Recent experiments with brain-machine-interfaces (BMIs) indicate that the extent of neural modulations increased abruptly upon starting to operate the interface, and especially after the monkey stopped moving its hand. In contrast, neural modulations that are correlated with the kinematics of the movement remained relatively unchanged. Here we demonstrate that similar changes are produced by simulated neurons that encode the relevant signals generated by an optimal feedback controller during simulated BMI experiments. The optimal feedback controller relies on state estimation that integrates both visual and proprioceptive feedback with prior estimations from an internal model. The processing required for optimal state estimation and control were conducted in the state-space, and neural recording was simulated by modeling two populations of neurons that encode either only the estimated state or also the control signal. Spike counts were generated as realizations of doubly stochastic Poisson processes with linear tuning curves. The model successfully reconstructs the main features of the kinematics and neural activity during regular reaching movements. Most importantly, the activity of the simulated neurons successfully reproduces the observed changes in neural modulations upon switching to brain control. Further theoretical analysis and simulations indicate that increasing the process noise during normal reaching movement results in similar changes in neural modulations. Thus we conclude that the observed changes in neural modulations during BMI experiments can be attributed to increasing process noise associated with the imperfect BMI filter, and, more directly, to the resulting increase in the variance of the encoded signals associated with state estimation and the required control signal.