Merrill Lynch & Co. has prohibited its research analysts from buying shares in companies they cover.
The move, announced Tuesday, took effect immediately and affects all of its 600 analysts around the world.
The announcement followed increased regulatory scrutiny of sell-side analysts. The brokerage industry has come under fire from lawmakers as well as investors whose portfolios have shrunk in volatile markets. Some observers have charged that sell-side equity analysts talk up stocks that are underwritten by their companies.
About 20% of the employees in Merrill's equity research department hold positions in stocks they cover, said Angela Wrigglesworth, a spokeswoman with the New York financial services giant. They will be given until Aug. 31 to unwind those positions or meet certain conditions for retaining them, she said.
Those who do not sell will have to transfer such holdings into blind trusts or disclose them in their research reports, Ms. Wrigglesworth said. The latter group will be permitted to sell only the stocks on which their intermediate and long-term opinions are "neutral" or lower, she said.
At Merrill, "neutral" is the second-lowest rating, ahead of "reduce/sell."
Ms. Wrigglesworth said that to the best of Merrill's knowledge it is the first large firm to implement a written policy on equity ownership by sell-side analysts. However, some of Merrill's regional peers already have such policies.
A.G. Edwards & Sons in St. Louis has had a similar policy for a couple of years, said Diana Yates, an equity analyst at A.G. Edwards who covers Merrill.
Merrill's announcement came less than a month after the Securities Industry Association, the umbrella trade group for the nation's broker-dealers, issued a code of best practices for its members in an effort to eliminate conflicts of interest between research departments and investment banking units at Wall Street firms.
The SIA's best practices, which were signed by the heads of 14 major firms, were issued to coincide with the start of hearings before the capital markets panel of the House Financial Services Committee. The SIA had recommended that analysts not trade against their recommendations and that they disclose their personal investments in a company in research reports.
On Tuesday, lawmakers commended Merrill for taking the lead among the major Wall Street firms.
Rep. Richard H. Baker, R-La., chairman of the capital markets panel, described the move as "a step toward the kind of real self-regulatory standards for analyst objectivity which serve the interests of individual investors."
Rep. Michael G. Oxley, R-Ohio, said he hoped other firms would follow Merrill's lead in reviewing their policies as the House committee continues its examination of the issues.
James Spellman, a spokesman for the SIA, also commended Merrill for its move and said that his group would continue to push for ways to preserve "integrity of research."
