According to the SEC’s order, 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. 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 found that the broker-dealer’s supervisory policies and procedures did not include guidance concerning the structure and sale of these bonds. BMO also did not 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.

“It is critical that firms have supervisory processes that are customized to their business units. 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,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement.