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BMO Capital Markets has agreed to a $40 million settlement with the U.S. Securities and Exchange Commission (SEC) over allegations that the broker-dealer failed to properly supervise employees who provided misleading information about mortgage-backed securities sold between 2020 and 2023, the agency announced Monday.

Misleading Metrics on $3 Billion in Bonds

The SEC’s investigation found that BMO Capital’s bond desk sold $3 billion worth of mortgage-backed securities while disseminating inaccurate information to investors regarding the bonds’ overall composition. According to the SEC, the brokerage’s failure to adequately supervise its employees allowed these practices to persist.

Settlement Details

BMO Capital Markets will pay:

• $19.4 million in disgorgement,
• $2.2 million in pre-judgment interest, and
• A $19 million civil penalty.

In total, the firm will pay $40.6 million to resolve the claims.

SEC Highlights Importance of Supervision

Sanjay Wadhwa, the SEC’s acting enforcement director, emphasized the need for tailored oversight in complex financial operations.

"It is critical that firms have supervisory processes that are customized to their business units," Wadhwa said. "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."

Industry Implications

The settlement underscores the SEC’s commitment to ensuring that broker-dealers maintain robust compliance systems, particularly when dealing with complex financial products like mortgage-backed securities. By penalizing inadequate oversight, the SEC aims to reinforce the importance of accurate investor communications and prevent similar misconduct in the future.

BMO Capital Markets has neither admitted nor denied the SEC’s findings but has agreed to comply with the settlement terms.