By Robb M. Stewart


Bank of Montreal will pay more than $40 million to settle charges by the U.S. Securities and Exchange Commission that the big Canadian lender failed to supervise employees who sold mortgage-backed bonds that were misleading.

BMO Capital Markets, without admitting or denying the commission's findings, agreed to an order that requires it to pay about $19.4 million in disgorgement, $2.2 million in pre-judgement interest and a $19 million civil penalty, the regulator said Monday.

The SEC order establishes a fund that will distribute the money to investors that it found were harmed.

A spokesman for BMO said the company was pleased to put the matter behind it. "We hold ourselves to the highest standards of fair and ethical conduct, and continuously review and enhance our controls and supervisory framework," the spokesman said.

The commission alleged that BMO employees from December 2020 until May 2023 sold mortgage-backed bonds using offering sheets and bond metrics that were misleading and didn't accurately describe the characteristics of the collateral backing the bonds.

The SEC's order found BMO representatives structured mixed-collateral bonds backed by pools of residential mortgages, using a "small sliver of higher-interest mortgages," in a way that caused the systems of third-party data providers to generate inaccurate information about the bonds' overall composition. It alleged BMO then sent misleading metrics about the bonds to customers, even though its representatives should have known they were misleading.

In about two and a half years, BMO sold $3 billion worth of these bonds, which are known as Agency CMO Bonds, and the SEC's order claimed that the broker-dealer's supervisory policies and procedures didn't include guidance concerning the structure and sale of these bonds. The SEC said BMO also didn't have a process for reviewing the type of information firm representatives shared with customers about the bonds or a process for reviewing bond structures against marketing communications.


Write to Robb M. Stewart at robb.stewart@wsj.com


(END) Dow Jones Newswires

01-13-25 1035ET