BMO capital markets corp. has agreed to pay more than US$40 million to settle securities and exchange commission charges over misleading marketing practices in its mortgage-backed securities business, amid broader turmoil in the commercial real estate debt markets.
The SEC found that from December 2020 until May 2023, BMO representatives structured and sold approximately US$3 billion of agency collateralised mortgage obligation Bonds using misleading offering sheets and bond metrics that did not accurately represent the underlying mortgage collateral characteristics.
The settlement comes as the commercial mortgage-backed securities (CMBS) market faces significant headwinds, with the Trepp CMBS delinquency rate climbing to 6.57% in December 2024. Office properties have been particularly affected, with delinquencies reaching a historic high of 11.01%, exceeding previous records set in 2012.
According to the SEC’s order, BMO’s 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.
“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. The regulator found that BMO lacked adequate supervisory policies and procedures for reviewing bond structures against marketing communications.
The enforcement action comes amid broader refinancing challenges in the CMBS market. According to KBRA, only 85.6% of CMBS loans maturing in 2024 were successfully refinanced, down from 94% in 2023, despite record issuance surpassing US$100 billion.
Without admitting or denying the findings, BMO agreed to pay US$19.4 million in disgorgement, US$2.2 million in pre-judgment interest, and a US$19 million civil penalty. The SEC will establish a fair fund to distribute these monies to harmed investors.
The case underscores growing regulatory scrutiny of structured product marketing as the commercial real estate sector grapples with declining property values and higher interest rates, particularly affecting larger loans and office properties.
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