UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38918 / August 11, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9360 ____________________________________ : In the Matter of : : ORDER INSTITUTING STOCK CLEARING CORPORATION OF : PROCEEDINGS PURSUANT TO PHILADELPHIA : SECTIONS 19(h) and 21C OF and : THE SECURITIES EXCHANGE : ACT of 1934, MAKING PHILADELPHIA DEPOSITORY TRUST : FINDINGS AND IMPOSING COMPANY, : REMEDIAL SANCTIONS : Respondents. : ___________________________________: I. The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest to institute public administrative and cease-and-desist proceedings, pursuant to Sections 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against the Stock Clearing Corporation of Philadelphia ("SCCP") and to institute cease-and- desist proceedings, pursuant to Section 21C of the Exchange Act, against Philadelphia Depository Trust Company ("Philadep"). In anticipation of the institution of these proceedings, SCCP and Philadep have submitted Offers of Settlement ("Offers") 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., SCCP and Philadep, by their respective Offers, consent to the entry of the findings and the imposition of the sanctions set forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 19(h) and 21C be, and hereby are, instituted. II. On the basis of this Order Instituting Proceedings Pursuant to Sections 19(h) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("Order"), and the Offers submitted by SCCP and Philadep, the Commission finds that:<(1)> A. Respondents Stock Clearing Corporation of Philadelphia ("SCCP") is a wholly-owned subsidiary of the Philadelphia Stock Exchange ("PHLX"). Since 1983, SCCP has been registered with the Commission as a clearing agency pursuant to Section 17A of the Securities Exchange Act of 1934 ("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 ("Philadep") 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; and, pursuant to Sections 3(a)(26), 17A(a)(2) and 19 of the Exchange Act, Philadep is also an SRO. Philadep offers 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. B. Summary 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. This matter involves SCCP's and Philadep's failure to comply with their respective rules and procedures, failure to file necessary proposed rule changes with the Commission and, in the case of SCCP, violations of Regulation T. C. Background 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. In those instances, described below, where SCCP and/or Philadep failed to comply with their respective rules and procedures, including their failures <(1)> The findings herein are made pursuant to SCCP's and Philadep's Offer and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== to comply with material procedures and requirements set forth in their final proposed rule change filings, SCCP and/or Philadep violated Section 19(g)(1) of the Exchange Act. 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 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 Safeguard Participants' Funds Both SCCP's and Philadep's Rules 4 require that their respective participants' funds be safeguarded. The Rules provide, in pertinent part: The Participants Fund deposit shall be held by the Corporation and shall be applied as provided in these Rules and as specified in the Procedures . . . The Participants Fund may from time to time be partially or wholly invested by the Corporation for its account in United States government obligations or any other investments which provide safety and liquidity of the principal invested . . . The Participants Fund shall be used for the protection of the Corporation against loss in the performance of its clearance and settlement functions . . . The Corporation shall maintain . . . appropriate liquidity at all times in the Participants Fund to meet short-term emergency needs, by holding cash balances or investments readily convertible to cash . . . . Rules 4, Sections 1 and 2. During the period from February 1996 through June 16, 1996, in order to alleviate the PHLX's short term cash deficits, funds were transferred to the PHLX from a SCCP operating account containing SCCP's and Philadep's ======END OF PAGE 3====== participants' funds, general corporate funds and other funds. As SCCP's and Philadep's corporate parent, the PHLX routinely incurred costs on their behalf for which the PHLX would be repaid, generally through wire disbursements from the SCCP operating account. During the above-referenced time period, however, at least eleven wire disbursements were made from the SCCP operating account to the PHLX for amounts in excess of actual costs incurred by the PHLX on SCCP's and Philadep's behalf. The total funds transferred through these eleven disbursements ranged from $650,000 in one month to slightly over $2 million in the highest month. Of these funds, amounts transferred to the PHLX in excess of actual costs incurred ranged, on a monthly basis, from approximately $54,000 to approximately $1.3 million. These monies were routinely paid back to SCCP when the PHLX's short term cash flow permitted such payments. SCCP