-------------------- BEGINNING OF PAGE #1 ------------------- UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36419 / October 26, 1995 ADMINISTRATIVE PROCEEDING File No. 3-8872 __________________________ : : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTIONS 15(b) LAZARD FRERES & CO. LLC, : AND 21C OF THE SECURITIES EXCHANGE and MERRILL LYNCH, : ACT OF 1934, MAKING FINDINGS AND PIERCE, FENNER & SMITH : IMPOSING REMEDIAL SANCTIONS INCORPORATED : __________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public cease-and- desist proceedings and administrative proceedings be and hereby are instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Lazard Freres & Co. LLC ("Lazard") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). II. In anticipation of the institution of these proceedings, Lazard and Merrill Lynch have each submitted an Offer of Settlement, each of 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 that Lazard and Merrill Lynch each admits the jurisdiction of the Commission over each of them and over the subject matter of these proceedings, Lazard and Merrill Lynch, by their Offers, consent to the issuance of this Order Instituting Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("Order") and to the imposition of the remedial sanctions set forth in Section VII below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 15(b) and 21C of the Exchange Act be, and hereby are, instituted. III. On the basis of this Order and the Offers submitted by Lazard and Merrill Lynch, the Commission finds that:-[1]- --------- FOOTNOTES --------- -[1]- The findings herein are made pursuant to Lazard's and Merrill Lynch's Offers of Settlement and are not (continued...) -------------------- BEGINNING OF PAGE #2 ------------------- A. RESPONDENTS Lazard is a New York Limited Liability Company with its principal place of business at Thirty Rockefeller Plaza, New York, New York. Lazard is registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act (File No. 8-2595). At all times relevant to these proceedings, Lazard was a New York Limited Partnership. Merrill Lynch is a Delaware corporation with its principal place of business at 250 Vesey Street, New York, New York. Merrill Lynch is registered with the Commission as a broker- dealer pursuant to Section 15(b) of the Exchange Act (File No. 8- 2592). B. FACTS 1. Background Among other things, Lazard conducts a municipal securities business through its Municipal Department, which principally (i) serves as financial advisor to certain municipal issuers with respect to the development of financial plans and strategies, and (ii) acts as underwriter with respect to the issuance of municipal securities by various state and local governments and their agencies and instrumentalities. Beginning in April 1988, Lazard maintained a Municipal Department branch office in Boston, Massachusetts, which was established and managed by a former partner of Lazard (the "Former Partner"). When the Former Partner resigned from Lazard at the end of January 1993, Lazard closed its Boston office. At times relevant to these proceedings, Lazard was a financial advisor to the Massachusetts Water Resources Authority ("MWRA") and the District of Columbia ("D.C."). Lazard's financial advisory services to those municipal issuers were provided primarily by the Former Partner and others under his supervision. Merrill Lynch, in addition to acting as a broker-dealer, is an underwriter of tax-exempt securities by state and local governments and their agencies. In the mid-1980s, Merrill Lynch began to develop and market interest rate swaps for municipalities and other tax-exempt issuers. By 1989, Merrill Lynch had become the largest provider of interest rate swaps to municipalities and other tax-exempt issuers.-[2]- Interest rate swaps are transactions by which an entity may exchange (i.e., swap) its obligation to make periodic payments based on a particular interest rate or index for the right to receive periodic payments based on a different rate or index (e.g., one may swap its obligation to make variable rate payments for the right to receive fixed rate payments). In the late 1980's, --------- FOOTNOTES --------- -[1]-(...continued) binding on any other person or entity named as a respondent in this or any other proceeding. -[2]- Unlike Merrill Lynch, Lazard did not serve as a counterparty in municipal interest rate swap transactions during the relevant time period. 2 -------------------- BEGINNING OF PAGE #3 ------------------- Merrill Lynch, whose swap business had in the past been done primarily with its own clients, sought to expand its swap business. 