TORONTO — The U.S. Securities and Exchange Commission says BMO has agreed to pay more than US$40 million to settle charges related to the bank's alleged supervision failure in bond selling.
The regulator said Monday the apparent lack of oversight allowed employees in the BMO Capital Markets division to allegedly sell residential mortgage-backed bonds using misleading metrics.
According to the SEC order, adding a small amount of higher-interest paying mortgages to the backing pool would distort how the collateral was reported by third-party data providers.
It says adding just US$1,000 worth of higher-interest paying mortgages to millions of dollars of lower-paying mortgages would make it seem like the bond was backed by a large amount of the more attractive, higher interest rate mortgages.
The SEC alleges BMO sold US$3 billion worth of bonds with such a structure between December 2020 and May 2023, without proper guidance to employees concerning the structure and sale of the bonds. It says BMO also didn't have a process to review what kind of information representatives shared with customers about the bonds.
"It is critical that firms have supervisory processes that are customized to their business units," said Sanjay Wadhwa, acting director of the SEC’s division of enforcement, in a statement.
While BMO agreed to pay US$19.4 million in disgorgement, US$2.2 million in interest and a US$19-million civil penalty, it did not admit or deny the SEC's findings.
BMO spokesman Jeff Roman said the bank is pleased to have 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," he said in a statement.
The penalty is the latest example of U.S. regulators levelling substantial fines against Canadian banks, with the most notable being the more than US$3 billion that TD Bank Group paid last year for anti-money laundering oversight failures.
The U.S. Consumer Financial Protection Bureau also fined TD US$28 million last year for allegedly providing inaccurate, negative credit information to credit agencies.
RBC's City National division also got hit with a US$65-million fine last year by the U.S. Office of the Comptroller of the Currency, related to alleged systemic deficiencies in the bank’s risk management and internal controls.
Canadian banks have also been swept up in the billions of dollars in fines regulators imposed last year over failures to keep communications records, often because of the use of third-party messaging platforms like WhatsApp.
The size of the fines against Canadian banks in the U.S. has also drawn attention to the limited fines Canadian regulators are able to impose.
Where the U.S. was able to charge US$500,000 per day for the years TD failed to properly oversee its anti-money laundering program, Canadian regulators are only able to charge $500,000 total per violation.
The federal government proposed in the fall economic statement to boost anti-money laundering fines to either $20 million per violation or three per cent of annual worldwide gross revenue, whichever is higher.
For TD, which reported $57.2 billion in revenue last year, three per cent would be $1.72 billion.
It's unclear what the future of the proposed fine increases is given the political turmoil in Ottawa.
This report by The Canadian Press was first published Jan. 13, 2025.
Companies in this story: (TSX:BMO, TSX:TD)
Ian Bickis, The Canadian Press
