BMO Division to pay $40.7 million to US SEC for misleading bond sales

By Jonathan Stempel

NEW YORK (Reuters) – A division of Bank of Montreal has agreed to pay $40.7 million to the U.S. Securities and Exchange Commission after it failed to supervise employees who misled investors about the beauty of mortgage-backed bonds the bank sold.

The settlement, announced by the SEC on Monday, includes a $19 million civil penalty.

BMO Capital Markets staff will resolve the fees used by the agency from December 2020 to May 2023, providing spreadsheets and metrics that accurately describe the agency’s more than $3 billion in so-called CMO bonds.

The agency’s CMO bonds are backed by pools of residential mortgages, and are issued by Fannie Mae, Freddie Mac and Ginnie Mae. They are considered low risk because of the principal and interest payments or other government-backed securities.

The SEC said BMO structured some of the bonds into slivers, often as little as $1,000, of mortgages with high interest rates, suggesting the bonds were heavily backed by mortgages, making them more attractive to investors.

BMO neither admitted nor denied wrongdoing in agreeing to settle. The settlement includes a $19 million penalty, $19.42 million in disgorgement and $2.24 million in interest. BMO also agreed to take the blame.

In a statement, he said, “We hold ourselves to high standards of fairness and ethics, and we continually review and improve our regulatory and regulatory framework. We are pleased to have this matter behind us.”

According to the regulator, BMO Banks talked about changing the “cosmetic” of bond sales.

Outsiders took notice, the SEC said, when a market participant complained to BMO Bank in June 2022 that the bank was “not selling what was announced.”

(Reporting by Jonathan Stempel in New York; Editing by Emilia Sitole-Mataris)