2. Events Leading Up To The June 1990 Contract In the late 1980's, the MWRA, which had been given responsibility for cleaning up the Boston Harbor and for providing water and sewerage services to over 40 Boston area cities and towns, determined to issue several billion dollars in revenue bonds in the coming years. To assist it in executing its bond transactions, in January 1989, the MWRA issued a request for proposals for the purpose of selecting an underwriting team. In his position as financial advisor to the MWRA, during early 1989, the Former Partner advised the MWRA throughout the selection process concerning, among other things, the strengths and weaknesses of the potential underwriters. Beginning in 1988 and continuing through 1989, Merrill Lynch representatives met and discussed with the Former Partner MWRA business and potential business involving non-financial advisory clients of Lazard. During the course of such discussions, the Former Partner solicited business from Merrill Lynch. The Former Partner did not advise anyone at Lazard's New York headquarters of these discussions. In March of 1989, the Board of Directors of the MWRA, which was being advised by the Former Partner, chose Merrill Lynch as one of three senior managing underwriters. The MWRA decided to rotate the senior managing underwriters. Merrill Lynch was chosen from this group of three to act as the senior managing underwriter for the MWRA's first bond offering, which ultimately was executed in January 1990. Beginning in the fall of 1989, Merrill Lynch attempted to market to the MWRA an interest rate swap in conjunction with the early 1990 underwriting. During this process, in late September 1989, Merrill Lynch initially raised the swap idea with the Former Partner as financial advisor to the MWRA. After being introduced to the swap concept by Merrill Lynch, the Former Partner expressed an immediate interest in the business potential of swaps. Merrill Lynch and the Former Partner discussed the prospect of Merrill Lynch and Lazard engaging in a joint swap marketing agreement. In the fall of 1989, while working on an interest rate swap with the Indian Trace Community Development District in Broward County, Florida (the "Florida Transaction"), Merrill Lynch invited the Former Partner to learn about the mechanics of structuring and documenting interest rate swaps. Ultimately, although neither the Former Partner nor any other Lazard personnel worked on the Florida Transaction, Merrill Lynch paid Lazard $90,000 in connection with this transaction, which represented approximately 10% of Merrill Lynch's overall compensation on the swap. The Former Partner did not advise his partners that Lazard personnel did not work on the swap. Following further discussions between representatives of Merrill Lynch and the Former Partner, Merrill Lynch and Lazard entered into a written contract dated December 5, 1989 (the "December 1989 Contract"). The December 1989 Contract, which was prepared by a national law firm at the request of the then head 3 -------------------- BEGINNING OF PAGE #4 ------------------- of Merrill Lynch's municipal swaps department, provided that Merrill Lynch and Lazard would split fees generated from any successful jointly marketed swaps. In January 1990, Merrill Lynch attempted to persuade the MWRA and the Former Partner that the MWRA should enter into an interest rate swap in conjunction with the 1990 MWRA underwriting. In connection with the MWRA's consideration of a possible swap transaction, the Former Partner told a representative of the MWRA that Lazard had been involved with Merrill Lynch in an out-of-state interest rate swap transaction in late 1989. The Former Partner did not fully disclose, and Merrill Lynch did not ensure full and complete disclosure of, the facts and circumstances of the Florida Transaction, including Merrill Lynch's payment of $90,000 to Lazard. The Former Partner advised his partners that the December 1989 Contract applied only to the Florida Transaction. The Former Partner did not advise his partners at Lazard's New York headquarters that Merrill Lynch was attempting to market to the MWRA an interest rate swap in connection with the MWRA's early 1990 underwriting. 3. The June 1990 Contract On June 26, 1990, Merrill Lynch entered into a successor contract with Lazard (the "June 1990 Contract"). The Contract, which was negotiated principally by the Former Partner and the then head of Merrill Lynch's municipal swaps department, provided that Merrill Lynch and Lazard would participate together in originating, negotiating and arranging interest rate swaps to be entered into between Merrill Lynch and municipal issuers. Like the December 1989 Contract, the June 1990 Contract was drafted by the same national law firm at the request of the then head of Merrill Lynch's municipal swaps department, and provided for fee- splitting between Merrill Lynch and Lazard on successful jointly marketed interest rate swaps. Unlike the December 1989 Contract, however, the June 1990 Contract further provided that: (1) Lazard would consult generally with Merrill Lynch with respect to the presentation, marketing and sales of municipal interest rate swaps; and (2) Merrill Lynch would pay Lazard an annual fee in the amount of $800,000 for the period June 26, 1990 through December 31, 1990. The June 1990 Contract initially covered only calendar year 1990. But in December 1990, prior to its expiration, the June 1990 Contract was renewed in writing to cover calendar year 1991. Later, Merrill Lynch and Lazard, acting through the Former Partner, orally extended the June 1990 Contract to cover the year 1992. During 1991 and 1992, the annual fee that Merrill Lynch paid Lazard was increased from $800,000 to $1,000,000. The June 1990 Contract effectively remained in place until it was terminated in January 1993.