Merrill Lynch & Co.’s agreement to pay $100 million in fines to New York and other states and to change the way it compensates its researchers has ended an investigation for one company, but it already is beginning to have a ripple effect on the rest of the sector. Following the decision to change the way it operates, Salomon Smith Barney (SSB) followed suit, acknowledging that Merrill Lynch had set an industry standard that should be followed.

However, whether there are changes across the industry remains somewhat questionable. Analysts are compensated for how well they perform for their investors, but in many cases, their firms are also compensated in investment banking fees for advice given to the corporations the analysts cover.

On Thursday, Securities and Exchange Commission (SEC) Chairman Harvey Pitt said the agency is going to “move quickly” to adopt conflict of interest rules for financial analysts. Pitt’s statements during an interview Thursday on public television’s Nightly Business Report following the Merrill Lynch settlement.

One rule, Pitt said, could require an analyst to “certify” that his views are real. He also said that analysts would have to verify that “no part of their compensation, either directly or indirectly, in anyway came as a result of the recommendation” contained in the analysis. Pitt said that type of rule would make analysts personally liable for fraud if their reports did not reflect their real beliefs.

The Merrill Lynch settlement last Tuesday ended a possible move by New York Attorney General Eliot L. Spitzer to file criminal charges against the firm or any of its analysts or managers. Spitzer, using emails of the Internet stock analysts, had accused the company of promoting stocks of companies whose business it wanted to obtain. The firm still faces lawsuits by individual investors, and federal regulators are investigating conflicts of interest among the analysts.

“The world is shifting,” Spitzer said following the agreement, noting that the “largest investment house was fundamentally rewriting the rules.” Stephen M. Cutler, director of enforcement for the SEC, called the settlement an “important milestone for investor protection,” but added, “it is not the finish line and will not preclude our own efforts on behalf of the investing public.”

Among other things, the company agreed to prohibit analysts from promising positive stock ratings to prospective clients or from lowering their ratings to punish companies for not hiring it. Although Merrill Lynch said it had never paid analysts a portion of the fees for particular transactions, the analysts’ contributions to investment banking were measured and were considered in settling their income.

Rosemary Berkery, Merrill Lynch’s general counsel, said the company will put more weight on how well the securities perform that are under a particular analyst, and the performance of the stocks, and not just the fees earned from them, will affect compensation.

Merrill Lynch stated that the settlement “represents neither evidence nor admission of wrongdoing or liability. However, executives were required to add a stipulation to the settlement, in which they publicly apologized to clients, shareholders and employees for the “inappropriate communications brought to light” by the investigation. The apology be released by the company, and said, “We sincerely regret that there were instances in which certain of our Internet sector research analysts expressed views which at certain points may have appeared inconsistent with Merrill Lynch’s published recommendations.”

The apology said the firm considered the situation “a very serious matter,” and said that the communications had “failed to meet the high standards that are our tradition and will not be tolerated.” The company plans to separate its research department from its investment banking by reinforcing its fire walls by adopting new policies. It also said there would be “intensified oversight” and “strengthened enforcement of existing ones.”

Under the agreement, which will pay $48 million to the State of New York and the rest distributed among the other states, Merrill Lynch plans to do the following:

State on each Global Equity research report whether it received or is entitled to receive compensation over the past 12 months, or whether it is entitled to receive compensation from equity offerings or merger or acquisition transactions by the companies covered in the report;

Include a legend on the first page of its research reports that investors should assume the company is seeking or will seek investment banking or other business from the mentioned companies.

Include specific disclosures on the reports the aggregate distribution, calculated quarterly, of the intermediate-term rating category used for all stocks in the sector and all those that Merrill Lynch has performed services for or received compensation for in that sector in the past 12 months.

Research analysts will be compensated only for those activities and services that are intended to benefit the investor clients.

Following the settlement announcement, SSB said Wednesday it would change the structure of its stock research department to match Merrill Lynch’s changes. In a memorandum to the SSB staff, CEO Michael A. Carpenter said a research review committee would be formed to oversee analysts’ recommendations, and said SSB would separate “the evaluation and compensation of equity research analysts from investment banking.”

Carpenter said the changes would “enhance the quality and integrity of our equity research product,” adding that Merrill Lynch had now set an industry standard that SSB would follow.

From the beginning, said Spitzer, New York had wanted to structure a way to “protect analysts from the improper pressures applied upon them by either investment bankers or the clients outside the investment house.” He said SSB’s changes were an “affirmation” that the plan could work.

Spitzer wants all of the large Wall Street firms to revamp their research departments in a way like Merrill Lynch’s changes, but SSB is the first to announce it would mirror those changes. Last week, Goldman Sachs appointed E. Gerald Corrigan to a position of investment research ombudsman to ensure the company’s research was objective.

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