BMO Pays $41M to Settle SEC Charges of Failing to Supervise ‘Sliver Bond’ Sales

BMO Capital Markets has agreed to pay nearly $41 million to settle U.S. Securities and Exchange Commission charges that it failed to supervise employees who sold mortgage-backed bonds using offering sheets and bond metrics that were misleading.

According to the SEC’s order, over the course of two and a half years, BMO employees sold mortgage-backed bonds using offering sheets and bond metrics that did not accurately describe the characteristics of the collateral backing the bonds.

According to the SEC, BMO representatives used a small sliver of higher-interest mortgages in mixed collateral bonds that caused third-party data providers to generate inaccurate information about the securities’ overall composition. For example, millions of dollars of mortgages from lower-interest mortgage pools were combined with just $1,000 worth of mortgages from higher-interest rate mortgage pools. According to the order, the financial services company sold more than $3 billion worth of the “sliver bonds,” known as Agency CMO bonds, during the time the alleged violations took place.

BMO’s “supervisory policies and procedures were not reasonably designed or implemented with a view towards preventing and detecting the violations,” according to the order.

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Agency CMO bonds are multi-class mortgage-backed securities created by pooling residential mortgages into trusts and issuing bonds that pay a rate of return to investors based on principal and/or interest payments made on the mortgages. According to the SEC, Agency CMO bonds are issued by Fannie Mae, Freddie Mac and Ginnie Mae and therefore considered relatively low-risk investments.

According to the SEC, BMO’s supervisory policies and procedures did not include guidance about the structure and sale of the bonds, and the firm did not have a process for reviewing the type of information representatives shared with customers about the bonds, nor did it have a process for reviewing bond structures against marketing communications.

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

Without admitting or denying the SEC’s charges, BMO agreed to an order requiring it to pay more than $19.4 million in disgorgement, more than $2.2 million in pre-judgment interest and a $19 million civil penalty. The order also establishes a fair fund to distribute the disgorgement to affected investors.

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Tags: Agency Collateralized Mortgage Obligation Bonds, BMO Capital Markets, bond metrics, CMOs, Sanjay Wadhwa, SEC, Settlement

Jenny Buck

The London CIV, an entity that manages the assets of 32 local government pension funds in the city and boroughs of London, announced on Tuesday the appointment of Jenny Buck as its CIO. Buck will take over the role in early March.

Buck succeeds Aoifinn Devitt, who announced her resignation from London CIV last July and left last November to join registered investment adviser firm Moneta. Prior to Devitt, Jason Fletcher was CIO between 2020 and 2023, and Mark Thompson was CIO in 2019 for less than a month.

London CIV, established in 2015, managed 50.8 billion pounds ($62.5 billion) as of March 31, 2024. It had more than 711,000 beneficiaries across all 32 pension funds at that time. Approximately 65% of the fund’s assets, or 32.8 billion pounds, are managed as part of the pool.

Buck was previously CIO of Tesco Pension Investment Ltd., starting in April 2021. She had held multiple senior roles at the fund since 2011, including head of property, head of private markets and deputy CIO. She was a member of the Tesco fund’s founding leadership team, which grew to more than 100 employees during her tenure. Previously, Buck was the head of global at Schroder Property Investment Management.

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“I am thrilled to be taking on this exciting role and am very much looking forward to working with the team and the partners of the London CIV, who, I know, are all focused on delivering sustainable prosperity for the communities that count on us,” Buck said in a statement.

As CIO of Tesco, Buck oversaw the transition of the fiduciary management of the defined benefit pension to Schroders, which was appointed as the outsourced CIO of the plan in February 2024.

The CIO appointment comes as Rachel Reeves, chancellor of the exchequer, plans to reform the U.K.’s pension system to encourage the consolidation of local plans. Last November, Reeves proposed the consolidation of into a handful of “mega funds”; this could allow the funds to invest in a wider range of assets, including infrastructure.

Reeves wants the pension system of the country to follow the investment styles of Canada’s “Maple 8” public pension funds and Australia’s superannuation system, which include internal management of assets, direct investing and higher allocations to infrastructure, an asset class Reeves wants the U.K.’s pension funds to invest in domestically.

“Given the government’s recent decision to redefine how LGPS pools across England and Wales work together with their partner funds in the coming months and years, Jenny’s appointment comes at a pivotal time for the London LGPS community,” said Dean Bowden, CEO of the London CIV, in a statement.