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2 BMO Units Must Pay SEC $37M Over Proprietary Fund Use

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Two BMO advisors agreed to pay more than $37 million to settle charges regarding their failure to tell clients about certain aspects of how the advisors selected investments in their retail investment advisory program, the Managed Asset Allocation Program (MAAP), which included the selection of more expensive investments from which BMO advisors profited.

According to the SEC’s order, when selecting investments for clients, BMO Harris Financial Advisors, Inc. (BMO Harris) and BMO Asset Management Corp. preferred mutual funds managed by BMO Asset Management and invested approximately 50% of MAAP client assets in those proprietary funds.

The practice resulted in payment of additional management fees to BMO Asset Management.

However, the SEC’s order found that neither BMO advisor disclosed this practice or the associated conflict of interest to clients.

Moreover, according to the SEC’s order, when considering mutual funds for MAAP, BMO Asset Management “evaluated the lower-cost institutional share class for both proprietary and non-proprietary funds, but the higher-cost, non-institutional share class for proprietary mutual funds always was selected for MAAP.”

The SEC also found that BMO Harris failed to disclose its conflicts of interest arising from investing MAAP client assets in higher-cost share classes of certain mutual funds, including proprietary funds, when lower-cost share classes were available.

“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 agency stated.

C. Dabney O’Riordan, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement that the BMO advisors “repeatedly put their own financial interests ahead of clients by giving preference to their own mutual funds or selecting higher-cost share classes. 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.”

The SEC’s order finds that BMO Harris and BMO Asset Management willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.

Without admitting or denying the SEC’s findings, the advisors agreed to cease and desist from committing or causing any future violations of these provisions, to pay disgorgement and prejudgment interest of $29.73 million, and to pay a civil penalty of $8.25 million, amounts that will be distributed to harmed investors, and to be censured.

— Check out SEC Hits 17 More Advisors in 12b-1 Fee Crackdown on ThinkAdvisor.