and Philadep did not safeguard participants' funds. Although funds were routinely disbursed from the SCCP operating account to the PHLX, SCCP did not monitor whether participants' funds were being used to, among other things, alleviate the PHLX's short term cash deficits. Consequently, SCCP and Philadep were unable to determine effectively, at any time during the day, whether participants' funds were used for this purpose. As a result of those matters set forth above, SCCP and Philadep failed to comply with their respective Rules 4, in violation of Section 19(g)(1) of the Exchange Act. In particular, SCCP and Philadep failed to hold and apply the participants' funds as specified under their respective Rules 4, and may have used the participants' funds other than for the protection of SCCP and Philadep against loss in the performance of their clearance and settlement functions. E. 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 ======END OF PAGE 4====== 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). 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. In addition, during the period from February 22, 1996 to May 8, 1996, SCCP and Philadep violated Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder by applying the inactive participants formula and effectively establishing a new class of participants and a new service without filing a rule proposal with the Commission. F. 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. ======END OF PAGE 5====== G. 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. H. SCCP's Calculation of Margin Values With Inaccurate Pricing in Violation of Regulation T Pursuant to its 1983 approval order, SCCP is authorized to offer margin financing to PHLX member participants. Pursuant to Section 220.3(g)(2) of Regulation T, SCCP is required to utilize the closing sale price of a security on the preceding day to determine current market value for purposes of margin financing, or, if there is no closing price, any reasonable estimate of the market value of the security as of the close of business on the preceding day. Commencing in approximately 1990 or 1991, SCCP began using the Securities Industry Association Corporation ("SIAC") as a pricing information source. Although prices on certain municipal securities were unavailable to SCCP through SIAC, daily prices -- whether based upon trade prices or a matrix derived from spreads to the yield curve -- for these municipal securities were available to SCCP from other sources. Nonetheless, from September 1990 until early February 1996, SCCP, in violation of Section 220.3(g)(2) of Regulation T, updated the pricing for these certain municipal securities only on a weekly basis. In early February 1996, SCCP began calculating margin values for municipal securities on a daily basis. However, SCCP continued to violate Section 220.3(g)(2) of Regulation T because it used two-day-old, rather than one- day old, pricing in calculating margin values until April 26, 1996. ======END OF PAGE 6====== I. SCCP's Improper Provision of Good Faith Margin in Violation of Regulation T Pursuant to Section 220.18(a) of Regulation T, the required margin for an equity security position held by a non-specialist is 50 percent. Pursuant to Section 220.12(b)(2) of Regulation T, the required margin for specialists' transactions is good faith margin. Under Section 220.2 of Regulation T, good faith margin is defined as ". . . the amount of margin which a creditor, exercising sound credit judgment, would customarily require for a specified security position and which is established without regard to the customer's other assets or securities positions held in connection with unrelated transactions." Generally, SCCP extended good faith margin at 15 percent. On May 25 and May 28, 1996, SCCP violated Section 220.18(a) of Regulation T because it failed to collect 50 percent margin to equity positions of four PHLX-member firms not designated as specialists and, instead improperly provided good faith margin. J. SCCP's Application of an Unapproved $75,000 Cap on Participants' Fund Formula SCCP's initial SDFS filing with the Commission proposed a $1 million cap and a $75,000 cap on its two-pronged activity-based participants' fund formula. In December 1995, SCCP received a letter from Market Regulation which discussed the fact that its participants' fund formulas could not be limited by any maximum deposit requirements. On January 24, 1996, SCCP filed an amendment to its SDFS filing stating that it was removing the cap on full service CNS activity. As a result, SCCP's final SDFS filing, which was approved by the Commission on February 22, 1996, did not contain any caps, except for RIO accounts, on participants' fund formula calculations. Nevertheless, SCCP began applying the $75,000 cap on February 22, 1996, the effective date of SCCP's SDFS order. As a result, during the period from approximately February 22, 1996 to the present, SCCP has failed to comply with its own procedures set forth in its final SDFS filing, in violation of Section 19(g)(1) of the Exchange Act. Section 19(b)(1) of the Exchange Act requires SROs