." Information and market conditions may change; past performance is not indicative of future outcomes. If any of the material offered here is inaccurate, please contact us for corrections.