Merrill tightens reins on analyst holdings

Summary:The brokerage will prohibit research analysts from owning stock in the companies they cover, the latest response to the backlash against Wall Street conflicts of interest.

Merrill Lynch said Tuesday it will prohibit research analysts from owning stock in the companies they cover, the latest response to the backlash against Wall Street conflicts of interest.

The policy, effective immediately, is part of an effort "intended to strengthen investor confidence in the process analysts follow," said Andrew J. Melnick, Merrill Lynch's director of Global Securities Research & Economics.

The new policy gives analysts already holding stock in the companies they cover several options and a "brief window of time" to make the transition. Analysts can either sell all of their holdings regardless of their ratings or transfer the stocks to accounts where they have no control over the investments. They also have the option of keeping their holdings, but can only sell when the intermediate- and long-term opinions are "neutral" or lower.

Wall Street analysts have been widely criticized for keeping "buy" ratings on stocks even when it was clear a company's prospects were unraveling. Under the new Merrill Lynch policy, analysts must wait 24 hours after a research report to sell the stock.

Merrill's policy extends to the lead analyst and members of the research team, including assistants, spouses and immediate members of their families. In addition, all positions will be disclosed no matter how small the holding.

Many brokerage firms are now disclosing analysts' "material" holdings. For example, Prudential Securities recently disclosed that Internet analyst Mark Rowen held shares of eBay, but said he did not have material positions in Amazon.com, Priceline.com and other companies he covers. Prudential defines material positions as those worth more than $10,000.

Morgan Stanley Dean Witter plans to put a similar policy into place that would require analysts to disclose whether they hold stock in a company they cover. The company doesn't plan to require them to divest holdings, said spokeswoman Judy Hitchen. Analysts are already prohibited from trading against their recommendations and from performing trades before their research is made public.

She said the forthcoming policy, which has no firm deadline, is in keeping with a set of "best practices" that the Securities Industry Association recently issued. Morgan Stanley and Merrill Lynch, along with 12 other Wall Street firms, helped the SIA formulate the guidelines.

An eye on Wall Street
In recent months, Wall Street analysts have been highly scrutinized for perceived conflicts of interest regarding their recommendations.

A proposal from the National Association of Securities Dealers issued last week would require analysts to disclose their holdings when they appear on TV to discuss stocks.

That proposal followed a congressional hearing into the issue, and the SIA guidelines.

The guidelines ask analysts to disclose their holdings, but the language used can sometimes be less than clear.

Some companies simply state at the beginning of a research report that "the senior analyst(s) has a material position" in the relevant stock.

But other alerts are not so obvious, particularly when they apply to business that the brokerage firm itself may have with the covered company.

Credit Suisse First Boston "may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or options thereon," one such notice reads. "In addition, it may make markets in the securities mentioned in the material presented in this report."

The Securities and Exchange Commission has even gotten into the fray, issuing an "investor alert" that encourages individuals not to rely solely on Wall Street analysts for guidance in picking stocks, and warning them that analysts could have conflicts of interest.

Topics: Tech Industry

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