to file proposed rule changes with the Commission. The requirement that such proposed rule changes be filed with the Commission embodies within it the requirement that such proposed rule changes be accurate. As discussed above, contrary to the SDFS filing, as approved, SCCP applied the $75,000 cap. As a result, SCCP's final SDFS filing was not an accurate description of the rule that it proposed to implement. Therefore, during the period from approximately February 22, 1996 to August 20, 1996, when SCCP filed a proposed rule change concerning the $75,000 cap, SCCP violated Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder. K. Philadep's Use of an Unapproved Override Function Pursuant to Philadep's February 22, 1996 SDFS approval order, Philadep was required to implement risk management controls such as net debit caps ======END OF PAGE 7====== and a collateral monitor. With the implementation of SDFS, Philadep began employing a manual override function to its risk management controls, primarily for one large participant, which had the effect of circumventing the net debit caps and collateral monitoring. Although the original technical specifications for Philadep's SDFS system contained a description of the override function, a discussion of its existence and intended uses was not included in Philadep's final SDFS filing with the Commission and, accordingly, was never approved by the Commission. The use of the override function occurred on a daily basis from at least January 1996 to September 1996. In September 1996, Philadep instituted manual controls on the use of the override function consistent with its final SDFS filing. As a result, during the period from approximately February 22, 1996 to September 1996, Philadep employed the override function in a manner inconsistent with the risk management procedures set forth in its final SDFS filing, in violation of Section 19(g)(1) of the Exchange Act. L. Philadep's Use of Unapproved Net Debit Caps Upon conversion to SDFS on February 22, 1996, Philadep implemented a second minimum net debit cap formula that was neither described in Philadep's final SDFS filing nor approved by the Commission. Both Philadep's SDFS filing and the Commission's approval order granted Philadep the right to make adjustments to an individual participant's net debit cap. However, by April 1996, the second formula had become more than an intermittently used "adjustment" to the formula described in the final SDFS filing; by that time, Philadep was applying the second formula to approximately seventy (70) percent of its participants. Philadep did not file a proposed rule change for this second formula until August 6, 1996, which received Commission approval on February 13, 1997. As a result, during the period from approximately April 1996 to February 13, 1997, Philadep, by applying a second minimum net debit cap formula to approximately seventy (70) percent of its participants, failed to adhere to the approved net debit cap formulas set forth in its final SDFS filing, in violation of Section 19(g)(1) of the Exchange Act. Furthermore, upon conversion to SDFS, Philadep applied a $1.00 net debit cap to approximately 100 participant accounts who limit their activities to deposit, transfer and SCCP Regional Interface Organization services. Application of the cap was neither described in Philadep's final SDFS filing nor approved by the Commission. As a result, from February 22, 1996 to the present, Philadep, by routinely using the $1.00 net debit cap, failed to adhere to the approved net debit cap formula set forth in its final SDFS filing, in violation of Section 19(g)(1) of the Exchange Act. M. Philadep's Application of a Volume Discount Fee Without Obtaining Board Approval 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 ======END OF PAGE 8====== . . .." 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. N. Philadep's Use of Inaccurate Pricing to Determine Collateral Valuation Pursuant to Philadep's February 22, 1996 SDFS approval order, based upon its final SDFS filing, securities designated as collateral by participants were to be valued based on the security's closing price on the prior business day, less an applicable haircut. From February 22, 1996 to April 26, 1996, Philadep calculated collateral valuations for all non-PHLX traded securities and municipal securities based on two-day-old pricing. As a result, Philadep failed to comply with the procedures set forth in its final SDFS filing, in violation of Section 19(g)(1) of the Exchange Act. O. SCCP and Philadep Enter Into Agreement To Exit Depository Business and Limit Clearing Services In an agreement dated as of June 18, 1997 ("the Agreement") by and among the PHLX, Philadep, SCCP and two other parties, Philadep has agreed to (i) cease providing securities depository services, (ii) make available to its participants access to the facilities of one or more other organizations providing securities depository services and (iii) transfer to the custody of such other organizations the securities that are held in the custody of Philadep for the accounts of such participants; and SCCP has