At Goldman's annual meeting on Thursday, Blankfein unveiled details of a three-year review and overhaul of the bank's practices in dealing with clients, following high-profile missteps that tarnished its reputation in the aftermath of the financial crisis. The overhaul imposes checks, including through elaborate computerized systems, to ensure that the bank is fair to clients and avoids conflicts, such as being on different sides of the same trade.

Goldman's changes do not appear to go beyond the kind of committee reviews that other Wall Street firms now do, executives at two rival banks said. But they added the use of computerized analyses to detect unfair deals could make the system more effective than rivals' at catching potential pitfalls, even if it costs them some business.

"They want to get their reputation back," said Roy Smith, a professor at New York University's Stern School of Business. "They know that means giving up some business."

Goldman faced public outrage in the aftermath of the 2008 financial crisis over accusations, including a U.S. Securities and Exchange Commission lawsuit, that it had treated clients improperly. Blankfein and other executives also faced intense grilling on Capitol Hill, which deeply embarrassed its CEO.

After serving as CEO since June 2006 and steering the bank through the financial crisis, the 58-year-old Blankfein does not want to leave his post until he feels the bank's reputation and his own legacy are fully restored, people familiar with the situation said.

The month after the SEC's charges, Blankfein set up the Business Standards Committee. He traveled around the world to hold town-hall-style discussions with Goldman partners and managing directors. In a video on Goldman's website on Thursday, Blankfein tells a group of employees not to be afraid to call him if a problem appears because the risk of reputational damage outweighs the cost of possibly wasting his time.

"Everyone has to have big eyes, big ears, know what's going on around them, and be policemen for the organization," he said.

The venue of the annual meeting - in Salt Lake City, where Goldman is heralded as an economic savior because of its recent expansion there - provided a friendlier atmosphere than other recent shareholder gatherings, where protestors drowned out talk of the committee's progress.

The company won shareholder support for its 12 nominees to the board and its positions on the seven other proposals on the ballot. The lowest vote the company received was 68 percent approval for its new stock compensation plan for executives.

Such plans tend to win support from around 85 percent of shareholders, according to proxy solicitor Georgeson Inc.

CHECKS AND BALANCES

Under the reforms, Goldman staffers are expected to be "looking around corners" to make sure deals that seem lucrative in the short term won't harm the bank later, the co-chairs of Goldman's Business Standards Committee told reporters at a briefing on Wednesday. The panel, led by J. Michael Evans and Gerald Corrigan, performed the review and implemented changes.

Evans said many proposed deals will now encounter hurdles that didn't exist before. If they don't clear them, Goldman won't get involved.

In the past, Goldman salespeople and bankers could sell clients almost anything they wanted to buy. Under the reforms, they must now run transactions through computerized processes - which the bank calls matrixes - and sometimes get top-level approvals to make sure deals are appropriate.

Transaction that don't pass muster are taken to more senior Goldman managers. Deals that reach the top executives tend to involve large derivatives or complicated financing schemes, complex structured derivative products or products that involve tax, accounting or regulatory arbitrage, Evans said.

New products proposed by Goldman staff also must run through a committee for approval, Corrigan said.

It will be possible for clients to appeal. Evans gave examples of one unnamed IPO client that took its business elsewhere when Goldman rejected its plan, and another that "begrudgingly" made changes so that Goldman would advise.

Evans said crisis-era deals, like the Abacus and Timberwolf derivatives trades that were documented in a U.S. Senate subcommittee report and involved litigation, would likely not be approved in the same manner today.

Abacus, a synthetic collateralized debt obligation, was the focus of the SEC case. The regulator had said that Goldman allowed Paulson & Co to help pick residential mortgage-backed securities underlying the CDO while the hedge fund was also betting against the security, and failed to disclose that to buyers of the CDO.

"If Abacus came today, it would run through a totally different framework for approval than before," Evans said.