-[3]- --------- FOOTNOTES --------- -[3]- The Former Partner advised his partners at Lazard's New York headquarters that Lazard would be helping Merrill Lynch to obtain swap business only with Lazard's municipal underwriting clients. Payments under the fee-splitting provision of the June 1990 Contract were received only for swaps with entities that were underwriting clients, not financial advisory clients, of Lazard. 4 -------------------- BEGINNING OF PAGE #5 ------------------- The Former Partner and others under his direct supervision primarily provided Lazard's services to Merrill Lynch under the June 1990 Contract. Pursuant to the June 1990 Contract, Merrill Lynch paid Lazard a total of $5,766,878 between September 1990 and November 1992, which consisted of $2,550,000 in annual fees and $3,216,878 in payments under the fee-splitting provision. Since the Former Partner was compensated based on the overall production of the Boston branch office, the Former Partner received a substantial financial benefit from the June 1990 Contract. The June 1990 Contract established an ongoing, continuing relationship between Lazard and Merrill Lynch that resulted in a substantial financial benefit to the Former Partner who was providing financial advisory services to certain clients that were considering the selection of Merrill Lynch. Consequently, the June 1990 Contract created at least a potential conflict of interest for Lazard that should have been disclosed to its financial advisory clients that were serviced by the Former Partner and were considering the selection of Merrill Lynch to provide certain financial services in the conduct of Lazard's and Merrill Lynch's municipal securities business. 4. Inadequate Disclosure of the June 1990 Contract and the Florida Transaction The MWRA and D.C. were not fully informed of the facts relating to the relationship between Lazard and Merrill Lynch at the time they evaluated the advice of the Former Partner concerning the selection of Merrill Lynch to provide certain financial services. Specifically, the June 1990 Contract and the facts and circumstances of the Florida Transaction, including Merrill Lynch's payment of $90,000 to Lazard, were not adequately disclosed to the MWRA and D.C. when the Former Partner provided financial advisory services relating to the following actions taken by those municipal issuers. The MWRA, with advice from the Former Partner as its financial advisor, (1) selected Merrill Lynch to execute interest rate swaps in May 1990 (notional amount: $90 million) and June 1990 (notional amount: $78 million)-[4]- and to serve as Book-Running Manager on a $717 million bond issue in March 1992, and (2) negotiated with Merrill Lynch with respect to bond prices, underwriting fees and swap fees for those transactions. D.C., with advice from the Former Partner as its financial advisor and in connection with related municipal securities offerings, (1) selected Merrill Lynch to execute an interest rate swap in September 1991 (notional amount: $230 million) and March 1992 (notional amount: $299.8 million), and (2) negotiated with Merrill Lynch with respect to swap fees for those transactions.-[5]- --------- FOOTNOTES --------- -[4]- The MWRA decided to execute swaps with Merrill Lynch, as opposed to any other entity, without issuing a request for proposals. The MWRA's decisions were based, at least in part, upon the initial recommendation of the Former Partner in January 1990, and subsequent input and advice from the Former Partner throughout the spring of 1990. -[5]- The related municipal offerings were a $331 million General Fund Recovery Bond issue in September 1991 and (continued...) 5 -------------------- BEGINNING OF PAGE #6 ------------------- Senior personnel in Lazard's New York office instructed the Former Partner to make disclosure and later asked the Former Partner whether he had made disclosure to the MWRA and D.C. In response, the Former Partner informed them that he had disclosed Lazard's relationship with Merrill Lynch to the MWRA and D.C. In addition, the Former Partner informed Merrill Lynch that he had disclosed Lazard's relationship with Merrill Lynch to the MWRA and D.C. In fact, however, the Former Partner had not fully disclosed the relationship; specifically, that Lazard and Merrill Lynch had entered into a contract, and that pursuant to the contract, Lazard and Merrill Lynch had an ongoing, continuing relationship pursuant to which Merrill Lynch was paying Lazard an annual fee of between $800,000 and $1 million for consulting generally concerning the marketing of interest rate swaps, as well as a share of Merrill Lynch's income earned on successful joint swap proposals. Moreover, not only did the Former Partner fail to fully disclose the June 1990 Contract, but he expressly represented to the MWRA that no conflicts of interest existed with respect to Lazard's