agreed to (i) cease providing securities full clearing services; (ii) make available to SCCP participants access to the facilities of one or more other organizations providing securities clearing services and (iii) transfer to the books of such other organizations the CNS system open positions of SCCP participants that are shown on the books of SCCP. Pursuant to the Agreement, SCCP and Philadep agree not to compete for a period of five years with the two other named entities in providing securities depository services or securities clearing services ("the Transaction"). The Agreement provides that the Transaction shall close on the later of September 30, 1997 or the satisfaction of several conditions precedent ======END OF PAGE 9====== ("Closing Date"). The Agreement contemplates that after the Closing Date, SCCP will continue to provide an interface clearing arrangement between certain of its floor members and specialists and a registered clearing agency and/or margin services to (i) PHLX equity specialists for their specialist and alternative specialist transactions and for the proprietary transactions in securities for which they are not appointed as specialist or alternative specialist and (ii) certain PHLX members listed on a schedule who are not PHLX equity specialists for the proprietary transactions. The clearing services contemplated to be conducted by SCCP following the Closing Date will be through an omnibus account which SCCP may maintain at another clearing agency for such purpose and does not include the maintenance or offering of CNS accounts for its participants ("SCCP's Omnibus Services"). Nothing in this Order shall be construed to mean that the Commission has approved any of the terms of the Transaction. In order to effect the terms of the Agreement, each party to the Agreement must take all necessary actions to obtain all consents, approvals or actions of the Commission, to make all filings with the Commission and to give all notices to the Commission as are required, pursuant to the relevant provisions of the Exchange Act, in order to meet their obligations under the Agreement. 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 SCCP and Philadep. Accordingly, IT HEREBY IS ORDERED that: A. SCCP be and hereby is censured; B. SCCP is ordered, pursuant to Section 21C of the Exchange Act, to cease and desist from committing or causing any violation, and committing or causing any future violations, of Sections 19(b)(1) and 19(g)(1) of the Exchange Act and Rule 19b-4 thereunder; and Regulation T (12 C.F.R. 220) as promulgated by the Board of Governors of the Federal Reserve System; C. Philadep is ordered, pursuant to Section 21C of the Exchange Act, to cease and desist from committing or causing any violation, and committing or causing any future violations, of Sections 19(b)(1) and 19(g)(1) of the Exchange Act and Rule 19b-4 thereunder; D. In light of the Agreement described in Paragraph II.O., SCCP and Philadep shall comply with the following undertakings: 1. Within forty-five (45) days of the entry of this Order, SCCP and/or Philadep shall file with the Commission the following items: a. SCCP shall file a proposed rule change describing its restructured securities clearing business, including ======END OF PAGE 10====== discontinued services and its clearing relationship with other registered clearing agencies; b. Philadep shall file a proposed rule change describing its withdrawal from the securities depository business including a description of specific tasks and target dates for the completion of such tasks as part of its withdrawal process; c. SCCP shall file a proposed rule change to reflect that its Participants' Fund, its new Reserve Fund and mark-to-market payments required by SCCP Rule 15 shall not be used in SCCP's margin lending program effective upon the Commission's approval of such proposed rule change. Rules 4 and 15 of SCCP's rules shall be amended to reflect this Agreement; d. Philadep shall file a proposed rule change amending Rule 2, Section 1(e), Rule 29, Section 3 and the procedures thereunder, to provide that Philadep shall diligently research each unclaimed dividend or other distribution received after the Closing Date with a value greater than $500. Any such unclaimed dividend or other distribution with a value of $500 or less shall continue to be treated in accordance with Rule 29 (i.e., Philadep can take it into income after five (5) years). All unclaimed dividends and other distributions subject to Rule 29 shall be held and invested in accordance with Philadep's Participants' Fund Rule 4. No unclaimed dividends or other distributions received after the Closing Date in excess of $500 shall be taken into income. 2. Within thirty (30) days after Philadep ceases to function as a "securities depository" as that term is described in Section 3(a)(23)(A) of the Exchange Act, Philadep shall file with the Commission a request to withdraw Philadep's clearing agency registration pursuant to Section 19(a)(3) of the Exchange Act. 3. Except for the provision of SCCP's Omnibus Services, which services shall be described in the proposed rule filing set forth in D.1.a. above, SCCP shall not initiate any new clearance and settlement services that would require a proposed rule change pursuant to Section 19(b) of the Exchange Act prior to the completion of the undertakings described below without the prior consent of the Commission's Philadelphia District Office ("PDO"). 