BMO Managing Director Dismissed Over SEC Mortgage-Bond Probe

The Securities and Exchange Commission (SEC) has charged BMO Capital Markets Corp., a subsidiary of the Bank of Montreal (BMO), with failing to supervise its employees involved in the sale of misleading mortgage-backed bonds. As a result of the charges, the managing director responsible for the Agency CMO desk has been dismissed. The SEC's order found that BMO's supervisory policies and procedures were not reasonably designed or implemented to prevent and detect the violations.



Between December 2020 and May 2023, BMO representatives structured mixed collateral bonds backed by pools of residential mortgages, using a small sliver of higher-interest mortgages. This manipulation caused third-party data systems to generate inaccurate metrics about the bonds' overall composition, which were then presented to customers. The SEC found that BMO's supervisory framework was inadequate, lacking specific guidance for employees selling these complex securities and failing to implement procedures to review marketing communications for accuracy.

To settle the charges, BMO agreed to pay over $40 million in disgorgement, prejudgment interest, and a civil penalty. The settlement includes:
- $19,417,908 in disgorgement
- $2,241,507 in pre-judgment interest
- A $19 million civil penalty

The SEC's order establishes a fair fund for the distribution of these funds to harmed investors. The managing director's dismissal sends a strong message that BMO is taking the matter seriously and is committed to addressing the issues raised by the SEC. However, the incident has raised concerns about the bank's reputation and investor confidence in its risk management practices.

In response to the incident, BMO has stated that it holds itself to the highest standards of fair and ethical conduct and continuously reviews and enhances its controls and supervisory framework. The bank has also agreed to implement several improvements to its supervisory processes, including strengthening its policies and procedures around the offering and sale of Agency CMO bonds, with the help of an outside consultant. These enhancements include a pre-approval process for certain collateral blends and enhanced scenario-based training for registered representatives focused on novel bond structures and escalation of complaints and potential issues.

The incident has also sparked renewed criticism of Canada's banking system, which is characterized by heavy consolidation. Critics argue that this limited competition fosters complacency and even misconduct. The SEC's enforcement action highlights the importance of having supervisory processes that are customized to business units and the need for institutions to review and enhance their processes for ensuring the accuracy and completeness of marketing materials related to mortgage-backed securities.

In conclusion, the dismissal of the managing director at BMO Capital Markets Corp. has significant implications for the bank's reputation and investor confidence in its risk management practices. The settlement of over $40 million and the associated negative publicity could have long-term financial implications for BMO, both in terms of the immediate financial burden of the settlement and the potential impact on the bank's reputation and investor relations. The incident also highlights the importance of robust internal controls and the need for financial institutions to maintain a strong commitment to ethical conduct and transparency in their business practices.