Investing.com -- The Securities and Exchange Commission (SEC) today charged BMO Capital Markets Corp., a registered broker-dealer, for failing to adequately supervise employees who sold misleading mortgage-backed bonds from December 2020 until May 2023. To resolve these charges, BMO agreed to pay over $40 million, which includes disgorgement, prejudgment interest, and a civil penalty.
According to the SEC, BMO representatives structured mixed collateral bonds backed by residential mortgages in a way that led to the generation of inaccurate information about the bonds' overall composition by third-party data systems. Despite knowing the information was misleading, BMO sent metrics about the bonds to its customers. Over approximately two and a half years, BMO sold $3 billion worth of these bonds, known as Agency CMO Bonds. The SEC found that BMO's supervisory policies and procedures did not provide guidance on the structure and sale of these bonds. Moreover, BMO lacked a process for reviewing the information its representatives shared with customers about the bonds or for reviewing bond structures against marketing communications.
Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, emphasized the importance of firms having supervisory processes tailored to their business units. He said that if BMO had properly supervised the marketing of new-issue mortgage-backed securities by its Agency CMO desk, it might have prevented the continuation of these misleading practices.
The SEC found that BMO failed to reasonably supervise its registered representatives involved in the offer and sale of Agency CMO Bonds, as required by Section 15(b)(4)(E) of the Securities Exchange Act of 1934. Without admitting or denying the Commission’s findings, BMO agreed to pay $19,417,908 in disgorgement, $2,241,507 in pre-judgment interest, and a $19 million civil penalty. The SEC has established a fair fund for the distribution of these funds to the investors who were harmed.
The SEC’s investigation was conducted by Eric S. Berelovich of the Enforcement Division’s Complex Financial Instruments Unit, with assistance from Harry Roback, Melissa Armstrong, Gregory Smolar, Sharon Bryant, and Joshua Brodsky. It was supervised by Armita Cohen. Eugene Canjels and Jason Lee from the agency’s Division of Economic and Risk Analysis also collaborated closely with the team.
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