Brokerages Launch Stock-Ratings Changes

Several major brokerages Monday implemented previously announced changes to their stock ratings systems, seeking to answer criticism that Wall Street research picks are confusing and overly bullish.

The firms, including Salomon Smith Barney, Bear Stearns, Merrill Lynch & Co. and Credit Suisse First Boston, cut the number of possible stock ratings and, in some cases, simplified their terminology. Bear Stearns and CSFB also began to rate stocks against their industry sector rather than the overall market.

Bear Stearns, which used to have a five-level rating system, now rates stocks as either “outperform,” “peer perform” or “underperform.”

Salomon Smith Barney, a unit of Citigroup Inc., also reduced its possible ratings from five to three, similar to the Bear Stearns system.

Merrill said its ratings of “buy,” “neutral” and “sell” replace the previous four-rating system of “strong buy,” “buy,” “neutral” and “reduce/sell.”

The revised ratings come after a firestorm of criticism that Wall Street firms and their analysts have issued too many positive calls on stocks to please company managements, and that brokerages purposefully obfuscated their ratings to mislead small investors.

Federal and state securities regulators have ongoing probes into whether analysts crossed legal lines in the late 1990s by hyping stocks primarily to generate lucrative banking deals.

Some brokerages moved earlier to simplify their ratings systems. Morgan Stanley implemented a new system in March, and has 21% of its stock picks rated as “underweight,” its lowest category.

Across the industry, the number of “sell” or “underweight” stock ratings has remained a tiny minority, even as share prices have plunged over the last 2 1/2 years.