“Merrill Lynch & Co. has put the finishing touches on a formal proposal that it hopes will persuade New York Attorney General Eliot Spitzer to not bring formal charges as a result of his 10-month inquiry into the firm’s research practices, according to people close to the investigation,” writes Charles Gasparino.

“The proposal, these people said, includes the creation of an ombudsman and a separate committee to monitor Merrill’s research, payment of a fine totaling tens of millions of dollars and an expression of some contrition. Restitution for aggrieved investors who lost money on stocks Merrill analysts recommended, however, would be left up to civil litigation on their behalf.”

“Another key element to the deal: Merrill will also attempt to get other Wall Street firms to go along with similar plans as a way of attempting to restore investor confidence in the research process, these people said.”

“The move comes only two days after the two sides agreed on a ‘framework’ for a possible settlement of allegations by Mr. Spitzer that the big Wall Street firm misled small investors with overly optimistic research on stocks of companies that were also investment-banking clients, paying big fees to Merrill. When the stocks plummeted, investors lost large sums in the process.”

“Merrill has denied the charges, but after Mr. Spitzer released e-mails from analysts showing that they privately harbored doubts about companies that received higher ratings from the firm, shares of Merrill dropped nearly 20% over the next few weeks. On Thursday, Merrill fell $1.04 to $42.91 as of 4 p.m. in New York Stock Exchange composite trading.”

“The firm planned to present the proposal to Mr. Spitzer’s office before the weekend. If Mr. Spitzer agrees to its terms, a final settlement could be reached in a matter of days. Spokesmen for both Merrill and Mr. Spitzer declined to comment Thursday.”

“Under the proposal, Merrill would agree to appoint an ‘ombudsman’ to monitor its research department, as well as create a separate committee that will keep tabs on the relationship between research and investment banking, these people said. Analysts no longer would be paid based on how many investment banking deals they help the firm generate; in fact, such deals would be specifically barred from being taken into account when the firm develops its end-of-year bonuses for researchers.”