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September 19, 2009

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Regulators eye greater transparency

UNITED States regulators on Thursday proposed rules designed to stem conflicts of interest and provide more transparency for credit rating companies. They also proposed banning "flash orders," which give some traders a split-second edge in buying or selling stocks.

The changes, which were opened to public comment for 60 days, could eventually be adopted by the agency, possibly with revisions.

The credit rating industry was widely faulted for its role in the subprime mortgage debacle and the financial crisis. The five members of the Securities and Exchange Commission voted at a public meeting to propose rules that could reshape an industry dominated by three firms: Standard & Poor's, Moody's Investors Service and Fitch Ratings. Their practices would be opened wider to public view and subject to some restraints.

Regulators say they also hope to spur more competition in the rating industry, with possible new entrants -- as well as the other seven existing agencies -- challenging the dominant firms. One of the SEC's proposals is intended to bar companies from "shopping" for favorable ratings of their securities, by requiring companies to disclose whether they had received preliminary ratings from other agencies.

Meanwhile, flash orders have become a hot-button issue in recent weeks amid questions about transparency and fairness on Wall Street. A flash order refers to certain members of exchanges -- often large institutions -- buying and selling information about ongoing stock trades milliseconds before that information is made public.

Nasdaq OMX Group Inc, which operates the Nasdaq Stock Market, and the BATS exchange have voluntarily stopped using flash orders, which made up an estimated 3 percent of stock trading. The New York Stock Exchange has never used them.

The rating agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money.


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