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Post date: May 21 2002

Spitzer, Merrill Lynch Reach Unprecedented Agreement To Reform Investment Practices

State Attorney General Spitzer today announced an agreement that should bolster the integrity of stock analyst research at the nation’s largest securities firm, and substantially outstrips any current requirements or mandated reforms.

The agreement with Merrill Lynch comes after allegations that the company’s investment advice was tainted by conflicts of interest. A core issue was whether or not analysts were being truthful and fair in their public pronouncements on stocks of companies for which Merrill Lynch did investment banking business.

Merrill Lynch has agreed to enact significant and immediate reforms that will further insulate securities research analysts from undue influence from its investment banking division, and will change the way analysts are compensated.

"Real reform is the key to restoring investor confidence," Spitzer said. "This agreement changes the way Wall Street will operate -- severing the compensation link between the research and banking divisions that tainted investment advice."

Under the settlement, Merrill Lynch has agreed to:

  • Sever the link between compensation for analysts and investment banking. The agreement requires Merrill Lynch to separate completely the evaluation and determination of compensation for equity research analysts from Merrill Lynch’s investment banking business.

  • Prohibit investment banking input into analysts’ compensation. Merrill Lynch is forbidden from soliciting or considering any information concerning the amount of investment banking revenue received from clients covered by the research analysts and prohibiting the analysts from being evaluated by investment bankers.

  • Create a new investment review committee responsible for approving all research recommendations with strict standards and independence from investment banking and the analysts themselves;

  • Establish a monitor to ensure compliance with the agreement. The appointment of the monitor is subject to the approval of the Attorney General;

  • Require that upon discontinuation of research coverage of a company, Merrill Lynch will issue a report disclosing the termination of coverage and the rationale for such termination, and will notify investors that the last rating should no longer be relied upon;

  • Disclose in Merrill Lynch’s research reports whether it has received or is entitled to receive any compensation from a covered company over the past 12 months;

  • Pay a $100 million penalty;

  • Issue a statement of contrition on the part of Merrill Lynch for failing to address conflicts of interest.

The agreement also continues and expands the disclosure requirements implemented pursuant to a State Supreme Court order that the Attorney General obtained last month. These disclosure obligations include the requirement that Merrill Lynch provide conspicuous notice on all research reports of whether the company being rated is an investment banking client. The order was signed on April 18, after Spitzer petitioned the court with evidence that Merrill Lynch’s stock analysts disseminated misleadingly bullish ratings to the detriment of individual investors. The conflicts were revealed in internal e-mail communications obtained during a 10-month investigation by Spitzer’s Investment Protection Bureau.

Spitzer commended Merrill Lynch for working with his office to resolve a matter that threatened to undermine this leading Wall Street firm.

"By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," Spitzer said.

Spitzer said his office is continuing the conflict-of-interest probe against other major brokerages. At the same time, Spitzer said he would work with national and state regulators to be as aggressive as possible in implementing industry-wide measures to address the problem.

The Attorney General thanked the North American Securities Administrators Association (NASAA) for its valuable assistance in addressing possible securities law violations at Wall Street investment firms. A NASAA task force co-chaired by New York, California and New Jersey is leading the investigation.


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