World Stock Watch

Bank of Montreal Unit Agrees to Pay $40.7 Million to Settle SEC Charges

Misleading Investors About Mortgage-Backed Bonds

A significant settlement has been reached between the U.S. Securities and Exchange Commission (SEC) and a unit of Bank of Montreal, with the bank agreeing to pay $40.7 million to resolve charges related to the supervision of employees who misled investors about the attractiveness of mortgage-backed bonds.

The Charges

The SEC alleged that BMO Capital Markets employees used inaccurate offering sheets and metrics to describe the collateral backing over $3 billion of Agency CMO bonds between December 2020 and May 2023. These bonds, issued by Fannie Mae, Freddie Mac, and Ginnie Mae, are considered low-risk due to government guarantees of principal and interest payments.

The Misconduct

The SEC claimed that BMO structured some bonds with a small amount of mortgages with higher interest rates, making it appear as though the bonds were backed by larger amounts of these mortgages, thereby increasing their appeal to investors. This practice was referred to as changing the bonds’ “cosmetics” to boost sales.

The Settlement

As part of the settlement, BMO will pay a $19 million civil fine, $19.42 million in disgorgement, and $2.24 million in interest. The bank has also agreed to a censure. While BMO did not admit or deny wrongdoing, it stated that it holds itself to high standards of fair and ethical conduct and continuously reviews and enhances its controls and supervisory framework.

Industry Reaction

The misconduct was noticed by outsiders, with one market participant complaining to a BMO banker in June 2022 that the bank was “not selling what is advertised.” The settlement serves as a reminder of the importance of transparency and accuracy in financial markets.

Moving Forward

With this matter now behind it, BMO can focus on rebuilding trust with its investors and the wider financial community. The settlement highlights the need for financial institutions to prioritize ethical conduct and ensure that their employees are held to the highest standards.