4. Within ninety (90) days of the entry of this Order, SCCP must enter into a binding contract to provide an alternative power source to its data center. A diesel generator, battery backup or other alternative power source must be installed to supply the operations facilities of SCCP with uninterrupted power to protect the clearance and settlement related operations from power failures. The binding contract shall provide for the installation of the alternative power ======END OF PAGE 11====== source at the earliest practical time and in no event later than one hundred and eighty (180) days from the date of the contract. 5. Within one hundred and eighty (180) days of the entry of this Order, the Boards of Directors of both SCCP and Philadep shall amend SCCP's and Philadep's by-laws to require that non-participant directors fill fifty (50) percent of the director positions on the Boards of both SCCP and Philadep. Within one hundred and eighty (180) days of the date of the approvals of such an amendment to SCCP's and Philadep's by-laws, non-participant directors shall compose fifty (50) percent of the director positions on the Boards of both SCCP and Philadep. For the purpose of this undertaking, the term "non- participant" shall mean: (a) persons who are not officers, directors or employees of participants and persons who have not been employed in any such capacity at any time within the prior three years; and (b) persons who have no consulting or employment relationships with, nor provide professional services to, the PHLX, SCCP or Philadep and persons who have not had any such relationship nor have provided any such services at any time within the prior three years. 6. Within thirty (30) days of the end of the month following the entry of this Order, and every thirty (30) days thereafter, SCCP and Philadep shall send monthly reports to the PDO and Market Regulation. Such reports will include monthly financial statements of both entities, status reports on Philadep's handling of unclaimed dividends or other distributions pursuant to its Rule 29, and progress reports on completion of the undertakings and on the completion of Philadep's withdrawal from the securities depository business. Such reports may be discontinued when the undertakings required by this Order have been accomplished and the PDO, in writing, has released SCCP and Philadep from the requirements of submitting further reports. 7. The Boards of Directors of SCCP and Philadep shall make a commitment to expend a minimum of $5,000,000 over a three year period commencing on the date of this Order. This capital commitment shall be used to complete each undertaking included in Section III.D. of this Order; to maintain and enhance SCCP's limited clearance and settlement systems necessary for SCCP's Omnibus Services, including the installation of adequate disaster recovery systems; to provide for an orderly transition from SCCP's current full-services clearing services to SCCP's Omnibus Services; to provide for an orderly withdrawal from the securities depository business; to provide for an adequate Compliance Program appropriate for its continued operations; to provide appropriate testing by its Quality Assurance staff prior to implementing any changes to SCCP's and Philadep's production systems; and to establish an adequate Reserve Fund to cover all reasonably anticipated operating expenses. The Reserve Fund (which shall total $3,000,000 at the end of the three year period) shall be held and invested in accordance with Rule 4 of SCCP's rules (Participants' Fund rule). Rule 4 shall be amended to provide detail on the establishment and use of the Reserve Fund, including specifying that expenses paid through the Reserve Fund must be replenished within sixty (60) days of ======END OF PAGE 12====== the use of such monies. Funding of the commitment shall be completed according to the following schedule: Year Commitment Reserve Fund Expenditures First Year $1,750,000 $1,000,000 $750,000 Second Year $1,750,000 $1,000,000 $750,000 Third Year $1,500,000 $1,000,000 $500,000 If over the course of this time period the Boards of Directors of SCCP and Philadep believe that the $5 million expenditure is not necessary in light of actual experience gained in operations and risk controls associated with SCCP's Omnibus Services, they may, by application to the Commission, seek modification of this commitment. 