SEC Charges Broker-Dealer, CEO With Net Capital Rule Violations
March 27, 2018
File No. 3-18409
March 27, 2018 – The Securities and Exchange Commission today announced settled charges against a New York-based broker-dealer and its CEO and founder for violating an SEC rule designed to protect customer assets held in brokerage accounts.
The net capital rule is a key component for investor protection, requiring broker-dealers to maintain sufficient liquid assets to meet all obligations to customers and counterparties and have adequate additional resources to wind down its business in an orderly manner if the firm fails financially. According to the SEC's order instituting settled administrative and cease-and-desist proceedings, between September 2015 and July 2016, JH Darbie & Co., Inc. repeatedly violated the net capital rule by failing to maintain sufficient net capital. JH Darbie failed to accrue certain liabilities on its books and records, and misclassified certain assets when performing its net capital calculations. JH Darbie further misidentified its minimum net capital requirement. Robert Rabinowitz, the firm's founder, CEO, and financial and operations principal (FINOP), was involved in discussions about the firm's unaccrued legal liabilities, and was aware of the misclassified assets, yet prepared JH Darbie's erroneous net capital calculations.
The SEC's order finds that JH Darbie willfully violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-3 and 17a-5 thereunder. The order further finds that Rabinowitz caused each of JH Darbie's violations and willfully made or caused to be made false statements in JH Darbie's financial reports filed with the Commission. Without admitting or denying the SEC's findings, JH Darbie consented to a cease-and-desist order, to be censured, and to pay a civil penalty of $50,000. In addition, JH Darbie agreed to hire a new FINOP for at least three years. Rabinowitz, also without admitting or denying the SEC's findings, consented to a cease-and-desist order and to pay a civil penalty of $25,000. Rabinowitz further agreed to not serve as a FINOP for three years and to take and pass the required licensing examination prior to resuming duties as a FINOP.
The SEC's investigation was prompted by an examination conducted by the SEC's broker-dealer examination program in New York.