Merrill Lynch puts limits on analyst shares

Merrill Lynch analysts can trade in the shares they follow

By BBC News Online's North America Business Reporter, David Schepp

In an attempt to ensure the integrity of its equities research, Merrill Lynch has set new restrictions on the stock holdings of its market analysts.

The world's largest brokerage announced on Tuesday its equity analysts would be prohibited from buying stocks in the companies they cover, among other restrictions.

Internet bust: When stocks fell, some people blamed analysts

The move comes less than a month after an industry group, the Securities Industry Association (SIA), unveiled a list of guidelines aimed at restoring credibility among its member brokerages.

Merrill Lynch said the new policy immediately applies to all 850 of its analysts in 26 countries who cover more than 3,500 companies worldwide.

Dot.bomb fallout

The move "is intended to strengthen investor confidence in the process analysts follow," Andrew Melnick, Merrill Lynch's director of global research, said in a written statement.

Confidence was shaken following several positive recommendations on technology stocks - specifically those in the now-failed dot.com realm - that led to many investors losing thousands if not millions of dollars.

Merrill Lynch analyst Henry Blodget - along with Morgan Stanley analyst Mary Meeker - has been held up as a poster-child for making the type of recommendations that caused some investors to lose money.

A New York doctor has alleged that the high-profile analyst recommended stocks in which the US investment bank had a financial interest.

Last month, Merrill Lynch was among the 14 largest investment banks to approve what the SIA termed "best practices" for analysts and brokerages.

In issuing its guidelines, SIA said analysts should adhere to a number of principles, including not to trade against their own recommendations and disclosing their holdings in the companies they cover.

Rosy stock ratings

Analysts, who take a critical look at a company's operations and make recommendations on whether to buy, sell or hold shares based on their findings, have come under fire in recent years for issuing overly rosy stock ratings.

Securities firms routinely publish research, advising investors which stocks to buy and sell. But they also compete for assignments to package new stock floats for corporate clients.

At hearings last month in Washington, US Representative Richard Baker criticised analysts who recommend a "buy" rating on stock only to sell their holdings from their portfolio of stocks.

Merrill Lynch said its analysts would be barred from doing so from now on.

Analysts who currently own stocks they cover have the option to sell all those stocks at the same time, put the shares into a managed account over which they have no investment discretion, or hold all the stocks under new disclosure rules and stricter disposition policies.

Further, Merrill Lynch also plans to disclose in research reports which analysts have positions in the stocks discussed in the report - without regard to the size of the holdings.

The disclosure, which will begin to appear on reports dated 1 September and later, will say: "One or more analysts responsible for the recommendation on this security maintains a position in this security."