services to that municipal issuer. Lazard did not take adequate steps to ensure that the Former Partner had fully disclosed the June 1990 Contract to Lazard's financial advisory clients serviced by the Former Partner that were considering the selection of Merrill Lynch to provide certain financial services. Lazard did not have adequate procedures in place to ensure that the Former Partner made full disclosure of the June 1990 Contract to those municipal financial advisory clients. Lazard did not have a procedure to require the Former Partner to make disclosures to Lazard's municipal financial advisory clients in writing. Moreover, when informed by the Former Partner that he had made disclosure, senior personnel in Lazard's New York office did not ask the Former Partner whether he had specifically disclosed the consulting relationship and the annual fee. In addition, Merrill Lynch did not take adequate steps to ensure that the June 1990 Contract and the facts and circumstances of the Florida Transaction, including Merrill Lynch's payment of $90,000 to Lazard, were fully disclosed to Lazard's financial advisory clients serviced by the Former Partner. These clients were considering the selection of Merrill Lynch to provide certain financial services. Although the Former Partner advised Merrill Lynch that he had disclosed the relationship, Merrill Lynch did not ask the Former Partner whether he had specifically disclosed the Florida Transaction, the consulting relationship and the annual fee. C. LEGAL DISCUSSION 1. Rule G-17 --------- FOOTNOTES --------- -[5]-(...continued) a $229.8 million General Obligation Bond refunding in March 1992. The swap transactions were executed contemporaneously with the two bond offerings for the purpose of converting variable-rate interest rate obligations arising from the bond offerings into fixed- rate obligations. 6 -------------------- BEGINNING OF PAGE #7 ------------------- Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB") provides that: In the conduct of its municipal securities business, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. As broker-dealers conducting municipal securities businesses, Lazard and Merrill Lynch are subject to the MSRB Rules. 2. Violations of Rule G-17 a. Lazard The Former Partner did not fully disclose the June 1990 Contract to the MWRA and D.C., and Lazard did not have adequate procedures in place to ensure that the Former Partner made full disclosure of the June 1990 Contract to those financial advisory clients. Senior personnel in Lazard's New York office asked the Former Partner whether he had disclosed Lazard's relationship with Merrill Lynch to the MWRA and D.C. When told by the Former Partner that he had disclosed the relationship with Merrill Lynch to those municipal financial advisory clients, Lazard took no further steps to determine what was disclosed. For example, Lazard did not have a procedure to determine whether the Former Partner had specifically disclosed the consulting relationship and the annual fee. In addition, Lazard did not have a procedure to ensure that the Former Partner made disclosures to Lazard's municipal financial advisory clients in writing. Lazard, as the financial advisor to the MWRA and D.C., was required to disclose the potential conflict of interest created by the June 1990 Contract. As a result of the Former Partner's failure to fully disclose the June 1990 Contract to the MWRA and D.C., Lazard's failure to take adequate steps to ensure that the Former Partner made full disclosure of the June 1990 Contract, and the Former Partner's representations to the MWRA that no conflicts of interest existed, Lazard engaged in a willful violation of MSRB Rule G-17.-[6]- b. Merrill Lynch While providing certain financial services for the MWRA and D.C., Merrill Lynch failed to take adequate steps to ensure that the June 1990 Contract and the facts and circumstances of the Florida Transaction, including Merrill Lynch's payment of $90,000 to Lazard, were fully disclosed to the MWRA and D.C. As a result, Merrill Lynch engaged in a willful violation of MSRB Rule G-17. IV. --------- FOOTNOTES --------- -[6]- As used in this Order, "willful" means the intentional commission of an act which constitutes the violation. There is no requirement that the actor also be aware that he is violating the federal securities laws. See Tager v. SEC, 344 F.2d 5 (2d Cir. 1965). 