An SEC investigation found that Latour Trading LLC operated without maintaining its required minimum net capital on 19 of 24 reporting dates during a two-year period, and the firm missed the mark by large amounts ranging from $2 million to $28 million. During this period, Latour’s trading at times accounted for as much as 9 percent of the trading volume in equity securities for the entire U.S. market.

To settle the SEC’s charges, Latour agreed to pay a $16 million penalty, the largest ever for violations of the net capital rule. The previous high was $400,000 in an enforcement action in 2004. Nicolas Niquet, Latour’s chief operating officer when the series of violations began, agreed to pay a $150,000 penalty to settle the charges against him. Said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement:  This record sanction reflects the seriousness of Latour’s violations of the net capital rule, which is a critical broker-dealer financial responsibility requirement. We also will aggressively pursue executives who cause the violations.

According to the SEC’s order instituting a settled administrative proceeding, a crucial step for a broker-dealer when calculating its net capital is to take percentage deductions referred to as “haircuts” from the firm’s proprietary securities and other positions. The purpose of these haircut deductions as prescribed in the net capital rule is to account for the market risk inherent in a firm’s positions and create a buffer of liquidity to protect against other risks associated with the securities business. A failure to calculate proper haircuts can inflate a broker-dealer’s net capital.
The SEC’s order finds that Latour repeatedly miscalculated its net capital amounts in 2010 and 2011 by failing to make proper haircut deductions from the market value of its proprietary securities positions and other positions.