L.A. Code Said to Influence Divestment Policy : South Africa: U.S. brokerages face a choice--maintaining business ties in the deeply troubled nation or getting millions of dollars in municipal accounts at home.

Merrill Lynch’s decision last week to eliminate the last of its business connections with South Africa, including trading South African stocks, highlights an unexpected role that the City of Los Angeles increasingly is playing--that of primary municipal policeman of South African divestment.

The city’s recently toughened stance reportedly influenced the move by Merrill Lynch, the nation’s largest brokerage firm, bringing it in line with several other companies eager to hold on to millions of dollars worth of city business. Merrill’s new policy also reflects a concerted effort by state and local governments to force U.S. corporations to break all links with South Africa.

“I think we have had a significant impact,” Mayor Tom Bradley said in an interview Tuesday. “Companies like Salomon Bros. and Ashland Oil have pulled out of South Africa as a direct result of the city’s refusal to do business.”

The city’s anti-apartheid ordinance, which the City Council first passed in 1986 and strengthened last July, is probably the most stringent in the nation. It forbids the city from buying goods from or otherwise doing business with companies that have even the thinnest of ties to South Africa.

The tougher rules, pushed by Councilwoman Gloria Molina after a report showed that more than 900 exemptions had been granted to the 3-year-old ordinance, now prohibit such activities as the buying and selling of a variety of South African securities or even affiliating with an insurance company that has a reinsurance agreement with a South African insurer.

Merrill Lynch said Thursday that it would no longer research or trade the shares of South African companies, except generally to follow gold mining and a few other industries without recommending specific stocks. Among other things, the company said that, as of Dec. 1, it would not trade American depository receipts for South African stocks--the vehicle by which U.S. investors hold foreign securities--or maintain any accounts with South African banks.

A Merrill Lynch spokesman would not confirm a Wall Street Journal report that the city’s strengthened law contributed to Merrill’s policy change, a contention that city officials believe to be true. Merrill Lynch stated that the change came as part of a regular policy review of its South African stance, which already prohibited doing business in the troubled country or trading its gold coins or commodities.

“Firms who thought they were clean and we thought were clean became connected (to South Africa) under the revised ordinance,” one city official said. “If you don’t pass muster with Los Angeles, it will become an issue with a number of cities that have ordinances” that are less precisely worded.

Increasing pressure from state and local governments is hard for companies such as Merrill Lynch to ignore, said Richard Knight, research associate at the Africa Fund, a New York-based organization that tracks corporate ties to South Africa.

Los Angeles, for example, is a major issuer of municipal bonds, and its pension funds have huge holdings of securities. For brokerage houses that underwrite those bonds and manage the assets of those pension funds, “that’s a big piece of their business, probably more important for them than trading a few South African stocks,” Knight said.

“We are pushing the state of the art,” Councilman Marvin Braude said. “It’s kind of an esoteric thing for a municipality to be engaged in, and I think it’s an effective way of carrying out the policy.”

The only pressure directly applied by the city was in the form of a questionnaire requesting more detailed information about the South African dealings of the companies that do business with Los Angeles.

The questionnaire was sent in late August to about 240 banks, investment firms and insurance companies, among them Merrill Lynch, said George Wolfberg, chief administrative analyst for City Administrative Officer Keith Comrie. About two-thirds of the forms have been returned, but Merrill Lynch’s so far is not one of them, said Wolfberg, who specializes in tracking South African involvement for the city.

Among the investment firms who have stated on the questionnaire, under penalty of perjury, that they have no such business dealings with South Africa are Bear, Stearns & Co., Salomon Bros. and Morgan Stanley & Co., Wolfberg said.

In an informal survey Tuesday of other big investment firms, Goldman, Sachs & Co. and Smith Barney, Harris Upham & Co. said they trade no South African stocks or other securities and have no other South African business dealings. Shearson Lehman Hutton, which is controlled by American Express, said it doesn’t do business with South Africa but does trade American depository receipts for South African securities, which could put the company in violation of the Los Angeles ordinance.

Local officials said they were pleased about Merrill Lynch’s decision.

“This is good,” said Councilman Zev Yaroslavsky. “Merrill Lynch was at one time being pretty stubborn and recalcitrant about changing their policy.”

“It’s late but nonetheless welcome,” Councilman Robert Farrell said, adding that the divestment shows that the message of anti-apartheid demonstrations in South Africa “has been received, fully understood and acknowledged.”