UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38917 / August 11, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9359 ______________________________ : In the Matter of : : ORDER INSTITUTING CEASE-AND-DESIST TIMOTHY J. GUIHEEN, : PROCEEDINGS PURSUANT TO SECTION : 21C OF THE SECURITIES EXCHANGE : ACT OF 1934, MAKING FINDINGS AND Respondent. : ORDERING TO CEASE AND DESIST ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute cease-and-desist proceedings, pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Timothy J. Guiheen ("Guiheen"). In anticipation of the institution of these proceedings, Guiheen has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except for those set forth below in Section II., paragraph A., which are admitted, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.1 et seq., Guiheen, by his Offer, consents to the entry of the findings and the imposition of the sanctions set forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Section 21C be, and hereby are, instituted. II. On the basis of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("Order"), and the Offer submitted by Guiheen, the Commission finds that:<(1)> <(1)> The findings herein are made pursuant to Guiheen's Offer and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== A. Respondent Timothy J. Guiheen ("Guiheen"), age 61, was President and Chief Executive Officer ("CEO") of the Stock Clearing Corporation of Philadelphia ("SCCP") and the Philadelphia Depository Trust Company ("Philadep") from July 1985 to February 28, 1997, when he resigned. As part of his severance agreement with SCCP and Philadep, Guiheen will continue to serve as a part- time special advisor to the Chief Operating Officer of the Philadelphia Stock Exchange ("PHLX") through December 31, 1998. B. Related Entities Stock Clearing Corporation of Philadelphia is a wholly-owned subsidiary of the PHLX. Since 1983, SCCP has been registered with the Commission as a clearing agency pursuant to Section 17A of the Exchange Act. Pursuant to Sections 3(a)(26), 17A(a)(2) and 19 of the Exchange Act, SCCP is a self regulatory organization ("SRO"). SCCP offers a wide range of clearing services, including trade recording, trade comparison, continuous net settlement ("CNS") and trade-for-trade settlement, margin financing, stock borrowing and lending, money settlement, and clearance and settlement with other clearing agencies through the Regional Interface Organization ("RIO"). Philadelphia Depository Trust Company is also a wholly-owned subsidiary of the PHLX. Since 1983, Philadep has been registered with the Commission as a clearing agency pursuant to Section 17A of the Exchange Act. Pursuant to Sections 3(a)(26), 17A(a)(2) and 19 of the Exchange Act, Philadep is an SRO that offers its participants a wide range of depository services, including custodial services, deposit and transfer services, confirmation, affirmation, book-entry settlement, and settlement with other clearing agencies through inter-depository interfaces. C. Background As SROs, SCCP and Philadep are rule-based organizations that are required to operate by and enforce their own rules and procedures, as approved by the Commission, and the federal securities laws. Pursuant to Section 19(g)(1) of the Exchange Act, both SCCP and Philadep are obligated to comply with the provisions of the Exchange Act, and the rules and regulations thereunder. SCCP and Philadep are also obligated under Section 19(g)(1) to comply with their own rules and to enforce compliance with those rules by their respective participants. Section 19(b) of the Exchange Act sets forth the procedure by which an SRO shall make a proposed rule change. Filings with respect to proposed rule changes by an SRO are to be made on Form 19b-4. Once filed, Form 19b- 4 may be amended by an SRO by letter, based upon comments made by Commission staff. Ultimately, a final Form 19b-4 filing is made publicly available and reviewed by the Commission. The final filing forms the basis for a Commission approval order, issued pursuant to Section 19(b)(2). While the approval order does not typically recite all of the conditions and procedures that are set forth in the final filing by the SRO, the order ======END OF PAGE 3====== approves the proposed rule change, as described in the final filing, including all of the material procedures and requirements set forth therein. Once approved, the proposed rule change described in a final 19b- 4 filing, as amended, is a rule of the SRO within the meaning of Section 3(a)(27) and (28), for the purpose of Section 19(g)(1) of the Exchange Act. In those instances, described below, where SCCP and/or Philadep (i) failed to make a required fee filing with the Commission, (ii) established a new category of participants and a new service, or (iii) filed a proposed rule change that was not accurate, SCCP and/or Philadep violated Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder. D. SCCP's and Philadep's Failure to Collect Minimum Participants' Fund Deposits Industry conversion to same day funds settlement ("SDFS") occurred on February 22, 1996. SDFS refers to payment in funds that are immediately available and generally are transferred by electronic means. In order to implement SDFS, SCCP and Philadep filed proposed rule changes with the Commission pursuant to Section 