(Additional reporting by David Henry; Editing by Frank McGurty, John Wallace, Jan Paschal and Andre Grenon)

The Securities and Exchange Commission said on Thursday that ISS, a unit of MSCI Inc, will pay a $300,000 penalty and hire an independent compliance consultant.

In settling, ISS neither admitted nor denied the SEC allegations that it violated financial adviser rules designed to prevent misuse of material non-public customer information.

Mutual funds, pension organizations and other institutional investors hire firms such as ISS to advise them on how to vote on important corporate issue such as executive compensation and board appointments.

The SEC alleged that, from 2007 through early 2012, an ISS employee provided a proxy solicitor, a firm that gathers shareholder votes, with nonpublic information revealing how more than 100 ISS clients were voting their proxy ballots.

Cheryl Gustitus, a spokeswoman for ISS, said the firm took "swift action of its own" and also cooperated with the SEC.

"The confidentiality of our clients' information is essential," she said. "We now consider this matter closed."

The company previously disclosed in its regulatory filings that both the SEC and Department of Justice were investigating the matter.

Gustitus said ISS does not expect the DOJ to take any action and a DOJ spokesman said he was not aware of any charges.

"We understand the matter to be closed there," she said.

The case marked the first time the SEC sued a proxy advisory firm, according to an agency spokesman.

Business groups such as the U.S. Chamber of Commerce have long complained about the influence that proxy advisory firms such ISS can wield in corporate elections.

Most recently, ISS urged JPMorgan Chase & Co shareholders to vote against the re-election of three board members, saying they failed to oversee the bank's risk-taking that led to $6.2 billion in losses from bad credit known as the "London Whale" trades.

Those directors won re-election earlier this week, but they received less than 60 percent of the vote.

The SEC alleged the ISS employee who revealed the voting intentions of clients received $11,500 worth of sporting and concert tickets, as well as $20,000 in meals.

"Based on emails between the ISS employee and the proxy solicitor, the ISS employee provided the information to the proxy solicitor as a quid pro quo for the tickets and meals he received," the SEC said.

The SEC did not name the ISS employee or the proxy solicitor employee.

Gustitus told Reuters the ISS employee was fired in March 2012.

A spokesperson for Georgeson, a proxy solicitation firm owned by Computershare Ltd, confirmed late on Thursday that its employees were involved in the matter, but declined to comment on details of the "ongoing SEC investigations" or the SEC's case against ISS.

"When the allegations surfaced last year, Georgeson proactively and promptly contacted the SEC and cooperated fully with the investigation. Upon further investigation, Georgeson determined that two employees acted outside of our policies and placed them on administrative leave in April 2012, and subsequently terminated the employment of these two employees," the spokesperson said.

The SEC has been mulling new regulations for proxy advisory firms for several years. In July 2010, it published a 150-page document soliciting comments from the public.

Since then, however, the SEC has not followed up with any new rules.

(Reporting by Sarah N. Lynch; Editing by Lisa Von Ahn, Tim Dobbyn, Leslie Gevirtz and Andre Grenon)

The Pentagon released new cost projections for 78 major weapons programs on Thursday, including the F-35 program which showed the first decline in cost after years of increases and restructurings.

The partners who are helping fund the F-35's development include Britain, Australia, Canada, Turkey, Italy, Norway, Denmark and the Netherlands.

Israel and Japan have also placed orders and Singapore may soon follow suit, according to U.S. government sources. Lockheed is also bidding for a 60-fighter order from South Korea.

Following are some key figures about the F-35 program:

COST OF THE OVERALL PROGRAM

* Senior Pentagon officials have said they consider that price tag unaffordable. Program officials are taking steps to reduce the projected operating cost, including hiring engine maker Pratt & Whitney, a unit of United Technologies Corp , to cut the fuel burn of the engine by 5 percent.

COST PER JET

Over time, as production quantities increase, the jets are expected to start dropping in price. The per-plane forecasts factor in foreign orders, which are not included in the U.S. development, procurement and operating cost.

