Friday, May 15, 2009

BMO faces regulatory sanctions

Posted on the Globe & Mail Streetwise by Andrew Willis:

BMO Nesbitt Burns faces regulatory sanctions for running the investment dealer with a $207-million capital shortfall back in September, 2007.

Investment banking brass are scheduled to attend a settlement hearing next Friday, May 22, over allegations that the firm failed to maintain the proper amount of risk adjusted capital in the fall of 2007. BMO Nesbitt Burns is one of Canada's largest brokerage houses.

The Investment Industry Regulatory Organization of Canada launched an investigation of the alleged capital shortfall 13 months after it happened, in November, 2008, and now a hearing has been called to get IIROC approval of a settlement with the firm.

BMO Nesbitt Burns spokesman could not be reached for comment on the allegations.

In the past, market watchdogs have clashed with other Canadian bank-owned dealers over capital levels. These debates typically focus on the eligibility of certain types of assets as regulatory capital. These are accounting issues, rather than any reflection of solvency problems at the dealers, which have the explicit support of well-capitalized parent banks: BMO Nesbitt Burns is a subsidiary of Bank of Montreal.

Why watchdogs targeted BMO

Next Friday, BMO Nesbitt Burns executives will walk into a private, carpeted boardroom and get a scolding from market watchdogs. No one will have to wear handcuffs, but for investment banking brass in the room, this experience will rank among the low points in their careers.

The Investment Industry Regulatory Organization of Canada has struck a settlement agreement with BMO Nesbitt Burns over allegations that the firm ran without adequate capital in September, 2007. The regulator alleges BMO Nesbitt Burns did business at this time with a capital deficiency of $207-million.

IIROC will gather on May 22 to approve that settlement, which is likely to involve a fine and promises to never, ever make these booboos again.

BMO Nesbitt Burns officials declined comment on specifics of the settlement, but a spokesman for the investment dealer arm of Bank of Montreal did offer up an explanation of what happened:

- This was a matter pertaining to an inadvertent breach of IIROC's Repatriation of Capital rules which resulted in a risk adjusted capital deficiency at BMO Nesbitt Burns in September 2007.

- At no time did this represent a risk to the health and strength of BMO Nesbitt Burns and no client accounts were affected in any way as a result of the incident.

- BMO Nesbitt Burns notified IIROC promptly as to the existence of the issue and co-operated with IIROC staff throughout the investigation.

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