7 -------------------- BEGINNING OF PAGE #8 ------------------- Lazard has submitted an Offer of Settlement in which, without admitting or denying the findings herein, it consents to the Commission's issuance of this Order, which makes findings, as set forth above, and orders Lazard to cease and desist from committing or causing any violation or future violation of MSRB Rule G-17; to pay, as also required by Settlement Agreements among each of the Respondents, the United States Attorney's Office for the District of Massachusetts and the Attorney General's Office for the Commonwealth of Massachusetts, a civil money penalty of $2.5 million and restitution to the MWRA and D.C. in the amounts of $2.12 million and $1.8 million, respectively; to maintain the undertakings described in Section VI below, implemented prior to the date of this Order; and to a censure of Lazard pursuant to Section 15(b) of the Exchange Act. As set forth in Lazard's Offer of Settlement, Lazard undertakes to cooperate with Commission staff in preparing for and presenting any civil litigation or administrative proceeding concerning the transactions that are the subject of this Order. V. Merrill Lynch has submitted an Offer in which, without admitting or denying the findings herein, it consents to the Commission's issuance of this Order, which makes findings, as set forth above, and orders Merrill Lynch to cease and desist from committing or causing any violation or future violation of MSRB Rule G-17; to pay, as also required by Settlement Agreements among each of the Respondents, the United States Attorney's Office for the District of Massachusetts and the Attorney General's Office for the Commonwealth of Massachusetts, a civil money penalty of $2.5 million and restitution to the MWRA and D.C. in the amounts of $2.0 million and $1.8 million, respectively; to maintain the undertakings described in Section VI below, implemented prior to the date of this Order; and to a censure of Merrill Lynch pursuant to Section 15(b) of the Exchange Act. As set forth in Merrill Lynch's Offer, Merrill Lynch undertakes to cooperate with Commission staff in preparing for and presenting any civil litigation or administrative proceeding concerning the transactions that are the subject of this Order. VI. Prior to the date of this Order, Lazard and Merrill Lynch revised their policies and procedures. Lazard and Merrill Lynch undertake to maintain such policies and procedures. The policies and procedures adopted and implemented by Lazard are as follows: (a) In October 1993, Lazard adopted comprehensive compliance policies and procedures for its Municipal Department that address, among other things, the proper documentation and disclosure of joint business relationships, has distributed those policies to all Municipal Department personnel, and has continued to revise and update them; (b) Lazard's Municipal Department compliance policies and procedures include a requirement that personnel working on financial advisory assignments make written disclosure to its municipal financial advisory clients of the existence 8 -------------------- BEGINNING OF PAGE #9 ------------------- and terms of all agreements and arrangements with actual or potential underwriters, financial advisors, consultants and/or swap counterparties that might create a potential conflict with the interests of Lazard's municipal financial advisory clients; (c) Lazard has held periodic compliance training sessions that are mandatory for all Municipal Department personnel; and (d) Lazard established a Municipal Task Force, of which a number of senior partners including the General Counsel are members, to ensure that the Municipal Department and its personnel are guided by all appropriate legal and ethical standards. This Task Force modified Lazard's training and compliance systems, its hiring procedures, its use of outside consultants and joint marketing efforts with other firms, its documentation and disclosure practices and its accounting policies. The policies and procedures adopted and implemented by Merrill Lynch are as follows: (a) On August 16, 1993, Merrill Lynch issued a new, comprehensive and detailed set of procedures governing interaction between Merrill Lynch's Municipal Markets employees and third parties such as consultants and broker- dealers. On June 6, 1994, Merrill Lynch supplemented those procedures.-[7]- The Procedures provide that Merrill Lynch will use the assistance of consultants to obtain or retain public finance business only in limited circumstances and only under specific guidelines, including the following: (b) Whenever Merrill Lynch decides to use a consultant to assist in obtaining or retaining public finance business, it will now as a matter of course disclose in writing its retention of the consultant to the governing body of all existing or prospective potentially affected public finance clients. The basic terms of the consulting agreement, including the compensation to be paid to the consultant, either must be included in the written disclosure or made available to the public finance clients upon request; (c) Whenever a Municipal Markets employee wishes to retain a consultant, the employee must prepare a memorandum for internal supervisory review and approval explaining the services sought from the consultant and indicating the compensation to be paid. When supervisory approval is granted, Merrill Lynch in-house counsel must review and approve all public finance consulting agreements before they are executed. As to specific payments under a consulting agreement, the Municipal Markets employee responsible for the agreement now must prepare a billing memorandum indicating the services performed and the amount of compensation to be paid. Management level review and written approval of the payments are required before payment will be made; --------- FOOTNOTES --------- -[7]- The August 16, 1993 procedures and the June 6, 1994 supplement thereto are hereinafter referred to as "the Procedures." 