Merrill Lynch Announces Major Changes to Stock Ratings and Compensation Systems for Research Analysts

Business Wire, June 7, 2002

Business & Finance Editors

NEW YORK--(BUSINESS WIRE)--June 7, 2002

Merrill Lynch (NYSE:MER) today announced key changes to its research process, including a new rating system for stocks that will be clear and simple for investors to use, and new performance-based compensation methods for research analysts.

The rating system, to be implemented in September, will provide clients with stock recommendations based on projections of total return and risk.

The compensation system, effective immediately, will provide further incentives for analysts to aspire to superior performance for the benefit of investors.

"These initiatives will increase the value we provide our clients," said Robert J. McCann, senior vice president and head of the Global Securities Research and Economics Group. "We're taking these steps to reinforce investor confidence in the quality, independence and insights of what we believe is the finest research team in the industry."

New Stock Ratings

The new rating system will show three dimensions that are important for investors to consider when assessing a stock: 1.) the 0-to-12-month investment recommendation, 2.) the projected risk as measured by potential price volatility, and 3.) the dividend outlook.

To simplify and clarify this system for investors, Merrill Lynch will issue only an intermediate-term (0-to-12-month) rating. The current long-term rating will be eliminated.

Stocks will be rated as follows:

-- accuracy of the analysts' ratings

-- accuracy of the analysts' earnings estimate

-- client service to individual and institutional investors

-- surveys and input from investor clients

-- identifying and assessing investment opportunities for investor clients

This will replace the current rating system of Strong Buy (1), Buy (2), Neutral (3) and Reduce/Sell (4). Price volatility risk will be rated as:

-- accuracy of the analysts' ratings

-- accuracy of the analysts' earnings estimate

-- client service to individual and institutional investors

-- surveys and input from investor clients

-- identifying and assessing investment opportunities for investor clients

This will replace the current system of Low Volatility (A), Average Volatility (B), Above Average Volatility (C) and High Volatility (D).

Cash dividend will be rated as:

-- accuracy of the analysts' ratings

-- accuracy of the analysts' earnings estimate

-- client service to individual and institutional investors

-- surveys and input from investor clients

-- identifying and assessing investment opportunities for investor clients

In assigning Buy, Neutral and Sell ratings, analysts will be guided by specific guidelines for anticipated total return, with riskier stocks requiring higher expected returns, as follows:

-------------- --------------------------- -------------------------
               Low and Medium              High Volatility Risk
Risk Rating    Volatility Risk Stocks      Stocks
-------------- --------------------------- -------------------------
Buy                         > 10%                   > 20%
-------------- --------------------------- -------------------------
Neutral                   0% - 10%                 0% - 20%
-------------- --------------------------- -------------------------
Sell                        < 0%                     <0%
-------------- --------------------------- -------------------------

To comply with various regulatory initiatives and to help investors measure the value, objectivity and independence of Merrill research reports and recommendations, all reports will also include the following information:

-- accuracy of the analysts' ratings

-- accuracy of the analysts' earnings estimate

-- client service to individual and institutional investors

-- surveys and input from investor clients

-- identifying and assessing investment opportunities for investor clients

New Compensation System

The new compensation system, effective immediately, will base analysts' pay on their industry expertise and performance, how their insights and recommendations benefit investors, as well as competitive factors. Investment banking will not have input into analyst compensation.

Performance will be evaluated on key measures, such as:

-- accuracy of the analysts' ratings

-- accuracy of the analysts' earnings estimate

-- client service to individual and institutional investors

-- surveys and input from investor clients

-- identifying and assessing investment opportunities for investor clients

These changes, which implement terms of the company's recent agreement with the New York State Attorney General, are just the beginning of a series of modifications to the research process. During the coming months, Merrill Lynch will also roll out several other initiatives to help clients gauge performance.

"Achieving research excellence is our singular mission, and these changes are just the beginning of a series of modifications to the research process," McCann said. "We cannot, of course, guarantee that our recommendations will always turn out to be correct. But we do promise that honesty is our guidepost, and that clients' interests will come first. That is our tradition of trust. That is our commitment to our clients."