19(b) and Rule 19b-4 ("SDFS filings"). SCCP and Philadep proposed in their SDFS filings, the establishment of a minimum participants' fund deposit of $10,000 for each entity. In addition, SCCP's and Philadep's initial SDFS filings defined "inactive participants" as those participants with less than $100 of average monthly billing and proposed that a Philadep inactive participant who was also a SCCP participant would not be required to make the required $10,000 per entity minimum participants' fund deposit. Instead, the SDFS filings proposed an allocation feature which allowed inactive participants to meet their minimum participants' fund deposit requirement by depositing only $10,000 into SCCP's clearing fund; SCCP would then allocate $5,000 of this amount to Philadep's participants' fund ("inactive participants formula"). SCCP's and Philadep's initial SDFS filings, filed in November 1995, would have established a new class of participants (i.e., inactive accounts) and a new service (i.e., limited clearance and settlement services with a lower participants' fund deposit requirement). In December 1995, SCCP and Philadep received a letter from the Commission's Division of Market Regulation ("Market Regulation") which, among other things, discussed the fact that no allocation should be made from the participants' fund of one entity to the participants' fund of the other entity for the purposes of meeting the minimum required deposit and that deposit requirements must be applied uniformly to all participants. The letter explicitly stated that there should be no exceptions for inactive participants. Thereafter, on February 5, 1996, SCCP and Philadep filed an amendment to their initial SDFS filings removing the inactive participants formula. The Commission's February 22, 1996 Order approving SCCP's and Philadep's final SDFS filings did not contain such a formula. Nonetheless, beginning on February 22, 1996, SCCP and Philadep applied the inactive participants formula which had been deleted from their final SDFS filings, resulting in the failure to collect the minimum participants' fund contribution required by their respective Rules (totalling approximately $600,000). ======END OF PAGE 4====== Between February and May 1996, SCCP and Philadep engaged in discussions with the Commission staff regarding the required deposits. Subsequently, on May 8, 1996, SCCP and Philadep filed a proposed rule change with the Commission to establish the inactive participants formula with certain safeguards not previously included in the SDFS filing. The Commission approved the proposed rule change on August 9, 1996. As a result of the matters set forth above, during the period from approximately February 22, 1996 to August 9, 1996, SCCP and Philadep failed to comply with their own procedures concerning minimum participants' fund deposits, as set forth in their final SDFS filings, in violation of Section 19(g)(1) of the Exchange Act. Guiheen knew or should have known that SCCP and Philadep should have removed the inactive participants formula from their SDFS filings. He also knew or should have known that SCCP and Philadep continued to apply the inactive participants formula in violation of the minimum cash contribution established by the SCCP and Philadep Boards. As president and CEO of SCCP and Philadep, Guiheen had the requisite authority and ability to instruct SCCP and Philadep to stop applying the unapproved inactive participants formula and to apply the established formula. Based on the foregoing, Guiheen was a cause of SCCP's and Philadep's failure to comply with their own procedures concerning minimum participants' fund deposits, as set forth in their final SDFS filings, in violation of Section 19(g)(1) of the Exchange Act. E. SCCP's and Philadep's Failure to Separate and Segregate Participants' Funds Both SCCP's and Philadep's Rules 4 require that: "The assets in the Participants fund shall be held separately from the Corporation's other corporate assets." Commencing in December 1995, the Commission staff repeatedly notified SCCP and Philadep that both entities were required under their rules to maintain the assets of their respective participants' funds separate from other corporate assets, and that separate bank accounts containing solely their respective participants' funds were required. SCCP and Philadep did not completely separate and segregate their respective participants' funds until June 17, 1996. As a result, during the period from at least December 1995 to June 16, 1996, SCCP and Philadep failed to comply with their respective Rules 4, in violation of Section 19(g)(1) of the Exchange Act. Guiheen knew or should have known, by early March 1996, of the Commission staff's instruction to SCCP and Philadep to separate the participants' funds from each other and from other corporate assets, and that they had not done so. Guiheen signed an April 22, 1996 letter to the Commission staff stating that SCCP and Philadep had separated and segregated their participants' funds. In fact, SCCP and Philadep had not done so. Other than relying on information provided by his staff that SCCP and Philadep had complied with the Commission staff's request, Guiheen did not take steps to verify independently that SCCP and Philadep had done so. ======END OF PAGE 5====== Had Guiheen done so, he would have