U.S. Securities and Exchange Commission charges BMO Capital Markets for failing to supervise agency CMO bond sales and creates a USD 40 million fair fund

The U.S. Securities and Exchange Commission charged registered broker-dealer BMO Capital Markets Corp. with failing to reasonably supervise employees on its agency bond desk who, from December 2020 to May 2023, sold mortgage-backed bonds using offering sheets and bond metrics that were misleading and did not accurately describe the collateral backing the bonds. BMO agreed to pay more than USD 40 million in disgorgement, prejudgment interest, and a civil penalty, and the SEC order establishes a fair fund to compensate harmed investors. According to the SEC’s order, 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 providers’ systems to generate inaccurate information about the bonds’ overall composition, then sent customers misleading metrics that representatives should have known were inaccurate. The firm sold about USD 3 billion of these Agency CMO Bonds over roughly two and a half years, while supervisory policies and procedures lacked guidance on the structure and sale of the bonds and did not include processes to review bond structures against marketing communications or to review the information shared with customers. Without admitting or denying the findings, BMO agreed to pay USD 19,417,908 in disgorgement, USD 2,241,507 in prejudgment interest, and a USD 19 million civil penalty for violations of Exchange Act Section 15(b)(4)(E).