A pair of Bank of Montreal (BMO) entities were hit with a $37 million fine from the Securities and Exchange Commission for failing to disclose conflicts of interest related to allocating clients to higher-cost share class proprietary funds.
BMO Harris Financial Advisors and BMO Asset Management agreed to the fine without acknowledging or denying wrongdoing, according to an SEC order filed on Friday. The SEC argued that BMO Harris offered clients a chance to invest in mutual funds via its Managed Asset Allocation Program (MAAP), with BMO Asset Management evaluating and selecting the funds.
Included in the collection were several proprietary funds directly managed by BMO Asset Management, and BMO Harris advisors allegedly invested 50% of their client assets into these higher-cost share class proprietary funds. In doing so, BMO Asset Management pocketed additional management fees, while BMO Harris advisors got compensation through revenue sharing arrangements and avoided transaction costs that may have been necessary if they invested in lower-cost share class funds, according to the order.
Between July 2012 and March 2016, the firms routinely failed to tell clients about this conflict, according to the order.
“These BMO advisers repeatedly put their own financial interests ahead of clients, by giving preference to their own mutual funds or selecting higher-cost share classes,” said C. Dabney O’Riordan, the co-chief for the SEC Enforcement Division’s Asset Management Unit. “This is important information for an adviser to tell clients as it goes to the heart of the adviser-client relationship and will impact the clients’ returns.”
According to the order, BMO Asset Management had $36.8 billion in total assets under management (AUM) as of March 2019. As of March 31, 2016, $1.4 billion of MAAP’s total AUM of $2.7 billion was made up of proprietary funds. While the order indicated that BMO Asset Management typically selected lower-cost institutional share classes of nonproprietary funds for inclusion in MAAP, the firm always selected its proprietary funds to be included.
In addition to failing to disclose conflicts in picking higher-cost share class funds that would financially benefit advisors, the SEC also argued BMO Harris advisors failed to meet their fiduciary duty by opting for expensive mutual funds when more affordable options were available.
On Sept. 16, the SEC announced that BMO Capital Markets would pay $1.95 million for allegedly failing to provide accurate “blue sheet data” to the SEC over a period of years; the SEC order claimed it was likely due to “undetected coding errors.” In all, the SEC found the firm submitted missing or incorrect data about approximately 5.4 million transactions in total.
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