discovered that, in fact, SCCP and Philadep had not separated and segregated their participants' funds. Guiheen, as the president and CEO of SCCP and Philadep, had the requisite authority and ability to instruct SCCP and Philadep to separate and segregate the participants' funds. As a result, Guiheen was a cause of SCCP's and Philadep's failure to comply with their respective Rules 4, in violation of Section 19(g)(1) of the Exchange Act. F. SCCP's Use of Inaccurate Pricing to Determine Mark-to-Market Pursuant to SCCP's Rule 15, all valued positions of participants settling in continuous net settlement ("CNS") must be marked to the market using the "current market price." The Rule requires that: [SCCP] may at any time demand that a clearing member mark to the prevailing market price, any security due [SCCP] from such clearing member of any security due such clearing member from [SCCP]. All valued positions of clearing members settling in CNS will be automatically marked to the market [using] . . . the current market price. During the period from at least early 1991 until April 26, 1996, SCCP failed to use the current market price when marking-to-the-market certain of its participants' valued positions consisting of certain over-the- counter securities. During this time period, with respect to certain securities, SCCP operated its clearance and settlement system with the use of two-day old, rather than current market (during this time period, one- day old) pricing information. As a result, during this period, SCCP did not pay or collect correct mark-to-market payments to/from certain of its participants. As a result, during the period from approximately early 1991 to April 26, 1996, SCCP failed to comply with its Rule 15 by failing to mark-to-market utilizing current market prices for certain securities, in violation of Section 19(g)(1) of the Exchange Act. Guiheen knew or should have known that in 1991 and, again in 1993, the PHLX internal audit department concluded that SCCP was using two-day old pricing information in calculating its settlement with two participants. Although SCCP had developed internal procedures designed to manage settlement differences between SCCP and two participants, generated because of SCCP's use of two-day old pricing information, Guiheen knew or should have known that SCCP's use of two-day old pricing information could not be corrected without a major reconstruction of SCCP's clearance and settlement system. Guiheen, as the president and CEO of SCCP and Philadep, was ultimately responsible for ensuring that SCCP and Philadep used accurate pricing in calculating mark-to-market payments for all transactions. Based on the foregoing, Guiheen was a cause of SCCP's failure to comply with its Rule 15, in violation of Section 19(g)(1) of the Exchange Act. G. Philadep's Application of a Volume Discount Fee Without Obtaining Board Approval ======END OF PAGE 6====== Pursuant to Philadep Rule 19: "Each Participant shall pay such fees and charges to the Corporation as shall be specified in the Procedures and approved by the Board of Directors . . .." Pursuant to the provisions of Section 19(b) of the Exchange Act, fee changes must be filed with the Commission and become effective upon filing. In or about June 1992, Philadep implemented a volume discount fee charged to a participant that had not been approved by the Philadep Board of Directors or filed with the Commission. This discounted fee was finally approved by the Philadep Board in June 1995 and filed with the Commission in July 1995. As a result, from approximately June 1992 to June 1995, Philadep failed to comply with its Rule 19, in violation of Section 19(g)(1) of the Exchange Act. In addition, when Philadep altered its approved fee schedules by implementing the volume discount, it was required to file a proposed rule change with the Commission. Philadep's failure to do so violated Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder. Guiheen authorized Philadep's senior vice president for marketing to present the proposed volume discount fee to the participant. Guiheen knew or should have known that the discounted fee was being implemented, despite the fact that it had not yet been approved by the Philadep Board or filed with the Commission. Guiheen, as the president and CEO of SCCP and Philadep, was ultimately responsible for assuring that Board approval for the volume discount was obtained and for assuring that the fee was filed with the Commission before its implementation. Based on the foregoing, Guiheen was a cause of Philadep's failure to comply with its Rule 19, in violation of Section 19(g)(1) of the Exchange Act. In addition, when Philadep altered its approved fee schedules by implementing the volume discount, it was required to file a proposed rule change with the Commission. Thus, Guiheen also was a cause of Philadep's failure to file the required rule change, resulting in its violation of Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder. ======END OF PAGE 7====== III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer submitted by Guiheen. Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Guiheen cease and desist from causing any violations and any future violations of Sections 19(b) and 19(g) of the Exchange Act. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 8======