another MER self patting, sort of other way :-)
cbs.marketwatch.com
Merrill Lynch Limits Analysts' Stocks
7/10/2001 5:55:00 PM
NEW YORK, Jul 10, 2001 (AP Online via COMTEX) -- Merrill Lynch & Co. became the first major brokerage Tuesday to ban its analysts from buying stock in companies they research, a move designed to counter growing concern that analysts may be biased in their public assessments of stocks.
The measure addressed one area of concern - the potential for an analyst to have a direct, personal interest in touting a particular stock. Critics of the industry were quick to note, however, it does not deal with the potentially larger problem of influence on analysts from their firms' lucrative investment banking businesses.
"I think it's a baby step in the right direction. The huge inherent conflicts of interest that remain still need to be resolved," said Benjamin Mark Cole, author of "The Pied Pipers of Wall Street: How Analysts Sell You Down the River."
Cole and others said analysts can't be considered objective until brokerages take additional steps, such as eliminating the bonuses that some analysts get for bringing business to their firms' lucrative investment banking operations.
Merrill Lynch, based in New York, said the ban on stock ownership is effective immediately and was designed to "further ensure the objectivity and independence of its research."
"This move underscores Merrill Lynch's commitment to setting the standard for objectivity, independence and quality of research," said Andrew J. Melnick, director of Merrill Lynch's global securities research and economics division.
The move came several weeks after Wall Street's biggest trade group, the Securities Industry Association, adopted new voluntary guidelines for analysts, such as requiring them to clearly disclose their holdings in companies they cover and prohibiting them from trading against their own recommendations.
Analysts should not have their pay directly linked to the investment banking transactions handled by their firms for companies they cover, the guidelines say.
The Merrill Lynch policy is mandatory for its analysts and more specific than the brokerage industry guidelines, however.
A week ago, a self-policing brokers' group announced financial analysts would be required to disclose potential conflicts of interest when they recommend stocks on television or in other public appearances.
The decision by the National Association of Securities Dealers was made days after federal regulators warned investors not to rely solely on analysts' recommendations.
The NASD's board of governors also proposed and opened to comment tightening the group's rules for disclosing potential conflicts when stocks are recommended in ads, sales material and analysts' research reports. The disclosures would have to be prominent on the page and specific, rather than using formulaic "boilerplate" wording.
For some time, the proliferation of financial talking heads touting stocks on the airwaves has prompted regulators to consider requiring analysts who make stock recommendations to disclose whether they or their investment firm could profit from such advice.
Wall Street analysts, who can reach millions of households on TV, can derive credibility and celebrity status from their appearances.
At the same time, some financial analysts work for firms that do investment work for, or own stock in, the companies they cover - and some analysts own the stock themselves.
In addition, analysts' compensation, including bonuses, is sometimes tied to the business they bring their firms from companies they cover.
Some analysts are rewarded when their relationships with companies lead to lucrative fees the brokerages' investment bankers receive for arranging mergers or acquisitions for the same companies, said Cole.
Others are given bonuses for the overall performance of the investment banking units, which also arrange initial public stock offerings.
"If an analyst is known to be unfriendly to a company, that certainly doesn't help the investment bankers," said Ray Soifer, who runs his own consulting business after retiring last year from his post as senior banking and brokerage analyst at Brown Brothers Harriman.
Merrill Lynch said it will give its 850 analysts several months to sell their holdings in companies they cover, transfer the stocks to managed accounts over which they have no investment discretion, or maintain the holdings under new disclosure rules and stricter disposition policies.
The policy also applies to the analysts' spouses, parents and immediate members of their households, the company said.
Morgan Stanley Dean Witter & Co. in putting in place a system where analysts would have to disclose whether they own a stock they research. The firm has no plans to prevent analysts from buying shares in companies they cover, said spokeswoman Judy Hitchen.
Credit Suisse First Boston is reviewing its policy regarding analyst ownership of shares in companies they research, the company said in a statement.
Shares of Merrill Lynch fell 95 cents to $54.20 on the New York Stock Exchange.
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