|
MERRILL LYNCH REACH UNPRECEDENTED AGREEMENT TO REFORM INVESTMENT
PRACTICES
Merrill
Lynch to Pay $100 Million Penalty
On May 21, 2002, the Office of New York State Attorney
General Eliot Spitzer issued the following press release:
State Attorney General Eliot
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.
|