By David Schepp BBC News Online's North America Business Reporter

New York brokerage firm Merrill Lynch has proposed changes to its ratings system for stocks as well as how its research analysts earn their pay.

The changes follow the settlement last month of a 10-month investigation by the New York attorney general into "tainted" advice the firm gave some of its investing clients.

Merrill timeline

8 April - Judge orders Merrill Lynch to disclose conflicts of interest 17 April - Merrill begins talk with attorney general 26 April - Merrill CEO apologises for disparaging e-mails 7 May - Shares of Merrill trade below $40, having slipped 25% since 8 April 21 May - Spitzer announces deal, Merrill to pay $100m fine 7 June - Merrill announces changes to stock ratings and analyst pay

The proposed changes to its stock-rating system, to be instituted in September, include reducing the number of ratings Merrill issues to three from four.

The new ratings system "will be clear and simple for investors to use," and include the terms buy, neutral and sell, Merrill said in a press statement.

Merrill also said its new compensation scheme for its research analysts will be based on their experience and performance as well as other factors.

The investment-banking side of Merrill's business "will not have input into analyst compensation".

Simplified ratings

The new stock-rating system is not required by either the settlement reached last month with New York Attorney General Eliot Spitzer or recent rules implemented by the Securities and Exchange Commission (SEC).

The new ratings, however, make it simpler for Merrill to meet other regulations imposed by the rule-making bodies of US stock exchanges.

The new policies require brokerages to disclose the number of ratings it has issued and assign them one of three categories - buy, hold and sell - regardless of the terminology used by the firm.

Merrill has further simplified its rating system by eliminating ratings based on the length of time shareholders intend to purchase or sell a stock.

The firm's ratings will now only apply to the "intermediate term", described as "0-12 months" from the date the rating is issued.

Buy or sell?

Analyst pay came under much scrutiny after the bottom fell out of many technology stocks following the decline of investor confidence in shares of dot.com and other tech firms.

The attorney general, in his complaint against Merrill, said the firm issued "tainted" advice in telling some investors to buy certain high-risk tech stocks, while privately telling Merrill clients to sell them.

Mr Spitzer contended that the way in which Merrill had structured its operations resulted in conflicts of interest for its research analysts.

In the settlement, which imposed a $100m (�70m) fine upon Merrill but demanded no admission of guilt, the attorney general required the firm to establish a wall between its research and investment banking functions.

Merrill stock price was hurt by the investigation, losing one-quarter of its value in the weeks after the 8 April indictment by Mr Spitzer.

In midday trading on Friday in New York, shares of Merrill were trading at $39.50, much below their 52-week high of $67.