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Merrill limits analysts
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July 10, 2001: 2:56 p.m. ET
New rules restrict analysts' ownership, sale and disclosure of stocks they cover
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NEW YORK (CNNfn) - Merrill Lynch & Co., the nation's largest broker, said Tuesday its equity analysts will be prohibited from buying stocks in the companies they cover.
The policy at the nation's largest brokerage firm takes effect immediately. Analysts who currently own stocks they cover have the option to sell all those stocks at the same time, put the shares into a managed account over which they have no investment discretion, or hold all the stocks under new disclosure rules and stricter disposition policies.
Those new policies prohibit future sales unless the analysts' intermediate-term and long-term ratings are at neutral or lower, and they have not made a change in ratings for at least 24 hours. The previous policy required a "neutral" rating only in the intermediate term.
In addition, Merrill Lynch (MER: down $0.95 to $54.20, Research, Estimates) also plans to disclose in research reports the existence of any equity position maintained by any analyst who has responsibility for a security discussed in the report. This disclosure will be without regard to the size of such position.
The disclosure will appear on the back page of research reports and will say: "One or more analysts responsible for the recommendation on this security maintains a position in this security." This disclosure is expected to begin appearing on reports by Sept. 1.
Merrill has more than 850 analysts in 26 countries, covering over 3,500 companies worldwide. The rules also apply to holdings of any member of a research team as well as members of their families.
The Merrill rules are in response to concerns about the objectivity of analysts' recommendations. Congress has held hearings into the question of the analysts' recommendations and last week the regulatory arm of the National Association of Securities Dealers proposed rules intended to ensure analysts objectivity.
In addition the Securities Industries Association, a trade group that includes the 14 largest underwriting firms, has put together a list of what it calls "best practices" on financial disclosure by analysts which it said those major brokerages have all endorsed.
But those guidelines and the rules being studied by Merrill competitors do not have the same limits on ownership or trading of stocks called for in the Merrill rules. For example, a spokeswoman for Morgan Stanley (MWD: down $2.27 to $58.46, Research, Estimates) said the firm is in the process of drafting new disclosure rules for its analysts, but is not weighing any prohibition on purchases or limits on continued ownership of the covered stocks by analysts.
Two other Merrill competitors, Goldman Sachs (GS: down $0.31 to $81.60, Research, Estimates) and Salomon Smith Barney, are also reviewing their rules for analysts. A Goldman spokesman said the firm was "looking at a number of things" as part of a regular review of its investment research guidelines, but wouldn't specify any particular rule changes under consideration. Merrill said it was "completing a thorough review" of its practices to make sure they are consistent with the best practices of the industry.
Wall Street analysts' continued strong recommendations of stocks they cover in the face of the broad market decline since the spring of 2000 has prompted questions about the objectivity and validity of the ratings. Even with the decline in prices, a sell recommendation is relatively rare on Wall Street.
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The Merrill statement does not explicitly place any limits on the compensation analysts might get from investment banking work done by the firm, a potential conflict of interest that has prompted much criticism and scrutiny of the industry recently.
Merrill said its corporate strategy and research division does not report to any business unit of the firm, and that compensation to Merrill Lynch analysts, including bonus pools, is carefully separated from other Merrill Lynch business units and is determined by research management. 
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