(Recasts; adds accusations, BMO statement, byline)

By Jonathan Stempel

NEW YORK, Jan 13 (Reuters) - A unit of Bank of Montreal ( BERZ )

agreed to pay $40.7 million to settle U.S. Securities

and Exchange Commission charges that it failed to supervise

employees who misled investors about the attractiveness of

mortgage-backed bonds the bank was selling.

The settlement announced by the SEC on Monday includes a $19

million civil fine.

It resolves charges that BMO Capital Markets employees used

offering sheets and metrics that inaccurately described

collateral backing more than $3 billion of so-called Agency CMO

bonds from Dec. 2020 to May 2023.

Agency CMO bonds are backed by pools of residential

mortgages, and issued by Fannie Mae, Freddie Mac and Ginnie Mae.

They are considered low risk because of guarantees of principal

and interest payments or other government support.

The SEC said BMO structured some bonds with a sliver, often

just $1,000, of mortgages with higher interest rates, in a way

that suggested the bonds were backed by large amounts of the

mortgages, making them more appealing to investors.

BMO did not admit or deny wrongdoing in agreeing to settle.

Its payment includes the $19 million fine, $19.42 million of

disgorgement and $2.24 million of interest. BMO also agreed to a

censure.

In a statement, it said: "We hold ourselves to the highest

standards of fair and ethical conduct, and continuously review

and enhance our controls and supervisory framework. We're

pleased to have this matter behind us."

According to the regulator, BMO bankers spoke about changing

the bonds' "cosmetics" to boost sales.

Outsiders noticed, with one market participant complaining

to a BMO banker in June 2022 that the bank was "not selling what

is advertised," the SEC said.