8. Within fourteen (14) days of the Closing Date, SCCP and Philadep shall hire or designate a qualified Compliance Officer, not unacceptable to the PDO, who shall be responsible for administering SCCP's compliance program and Philadep's orderly withdrawal from the securities depository business. The Compliance Officer shall be granted full authority by each Board of Directors to effect all measures necessary to ensure compliance with all applicable laws, rules, procedures and regulation to which SCCP and Philadep are subject. The Compliance Officer shall establish a Compliance Program to monitor and to enforce SCCP's and its participants' continued compliance with all applicable laws, rules, procedures and regulations. The Compliance Program shall include, among other things, the establishment of adequate policies and procedures to ensure that rule proposals are properly filed with the Commission and that such rule proposals, once approved, are properly implemented consistent with Commission approval orders. The Compliance Program, including its budget, shall be submitted to the Boards of SCCP and Philadep for their approval. The Compliance Officer shall report directly to the Audit Committee of SCCP on a monthly basis; and directly to the Chief Executive Officer of SCCP and the Chief Executive Officer of Philadep, until such time as it withdraws its registration, on a routine and as-needed basis. 9. Within fourteen (14) days of the Closing Date, SCCP and Philadep shall retain an independent public accounting firm, not unacceptable to the PDO, to conduct a thorough review of and make recommendations with regard to SCCP's and Philadep's policies and procedures concerning: (1) accounting policies and practices relating to SCCP's Omnibus Services, and (2) accounting controls and safeguards regarding SCCP's Omnibus Services and Philadep's orderly withdrawal from the securities depository business. The review shall include an analysis of documentation and authorization of all cash transfers and payments, and the accounting controls and safeguards implemented for Philadep's withdrawal from the securities depository business. In addition, the accounting firm shall conduct a review of SCCP's risk management procedures. The independent public accounting firm shall consult with staff of the PDO and Market Regulation regarding the scope of the ======END OF PAGE 13====== review. Upon completion of its review, and no later than sixty (60) days following the Closing Date, the independent public accounting firm shall submit to the SCCP and Philadep Boards a written report detailing the findings and conclusions of such review and setting forth a description of any recommendations. Within forty-five (45) days after the receipt of the written report, the Boards of SCCP and Philadep shall adopt and propose a schedule to implement all recommendations of the independent public accounting firm; provided, however, that as to any of the recommendations of the independent public accounting firm that SCCP or Philadep determines is unduly burdensome and impractical, SCCP or Philadep may propose an alternative procedure reasonably designed to accomplish the same objectives. The independent public accounting firm shall reasonably evaluate such alternative procedure and, if appropriate, either approve the alternative procedure or amend the recommendation. Within twenty (20) days of the final determination with respect to the recommendation of the independent public accounting firm, SCCP and Philadep shall file with the PDO a copy of the written report and SCCP and Philadep's schedule to implement the recommendations of the independent public accounting firm. 10. Within fourteen (14) days of the Closing Date, SCCP and Philadep shall retain those outside consultants that have reviewed SCCP and Philadep's Financial Automation Department within the past 12 months, to provide updates of their reviews and recommendations as appropriate to specifically focus on the continued activities of SCCP and the orderly withdrawal from the securities depository business by Philadep. The identity of each such consultant shall be discussed with the PDO and if any such consultant shall not be retained for such purpose, an outside consultant not unacceptable to the PDO shall be retained to conduct the review. SCCP and Philadep shall provide copies of all reports by outside consultants relating to the activities of its Financial Automation Department (received following the date of this Order until the completion of this undertaking) to the PDO and SCCP and Philadep agree to require such consultants to include within their update examinations such matters as the PDO and Market Regulation may reasonably require. Upon completion of such reviews, and no later than sixty (60) days following the Closing Date, such consultants shall submit to the SCCP and Philadep Boards a written report detailing the findings and conclusions of such reviews and setting forth a description of any recommendations. Within forty- five (45) days after the receipt of such reports, the Boards of SCCP and Philadep shall adopt and propose a schedule to implement all recommendations of the consultants; provided, however, that as to any of the recommendations of the consultants that SCCP or Philadep determines is unduly burdensome and impractical, SCCP or Philadep may propose an alternative procedure reasonably designed to accomplish the same objectives. The consultants shall reasonably evaluate such alternative procedure and, if appropriate, either approve