BMO Capital Markets Settles $40 Million SEC Charges for Bond Supervision Failures
Toronto, Tuesday, 14 January 2025.
BMO Capital Markets agreed to pay over $40 million to settle SEC charges over inadequate supervision in bond sales, reflecting increasing regulatory scrutiny in the financial sector.
Settlement Details and Violations
BMO Capital Markets, a division of Bank of Montreal (TSX:BMO), has agreed to pay $40.6 million to settle charges with the U.S. Securities and Exchange Commission on January 12, 2025 [1][2]. The SEC investigation revealed that between December 2020 and May 2023, BMO representatives sold approximately $3 billion worth of residential mortgage-backed securities using misleading metrics and offering sheets that misrepresented the underlying collateral characteristics [2][3]. The settlement includes $19.4 million in disgorgement, $2.2 million in prejudgment interest, and a $19 million civil penalty [2].
Nature of Violations
The SEC’s investigation uncovered that BMO’s Agency CMO desk structured bonds in a way that caused third-party data providers to inaccurately represent the bonds’ composition [2]. The practice involved adding small amounts of higher-interest mortgages to pools of lower-interest mortgages, distorting the collateral reports [3]. The SEC found that BMO’s policies lacked specific guidance for supervising the sale and structuring of these ‘sliver bonds’ and did not include adequate processes to review bond structures or marketing communications [2].
Regulatory Response and Company Actions
According to Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, ‘It is critical that firms have supervisory processes that are customized to their business units’ [2][3]. In response to the settlement, BMO spokesman Jeff Roman stated, ‘We hold ourselves to the highest standards of fair and ethical conduct, and continuously review and enhance our controls and supervisory framework’ [3][7]. The company has since implemented several improvements to its supervision, including enhanced policies and procedures around the offering and sale of Agency CMO bonds, with assistance from an outside consultant [2].
Broader Industry Context
This settlement is part of a larger trend of increased regulatory scrutiny of Canadian banks by U.S. authorities [3]. In 2024, TD Bank Group faced a $3 billion penalty for anti-money laundering oversight failures, while RBC’s City National division received a $65 million fine for systemic deficiencies in risk management [3][7]. The SEC has established a fair fund to distribute the settlement amounts to investors harmed by BMO’s practices [2].