Merrill Lynch to Widen Disclosure

Merrill Lynch & Co. agreed Thursday to give investors new details about conflicts of interest that threaten the objectivity of its stock analysts. But the firm still must settle with regulators on broader issues involving its research practices.

The big brokerage consented to disclosure changes to satisfy a legal action brought last week by New York state Atty. Gen. Eliot Spitzer, who charged that Merrill’s stock research is compromised by conflicts with its investment-banking business.

A New York state Supreme Court judge had given Merrill until today to enact a new policy.

In a report last week, Spitzer charged that Merrill’s Internet-industry analysts in 2000 and 2001 routinely doubted the validity of their own stock touts and admitted talking up stocks simply to bring in investment-banking work.

Merrill’s deal with Spitzer calls for the brokerage to begin divulging on a Web site by next week any investment-banking work done in the last 12 months for companies reviewed by its analysts.

By June 3, the firm must prominently include in individual research reports information about potential banking conflicts of interest. By that date the brokerage also will provide a breakdown of how it rates stocks for performance over the coming 12 months--for example, the percentage of “buy” ratings versus “sell” ratings. One of Spitzer’s criticisms is that Merrill never rated Net stocks “sell,” even as prices plunged.

“These disclosures are necessary to inform consumers and investors of the inherent conflicts of interest at Merrill Lynch,” Spitzer said.

Merrill said the new disclosure policy “far exceeds the current industry standard.”

But Spitzer said that “serious issues remain to be resolved.” The two sides are holding intensive negotiations on a possible admission of wrongdoing by Merrill, the size of any fine it would pay and the steps that would be taken to insulate research from banking, a source said.

Talks have focused largely on the separation of research and banking, with lesser attention given thus far to the other issues, the source said.

The Merrill case has riveted Wall Street because its outcome is expected to serve as a framework for industrywide reform. Spitzer recently subpoenaed documents from other major brokerages, broadening his probe.

“Everybody is watching this pretty closely, because whatever happens in this situation will have an impact in shaping what happens at brokerages nationwide,” said Henry Hu, a securities-law expert.