the alternative procedure or amend the recommendation. Within twenty (20) days of the final determination with respect to the recommendation of the consultants, SCCP and Philadep shall file with the PDO a copy of ======END OF PAGE 14====== the written report and SCCP and Philadep's schedule to implement the recommendations of the consultants. E. If, for any reason, the Agreement referenced in paragraph II.O is terminated or the Transaction fails to close by July 1, 1998, SCCP and Philadep shall comply with the following additional undertakings: 1. The Boards of Directors of both SCCP and Philadep shall make a commitment to expend a minimum of $15,000,000 over a three year period commencing on the earlier of the date the Agreement is terminated or July 1, 1998 ("the Trigger Date"). To the extent that, as of the Trigger Date, SCCP and Philadep have already expended or reserved capital pursuant to their obligation to comply with the undertaking set forth in paragraph III.D.7. of this Order, the amount expended and/or reserved shall be credited toward the $15,000,000 capital commitment required pursuant to this paragraph. The $15,000,000 capital commitment shall be used to complete each undertaking included in this Order; to enhance SCCP's clearance and settlement systems, including the installation of adequate disaster recovery systems; to establish and maintain an adequate Compliance Program; to provide appropriate testing by its Quality Assurance staff prior to implementing any changes to SCCP's and Philadep's production systems; and to establish an adequate Reserve Fund to cover all reasonably anticipated operating expenses. The Reserve Fund (which shall total $5,000,000 at the end of the three year period) shall be held and invested in accordance with Rule 4 of SCCP's rules (Participants Fund rule). Funding of the commitment shall be completed according to the following schedule: Year Commitment Reserve Fund Expenditures First Year $6,000,000 $2,000,000 $4,000,000 Second Year $5,000,000 $2,000,000 $3,000,000 Third Year $4,000,000 $1,000,000 $3,000,000 If over the course of this time period the Boards of Directors of SCCP and Philadep believe that the $15 million expenditure is not necessary in light of actual experience gained in operations and risk controls associated with SCCP and Philadep, they may, by application to the Commission, seek modification of this commitment. 2. Within thirty (30) days of the Trigger Date, SCCP and Philadep shall establish a Special Management Review Committee ("Management Review Committee"), appointed by the Board of Directors of both SCCP and Philadep, and which shall be comprised of at least three independent directors, one of whom shall serve as chairman of the committee. The Management Review Committee shall complete an internal review of the functions and performances of SCCP's and Philadep's senior officers. The review shall focus, at a minimum, on the capability of SCCP's and Philadep's senior management to operate the organizations in a safe and efficient manner consistent with all ======END OF PAGE 15====== applicable laws, rules, and regulations. Upon completion of the internal review, and no later than sixty (60) days following the Trigger Date, the Management Review Committee shall submit to the SCCP and Philadep Boards a written report detailing the findings and conclusions of such review and setting forth a description of any proposed management changes. Within forty-five (45) days from the receipt of the report, the Boards of SCCP and Philadep shall adopt and propose a schedule to implement all recommendations of the Management Review Committee; provided, however, that as to any of the recommendations of the Management Review Committee that SCCP or Philadep determines is unduly burdensome and impractical, SCCP or Philadep may propose an alternative procedure reasonably designed to accomplish the same objectives. The Management Review Committee shall reasonably evaluate such alternative procedure and, if appropriate, either approve the alternative procedure or amend the recommendation. Within twenty (20) days of the final determination with respect to the recommendation of the Management Review Committee, SCCP and Philadep shall file with the PDO a copy of the written report and SCCP and Philadep's schedule to implement the recommendations of the Management Review Committee. 3. Within thirty (30) days of the Trigger Date, SCCP and Philadep shall hire a qualified Compliance Officer, not unacceptable to the PDO, who will be responsible for administering SCCP's and Philadep's compliance program. The position of Compliance Officer shall be an executive level position, and the Compliance Officer shall be granted full authority by the Board of Directors to effect all measures necessary to ensure compliance with all applicable laws, rules, procedures, and regulations to which SCCP and Philadep are subject. The Compliance Officer shall establish a Compliance Program to monitor and to enforce SCCP's and its participants' continued compliance with all applicable laws, rules, procedures, and regulations. The Compliance Program shall include, among other things, the establishment of adequate policies and procedures to ensure that rule proposals are properly filed with the Commission and that such rule proposals, once approved, are properly implemented consistent with Commission approval orders. The Compliance Program, including the budget and staffing levels of the compliance department, shall be submitted to the Board for its approval. The Compliance Officer shall report directly to the Audit Committees of SCCP and Philadep on a monthly basis and directly to the CEO of SCCP and Philadep on a routine and as-needed basis. 