Merrill Bars Stock Purchases by Analysts

Merrill Lynch & Co. on Tuesday became the first major U.S. brokerage to ban its analysts from buying shares in the companies they cover, in an attempt to defuse a growing perception among investors that Wall Street research is tainted.

Merrill, the biggest U.S. brokerage, said it will require its more than 850 analysts to take one of three actions with stock they already own in companies they follow: sell all the shares; put the stock in managed accounts over which they have no discretion; or keep the shares and disclose their stakes in research reports starting Sept. 1.

No additional purchases of followed stocks will be allowed, the firm said.

Wall Street research has come under sharp attack in the last year as many analysts maintained “buy” recommendations on technology stocks even as they collapsed.

Critics say analysts have lost their objectivity and are too beholden to their companies’ investment banking interests, as well as to their own self-interests, especially in cases where they also own shares of companies they cover.

Congressional hearings were held in June to air widespread allegations of internal pressure on analysts to pump up ratings of companies, or at least to avoid angering potential investment banking clients with negative reports or “sell” recommendations.

“One reason that the markets work so well in the U.S. is the belief that [they] function honestly,” said Richard Bove, a brokerage-industry analyst with Raymond James & Associates in St. Petersburg, Fla. “Clearly, when you have Congress looking at the credibility of analysts and we’re in a down market, a lot of people are questioning Wall Street. Merrill’s move was the right thing to do.”

Merrill’s action Tuesday goes beyond the new voluntary standards recently adopted by Wall Street’s biggest trade group, the Securities Industry Assn. Those guidelines included requiring analysts to clearly disclose if they own shares, but stopped short of banning ownership entirely.

Among other major brokerages, Credit Suisse First Boston recently said it would require more analyst disclosure of stock holdings, but not outright divestiture.

“Merrill is trying to get out front here with an aggressive step,” said Henry McVey, an analyst who follows brokerage firms for Morgan Stanley Dean Witter, one of Merrill’s biggest rivals.

As part of its new rules, Merrill said it will disclose on the back page of research reports if an analyst continues to hold stock in a company. But it won’t reveal the size of the stake.

The new policy covers analysts, junior members of an analyst’s team, as well as spouses and members of their households.

This move “is intended to strengthen investor confidence in the process analysts follow,” said Andrew J. Melnick, director of Merrill Lynch Global Securities Research and Economics.

Still, many critics say the industry has much further to go to eradicate analyst conflicts of interest, especially in terms of pressure from the corporate finance side of the business.

Michael DiResto, spokesman for Rep. Richard H. Baker (R-La.)--whose House subcommittee on capital markets held the June hearing--said more hearings will be held late this month or in early August on these issues. He said the subcommittee wants to focus on pressures placed on analysts not just by investment bankers, but also by institutional investors such as large mutual funds and by financial media.

But DiResto said Baker praised Merrill’s move. “Without question this is a positive development and should be commended,” DiResto said. “This is a meaningful component of an overall reform package.”

At Merrill rival Goldman Sachs & Co. on Tuesday, spokesman Ed Canaday said although the firm has “very strict” policies regarding analysts’ trading in stocks, it doesn’t ban them from owning shares of companies they cover.

“At this point no changes to those policies are being implemented,” he said. “But I don’t want to say what we will be doing in the future.”