Two U.S divisions of the Bank of Montreal have agreed to pay almost US$38-million to clients for failing to disclose conflicts of interest when selling certain in-house investment funds.
The U.S. Securities and Exchange Commission said on Friday that BMO Harris Financial Advisors Inc. and BMO Asset Management Corp. have agreed to pay the money to settle charges regarding their failure to tell clients about how they selected investments in their retail investment advisory program.
Known as the managed asset allocation program (MAAP), the two advisory firms invested approximately 50 per cent of client assets in proprietary funds, resulting in additional management fees being paid to BMO Asset Management, and which, in some cases, caused lower investment returns for clients.
“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,” C. Dabney O’Riordan, co-chief of the SEC enforcement division’s asset management unit, said in a statement.
“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,” he said.
A spokesperson for the Bank of Montreal said the bank has “enhanced” its conflict-of-interest disclosures and processes for identifying and addressing conflicts.
“We are pleased to have resolved this matter with the SEC,” BMO said in an e-mail statement. “We have a strong culture of compliance and a robust control framework that fully meets legal and regulatory requirements.”
The SEC also found that BMO Harris failed to disclose its conflicts of interest when investing client assets in more expensive class shares of certain mutual funds when lower-cost share classes were available, including funds managed by BMO Asset Management.
“By selecting the higher-cost share classes, BMO Harris received revenue sharing payments and avoided paying certain transaction costs, while clients received lower returns on these investments,” the SEC said.
BMO agreed to repay US$29.73-million including interest, and a civil penalty of US$8.25 million, amounts which will be distributed to harmed investors.
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