4. Within thirty (30) days of the Trigger Date, SCCP and Philadep shall hire an independent public accounting firm, not unacceptable to the PDO, to conduct a thorough review of and make recommendations with regard to SCCP's and Philadep's policies and procedures concerning: (1) accounting policies and practices, and (2) accounting controls and safeguards. The review shall include an analysis of documentation and authorization of all cash transfers and payments, risk management procedures, custody and valuation practices and procedures. Additionally, the independent public accounting firm shall, prior to ======END OF PAGE 16====== and immediately following the completion of its review, consult with staff of the PDO and staff of Market Regulation to discuss the scope of the review. Upon completion of its review, and no later than ninety (90) days following the Trigger Date, the independent accounting firm shall submit to the SCCP and Philadep Boards a written report detailing the findings and conclusions of such review and setting forth a description of any proposed management changes. Within forty-five (45) days from the receipt of the report, the Boards of SCCP and Philadep shall adopt and propose a schedule to implement all recommendations of the independent public accounting firm; provided, however, that as to any of the recommendations of the independent public accounting firm that SCCP or Philadep determines is unduly burdensome and impractical, SCCP or Philadep may propose an alternative procedure reasonably designed to accomplish the same objectives. The independent public accounting firm shall reasonably evaluate such alternative procedure and, if appropriate, either approve the alternative procedure or amend the recommendation. Within twenty (20) days of the final determination with respect to the recommendation of the independent public accounting firm, SCCP and Philadep shall file with the PDO a copy of the written report and SCCP and Philadep's schedule to implement the recommendations of the independent public accounting firm. 5. Within fourteen (14) days of the Trigger Date, SCCP and Philadep shall hire an independent consultant, not unacceptable to the PDO, to review SCCP's and Philadep's Financial Automation Department. Such a review shall include, among other things: (1) a complete examination of the adequacy of the design, the software, and the hardware used by SCCP and Philadep for all aspects of their operations; (2) an examination of the internal controls used by financial automation; and (3) an evaluation of the planning methodology used by SCCP and Philadep for anticipated future system enhancements. Upon completion of its review, and no later than sixty (60) days following the Trigger Date, the independent consultant shall submit to the SCCP and Philadep Boards a written report detailing the findings and conclusions of such review and setting forth a description of any proposed changes. Within forty-five (45) days from the receipt of the report, the Boards of SCCP and Philadep shall adopt and propose a schedule to implement all recommendations of the independent consultant; provided, however, that as to any of the recommendations of the independent consultant that SCCP or Philadep determines is unduly burdensome and impractical, SCCP or Philadep may propose an alternative procedure reasonably designed to accomplish the same objectives. The independent consultant shall reasonably evaluate such alternative procedure and, if appropriate, either approve the alternative procedure or amend the recommendation. Within twenty (20) days of the final determination with respect to the recommendation of the independent consultant, SCCP and Philadep shall file with the PDO a copy of the written report and SCCP and Philadep's schedule to implement the recommendations of the independent consultant. ======END OF PAGE 17====== 6. With regard to the undertakings set forth in paragraphs III.E.1. through III.E.5. of this Order, if the Boards of Directors of SCCP and Philadep believe that any such undertaking is not necessary in light of the actual business of SCCP and Philadep, if any, following the Trigger Date, or that SCCP and Philadep should be relieved of their ======END OF PAGE 18====== obligations to comply with said undertakings within the time periods specified, SCCP and Philadep may, by application to the Commission, seek a modification of, or an extension of time within which to comply with, said undertakings. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 19======