by Howard Haykin

Sterne, Agee & Leach agreed to a $160K fine to settle FINRA charges that it failed to establish and maintain adequate supervision over the activities and spending of its chief executive officer.

BACKGROUND.    Sterne Agee, based in Birmingham, AL, has been a FINRA member firm since 1936. The Firm, which is also a member of the MSRB, conducts a general securities business through its 92 registered reps operating out of 8 branch offices. During the timeframe of this case, Sterne Agee & Leach was wholly owned by the Sterne Agee Group (“SAG”). As such, all matters in this case took place prior to the acquisition of Sterne Agee by Stifel Financial Corp. on 6/5/15, and the subsequent acquisition of Sterne Agee by INTL FCStone on 7/1/16.

James Holbrook, Jr., was Sterne Agee’s President and CEO for many years, including the relevant timeframe of this case – between 6/1/11 and 5/23/14. Holbrook was terminated from those positions by the firm’s Board of Directors on 5/23/14.

FINRA FINDINGS.    Between 6/1/11 and 5/23/14, Sterne Agee failed to adequately supervise the firm’s CEO and his activities – particularly as it concerned the acquisition, use, and expenditure of the firm’s and its parent’s assets and property.

• Sterne Agee did not require Holbrook to follow the firm’s expense reporting procedures on expenditures submitted for reimbursement.
• Sterne Agee permitted Holbrook to determine whether certain benefits that he provided to political figures required reporting to Sterne Agee under MSRB Rule G-37.
• Sterne Agee did not maintain adequate documentation of Holbrook’s use of corporate assets - including jets, yachts and condominiums owned in whole or in part by SAG.

As a result:

• The firm could not ascertain whether Holbrook's use of corporate assets was for business purpose or personal pleasure.
• The firm could not ascertain whether Holbrook’s entertainment and/or contributions to political figures were appropriately reported.
• The firm could not authenticate and verify the business purpose of expenses submitted for reimbursement.
• The firm could not ascertain whether it the firm was in compliance with applicable securities laws and regulations, and with FINRA and MSRB rules.

FINANCIALISH TAKE AWAY.    It’s pretty common for powerful bosses to push back against subordinates who are tasked with monitoring their boss’s activities for compliance with firm policies and industry rules and regulations. That may have been the situation with James Holbrook, Jr., the long-time chief executive of Sterne Agee.

Confronted with such dilemmas, subordinates must choose between:: (i) acceding to the wishes of their boss; (ii) elevating their concerns to another authority at the firm; or, (iii) quitting. None of those options are appealing.

That said, financial services compliance always requires firms to ask: “Who’s supervising the supervisor?” If the boss or supervisor has nothing to hide, he or she will likely welcome oversight - if nothing more than to protect his or her ass. It's also a matter of protecting the firm and its customers.

[For additional commentary on this case, go to ThinkAdvisor’s 2014 article, “Sterne Agee Takes Ex-CEO to Court Over Luxury Spending.”]

This case was reported in FINRA Disciplinary Actions for July 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014041318503.