BMO Pays $41M to Settle SEC Charges of Failing to Supervise ‘Sliver Bond’ Sales

According to the regulator, firm employees used misleading metrics to sell mortgage-backed bonds.

 




BMO Capital Markets has agreed to pay nearly $41 million to settle U.S. Securities and Exchange Commission charges that it failed to supervise employees who sold mortgage-backed bonds using offering sheets and bond metrics that were misleading.

According to the SEC’s order, over the course of two and a half years, BMO employees sold mortgage-backed bonds using offering sheets and bond metrics that did not accurately describe the characteristics of the collateral backing the bonds.

According to the SEC, BMO representatives used a small sliver of higher-interest mortgages in mixed collateral bonds that caused third-party data providers to generate inaccurate information about the securities’ overall composition. For example, millions of dollars of mortgages from lower-interest mortgage pools were combined with just $1,000 worth of mortgages from higher-interest rate mortgage pools. According to the order, the financial services company sold more than $3 billion worth of the “sliver bonds,” known as Agency CMO bonds, during the time the alleged violations took place.

BMO’s “supervisory policies and procedures were not reasonably designed or implemented with a view towards preventing and detecting the violations,” according to the order.

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Agency CMO bonds are multi-class mortgage-backed securities created by pooling residential mortgages into trusts and issuing bonds that pay a rate of return to investors based on principal and/or interest payments made on the mortgages. According to the SEC, Agency CMO bonds are issued by Fannie Mae, Freddie Mac and Ginnie Mae and therefore considered relatively low-risk investments.

According to the SEC, BMO’s supervisory policies and procedures did not include guidance about the structure and sale of the bonds, and the firm did not have a process for reviewing the type of information representatives shared with customers about the bonds, nor did it have a process for reviewing bond structures against marketing communications.

“It is critical that firms have supervisory processes that are customized to their business units,” Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, said in a statement. “Had BMO appropriately tailored its supervision of the Agency CMO desk’s marketing of new-issue mortgage-backed securities, it might have stopped its employees from continuing to use these misleading practices.”

Without admitting or denying the SEC’s charges, BMO agreed to an order requiring it to pay more than $19.4 million in disgorgement, more than $2.2 million in pre-judgment interest and a $19 million civil penalty. The order also establishes a fair fund to distribute the disgorgement to affected investors.


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