Merrill Lynch alters system to avoid conflicts of interest

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NEW YORK — Investment bank Merrill Lynch & Co. will pay analysts based on the accuracy of their forecasts to avoid potential conflicts of interest.

The change comes less than a month after Merrill Lynch, the country's leading brokerage, reached a settlement with New York's attorney general, who accused the company's analysts of misleading investors. Eliot Spitzer said Merrill Lynch's analysts touted shares in companies so the firm would win highly profitable investment banking business from the same companies.

The settlement required Merrill Lynch to stop rewarding its 800 analysts for helping the firm win investment banking fees for arranging mergers and new stock offerings — and put pressure on other major Wall Street firms to do the same.

The company also agreed to pay a $100 million fine after revelations that Merrill Lynch analysts privately disparaged stocks they had publicly promoted.

Also a new stock rating system, which reduces the number of ratings to three (buy, neutral, sell) from the previous four ratings system (strong buy, buy, neutral, reduce/sell) will be implemented in September.

"Our analysts are eager and enthusiastic to do things that help win back the trust of investors," said Robert McCann, senior vice president and head of global securities research.

The new compensation system will base analysts' pay on how accurate they are and how their recommendations benefit investors, among other factors. The firm will use input from clients to help gauge the latter.

"Investment banking will not have input into analyst compensation," a company statement said.

A spokesman for New York Attorney General Eliot Spitzer said the changes announced by Merrill Lynch were in line with the settlement terms.

Last month, Citigroup Inc.'s Salomon Smith Barney investment banking division said it would change compensation for its stock analysts.