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To: Clappy who wrote (227)	6/7/2002 1:08:20 PM
From: stockman_scott	Respond to of 89467

-Merrill changes analyst pay, stock picking systems By Per Jebsen NEW YORK, June 7 (Reuters) -- Merrill Lynch & Co. <MER.N>, reeling from accusations that it misled investors with overly bullish research, on Friday said it will pay its analysts based on the performance of their stock picks and simplify its stock rating system. The changes come against the backdrop of increased scrutiny of Wall Street banks for the erosion of the so-called "Chinese wall" between their research and investment banking divisions. Merrill settled a lawsuit last month with New York Attorney General Eliot Spitzer, who accused the firm's Internet analysts of pushing stocks they had privately mocked in order to win investment banking business. Merrill, the No. 1 U.S. brokerage, agreed to pay a $100 million fine, and to restrict how it conducts its stock research. As required by the settlement, Merrill said it will prohibit investment bankers' input into determining research analysts' pay and will base compensation on such factors as analysts' industry expertise and the accuracy of their stock ratings and earnings estimates. Spitzer's probe uncovered evidence indicating that Merrill analysts had been paid in large part depending on whether they brought in lucrative deals. Nonetheless, analysts will continue to participate in generating investment banking opportunities, like initial public offerings and secondary stock offerings, Merrill said. Such participation was specifically permitted by the settlement. Robert McCann, the head of Merrill's global securities research group, said analysts play a critical role in helping companies raise money. "We want them to work with our corporate clients," he said. In April, when he unveiled his probe, New York Attorney General Spitzer publicly released e-mails in which Merrill Internet analysts had derisively referred to stocks as "junk" and worse, even though they had given the stocks top ratings. Documents suggested that the analysts were boosting risky stocks to earn multi-million dollar bonuses. Spitzer, with backing from about 40 other state securities regulators, has expanded his probe of analysts' conflicts to other top investment banks. NEW STOCK CATEGORIES Merrill plans to introduce in September a three-category system of "buy," "neutral," and "sell," replacing its current four-category approach of "strong buy," "buy," "neutral," and "reduce/sell." "We want a rating system that is relevant for all investors, and we particularly want our system to be direct and straightforward for our retail investors," said McCann. Merrill is the second top U.S. investment bank to overhaul its stock recommendation system. In March, Morgan Stanley <MWD.N> implemented a revised ratings approach. It changed to a three-category system from a four-category system. Morgan Stanley also began to actively use its lowest rating category, initially assigning 22 percent of covered stocks an underweight rating. The current Wall Street proportion of "sell" ratings is 2.7 percent, according to market research firm Thomson First Call. As part of Merrill's changed approach, it will abandon its current long-term rating system. Also, Merrill will introduce a three-category risk-rating approach of "low," "medium," and "high," replacing its current four-category risk approach. Merrill will retain its current dividend rating approach. Merrill also announced changes to its research reports that comply with new Securities and Exchange Commission rules. These changes include a stock price chart indicating the performance of an analyst's stock picks over time. Earlier this week, as required by the settlement, Merrill research began including tables that provide a breakdown of its ratings for all companies it covers and all companies for which it has provided investment banking services over the last 12 months. The tables also provide sector-specific breakdowns. ((Per Jebsen, Wall Street Desk, (646) 223-6152)) REUTERS * end of story *