SEC issues highest-ever fine for violating net capital rule

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An SEC investigation found Latour operated without maintaining its required minimum net capital on 19 of 24 reporting dates during a two-year period.

The firm missed the mark by large amounts – from $2 million to $28 million. At the same time, Latour’s trading accounted for as much as 9% of the trading volume in equity securities for the entire U.S. market.

Latour has agreed to pay the record-breaking penalty to settle the charges. Previously, the highest fine ever was $400,000 in a 2004 enforcement action.

Nicolas Niquet was Latour’s chief operating officer when the violations began, and the SEC has charged him with causing them. He’s agreed to pay a $150,000 penalty to settle the charges.

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A crucial step for a broker-dealer when calculating its net capital is to take percentage deductions (known as haircuts) from the firm’s proprietary securities and other positions, state SEC rules. The purpose is to account for the market risk inherent in a firm’s positions and create a buffer of liquidity to protect against other risks. Failure to calculate proper haircuts can inflate a broker-dealer’s net capital.

The SEC says Latour repeatedly miscalculated its net capital amounts in 2010 and 2011 by failing to make proper haircuts. Latour incorrectly used hypothetical positions the firm didn’t actually hold to create hedges and capitalize qualified stock baskets. Latour also used inaccurate index composition data for certain international ETFs the firm traded. The combined use of hypothetical positions and inaccurate index composition data resulted in haircuts that were generally far too low when calculating the firm’s net capital.

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The firm also failed to calculate minimum capital charges on all of its futures positions, and excluded some positions from taking any haircut at all due to a computer programming error. Niquet designed the computer code that facilitated Latour’s haircut calculations and caused its net capital violations.

The SEC also found Latour’s net capital violations resulted in violations of the books and records and financial reporting provisions of the federal securities laws.

Without admitting or denying the findings, Latour and Niquet agreed to pay the financial penalties as well as cease and desist from committing or causing any future violations of the securities laws.

The SEC’s Enforcement Division collaborated with the Division of Trading and Markets as well as the National Exam Program.