MARKETS: Financial  markets are as much a social contract as is democratic government. They operate under complex systems of rules and relationships that can trigger a disastrous and long-lasting set of consequences if they are broken.

The biggest rule in financial markets is that of trust: trust in the people we do business with; trust in the information published by companies we buy stock in; and trust in the expert opinions we gather to make investment decisions.

The recent, almost daily, news of insider partnerships, excessive executive compensation, self-serving stock-hyping, and accounting firms doubling as auditors and strategists has shaken public and investor trust in the markets. Low trading volumes and falling prices on US stock markets show a crisis in investor confidence. Institutional and retail investors are waiting for signs of leadership.

History suggests that financial shenanigans are more likely to destroy Americans' love for equities than a couple of years of poor market performance. During the Great Depression, investors witnessed scandals that erupted after the 1929 crash. People swore they would never own stocks again. A generation later, the go-go market of the 1960s ended with a series of scandals. In the 1930s and the 1970s, legislators and prosecutors took the lead in tackling public concerns over the market.

This time, there is a chance for a different outcome. The economy looks better now than it did in either period. The strong productivity gains seen in the 1990s' expansion are continuing, offering hope for further strong economic growth in the next few years. Even a double-dip recession or a further rise in the unemployment rate would be far less damaging than the depression of the 1930s, or the deep recession of 1973-75.

But integrity, reliable information for investors and clarity in corporate reporting are crucial. The investment community has begun to deal with some of the issues raised by bankruptcies and the dotcom bust. Several investment banks say they will change the way they publish stock recommendations. Others are taking steps to strengthen the barriers between corporate advisory businesses and their equity analysis.

It is also necessary for publicly held companies and their accounting firms to produce clear and transparent earnings reports. This should be combined with changes to eliminate conflicts of interest that threaten the market's integrity. Among the essential reforms in this area should be:

Full, quarterly reporting of employee stock option grant expenses. Investors must be able to see expenditures on employee and executive compensation and calculate the potential dilution of their holdings.

Company earnings statements that present an honest picture instead of a rosy scenario. Inevitable adjustments to business operations when the economy shifts should not be labelled as one-time events and ignored when earnings are calculated. Severance payments, asset write-downs, or factory closures, are real expenses.

A clear distinction between pension investments and corporate earnings. Professionally managed pension plans are valuable employee benefits. But if the portfolio manager responsible for the plan has a good year in the markets, the investment returns that support the plan's payments to its beneficiaries should not be counted as income to the company.

Limits on payments for non-audit work to auditors. If the current level of non-audit fees is so low that they make little difference to the auditors, eliminating these fees will not matter. If the non-audit business is large enough to matter to auditors, it is large enough to be a conflict of interest.

Americans used to pride themselves on having open financial markets with information and access for everyone. We used to sneer at less open and less fair markets abroad. But these problems affect the US as much as, or more than, anywhere else . Assuring that our markets are open, that information is available, that integrity matters and that conflicts of interest are controlled is essential if investors are to return to the stock market.

- (Financial Times Service)

The writer is a managing director and chief investment strategist of Standard & Poor's, the credit rating agency.