9 -------------------- BEGINNING OF PAGE #10 ------------------- (d) In cases in which the consultant also may act as a financial advisor to other issuers of municipal securities, Merrill Lynch is to obtain a list of the consultant's municipal financial advisory clients, which, by contract, the consultant is required to update quarterly. The Merrill Lynch Municipal Markets Consultant Relationship Manager responsible for the consultant's retention is required to promptly notify, in writing, the governing body of each of the consultant's financial advisory clients of the consultant arrangement. The written notification must include a general description of the arrangement, including the compensation; (e) Merrill Lynch Municipal Markets will not pay, directly or indirectly, or split a fee with any consultant in connection with an assignment for which the consultant is the financial advisor to the municipal issuer; (f) All agreements with Merrill Lynch public finance consultants are to be in writing. Consultants who may act as financial advisors to public entities during the pendency of the consulting agreement must acknowledge in the written agreement that they are not at the time of the agreement, and will not during the term of the agreement, be retained as financial advisors or financial consultants to any municipal issuers for whom Merrill Lynch is seeking to be retained as a result of the consultants' activities under the consulting agreement. Consultants who act as financial advisors to public entities must further acknowledge in the written agreement that no payment under the agreement will be made in connection with an assignment for which the consultants are the financial advisor to the public entity; and (g) During 1993, 1994 and 1995, Merrill Lynch has conducted in-house compliance meetings for its Municipal Markets employees throughout the United States during which the employees have been instructed as to various compliance issues including Merrill Lynch's procedures governing interaction with third parties such as consultants. VII. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers submitted by Lazard and Merrill Lynch and impose the sanctions specified in the Offers. In determining to accept these Offers, the Commission considered the policies and procedures adopted and implemented by Lazard and Merrill Lynch and cooperation afforded the Commission staff. Accordingly, IT IS HEREBY ORDERED that: 1. Lazard shall cease and desist from committing or causing any violation or future violation of MSRB Rule G- 17; 2. Lazard shall be, and hereby is, censured; 3. Lazard shall, within ten business days of the issuance of this Order, pay a civil money penalty in the amount of 10 -------------------- BEGINNING OF PAGE #11 ------------------- $2.5 million to the United States Treasury and shall make restitution to the MWRA and D.C. in the amounts of $2.12 million and $1.8 million, respectively; 4. Lazard shall comply with its undertaking to maintain the policies and procedures described in Section VI above, implemented prior to the date of this Order; provided, however, that Lazard may modify such policies and procedures with alternative policies and procedures designed to achieve the same purposes; 5. Merrill Lynch shall cease and desist from committing or causing any violation or future violation of MSRB Rule G- 17; 6. Merrill Lynch shall be, and hereby is, censured; 7. Merrill Lynch shall, within ten business days of the issuance of this Order, pay a civil money penalty in the amount of $2.5 million to the United States Treasury and shall make restitution to the MWRA and D.C. in the amounts of $2.0 million and $1.8 million, respectively; 8. Merrill Lynch shall comply with its undertaking to maintain the policies and procedures described in Section VI above, implemented prior to the date of this Order; provided, however, that Merrill Lynch may modify such policies and procedures with alternative policies and procedures designed to achieve the same purposes; 9. The Respondents have each entered into Settlement Agreements with the United States Attorney's Office for the District of Massachusetts and the Attorney General's Office for the Commonwealth of Massachusetts. The Respondents' respective obligations to pay penalties and restitution under the terms of this Order will be satisfied by the payment of penalties and restitution under the terms of such Settlement Agreements; and 10. Lazard and Merrill Lynch shall within 30 days of entry of this Order, send to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Boston, Massachusetts, 02108, via certified mail, evidence, including copies of checks, of the payments of the civil penalties and restitution, as ordered herein. Such evidence shall be submitted under cover letter which identifies the respondent as the respondent in these proceedings, the file number, and the Commission case number. By the Commission. _________________________________ Jonathan G. Katz Secretary 11