SEC Targets Nasdaq Conflicts of Interest : Securities: New rule prohibits changing of inventory position in a stock before research report’s release.

Regulators approved a rule Friday aimed at eliminating conflicts of interest when Wall Street firms trade a company’s stock before releasing a research report on the business.

The Securities and Exchange Commission said the new rule, which applies primarily to the Nasdaq stock market, “will increase investor confidence in the integrity of research reports, thereby protecting investors and the public interest.”

In May, Nasdaq’s parent organization, the National Assn. of Securities Dealers, proposed a rule to prohibit an NASD member from “purposefully establishing, creating or changing its inventory position in a Nasdaq stock” ahead of a research report on the company.

The release of an upbeat research report commonly triggers substantial trading in the affected company’s stock, offering a window for short-term profits. Negative reports can lead to heavy selling of a firm’s shares.

The New York Stock Exchange has had a similar rule for a number of years.

The new rule also covers exchange-listed stocks trading in places other than the share’s primary exchange, known as the third market, as well as derivative securities linked to stocks that are a focus of new research reports.

NASD member firms are urged to create strict internal controls to prevent the flow of research reports into a firm’s trading floor.

NASD spokesman James Spellman said the new rule “is an important move for individual investors.”

The SEC received two letters on the proposed rule, both in opposition.

A.G. Edwards & Sons, a major St. Louis brokerage firm, said the rule would hurt retail customers of a firm with an active research department.

It would prevent a firm from buying stock to meet anticipated customer demand once it issued a favorable research report, the company said.

Firms would have to use outside dealers to meet customer orders once a report was issued, which would raise individual investors’ costs, A.G. Edwards said.