Grandmother Test Applied – FINRA Sanctions for Conversion of Customer Securities Upheld

Mission Securities, Corp., Craig M. Biddick, Exchange Act Rel. 63453, December 7, 2010

Time since appeal filed - 8 months 6 days
Time since last brief - 4 months 26 days

FINRA found that Mission and Biddick, a rep at the firm converted customer securities. Mission was expelled and Biddick barred. Joint disgorgement of $38,000 plus interest was also ordered. The facts were not disputed. Mission and Biddick transferred securities from customer accounts without notice or authorization and used a portion of the proceeds to pay the firm's expenses. The Commission rejected the defense claims that the accounts had been abandoned, the appropriated stock was worthless, and the firm had been paying safekeeping fees on behalf of the customer accounts. It found the record did not support these arguments.

Contrary to the abandonment claim, several customers testified that they had not in fact abandoned their accounts and received no notice of the conversion of their securities. Needless to say, the assertion the stock was worthless was belied by the fact that the proceeds from its sale were used by the firm to pay operating expenses.

Respondents also claimed that FINRA is unconstitutional on separation of powers grounds, citing Free Enterprise Fund v. Public Company Accounting Oversight Board, 130 S. Ct. 3138 (2010). The Commission noted that the court distinguished the PCAOB from self regulatory organizations like FINRA.

In upholding the sanctions the Commission noted the stunningly obvious - by deliberately converting customer property to pay for firm expenses and then attempting to conceal the misconduct respondents should not be licensed to handle other people's money. This invocation of the "grandmother test" (would you want this person to handle your grandmother's money?) was not surprising.

Read more commentary on SEC administrative opinions at SEC Tea Party, a blog by Robert Fusfeld.