Bogdan recently said he expected to reach the target price at least for the A-model by 2020, when Australia is due to start buying the first of the 100 F-35s currently in its plans.

Lockheed executives say they believe the government's estimates are too conservative, and predict that the price of the new warplane will be even lower once the company starts full-rate production later this decade.

Critics of the program say Pentagon cost projections are probably too low, noting that further technical issues may well arise during flight testing of the new fighter jet.

The jet is built by Lockheed at its Fort Worth, Texas, plant, with Northrop Grumman Corp and BAE Systems Plc serving as key suppliers. Engines are built by Pratt & Whitney.

(Reporting by Andrea Shalal-Esa; Editing by Bob Burgdorfer)

Under an agreement made public on Thursday, MBIA and FGIC, which insured residential mortgage-backed securities issued by ResCap, get about $1 billion - a bigger share of the total pot than they would have received in an earlier version of the settlement. Other bond insurers get a total of $96 million.

But the insurers have had to pay billions of dollars in claims stemming from the failed securities - MBIA alone has already paid out more than $2 billion - and may have to pay more in the future.

Paulson and other holders of ResCap's unsecured notes, on the other hand, may have made a profit. The noteholders will receive $351 million or so, about 35 cents on the dollar for their roughly $1 billion in claims.

While Paulson has not disclosed what it paid for its stake, it is likely making a profit. The bonds were trading lower than 30 cents on the dollar last May, when ResCap filed for bankruptcy, according to bond tracking program TRACE. They dipped to 24 cents at the beginning of this year, but have since risen to about 34 cents, TRACE shows.

Ally Financial said on Thursday it would pay $2.1 billion to creditors of ResCap, its bankrupt mortgage unit, up from the $750 million it had previously offered to settle the same claims against it.

ResCap estimates it will now have about $2.5 billion to pay to unsecured creditors - the contribution from Ally plus another $400 million or so from the proceeds of unliquidated assets.

The agreement was filed in bankruptcy court in New York and is subject to court approval. Under the agreement, MBIA will receive about $800 million and FGIC will get $206.5 million.

Paulson is the largest holder of ResCap's unsecured bonds. Dan Kamensky, a partner at Paulson, did not return a call on Thursday. In a statement, Kamensky said "we are supportive of the settlement that allows Ally to move forward as a leading automotive financial services company."

Holders of residential mortgage-backed securities - of which there are more than 40,000 among 392 separate RMBS trusts - will recoup about $672 million.

The settlement also resolves ongoing litigation, including a securities class action led by the New Jersey Carpenters Health Fund, which will receive $100 million. A trust created for the benefit of other private securities claimants will receive $226 million.

(Reporting by Nick Brown; editing by Eddie Evans and Matthew Lewis)

The Fed's evolving stance was made apparent by Federal Reserve chairman Ben Bernanke's remarks to Congress Wednesday, where he laid out the conditions that might cause the Fed to reduce its $85 billion a month buying of Treasuries and mortgage-backed bonds.

U.S. stock and bond markets were whipsawed - the S&P 500 rose dramatically On Wednesday, only to fall sharply in its largest one-day point swing since early November, and bond yields rose above 2 percent to a 10-week high. On Thursday, both markets stabilized.

Volatility has been low over the past few months. The 50-day moving average of the CBOE volatility index, Wall Street's favorite fear gauge, hit a six-year low last week. In the past two days it rose as much as 13 percent, but it remains at historically low levels. That may change, depending on future remarks and moves by the Fed.

"As you start hearing about the Fed tapering off asset purchases I wouldn't be surprised if that spooks investors and you begin to see volatility pick up," said Joseph Tanious, global market strategist at JPMorgan Funds.

Fed officials say they will need more signs of sustained improvement in the economy and the labor market before reducing the bond buying that has lowered borrowing costs, underpinned a rebound in housing, and helped to boost stocks to record levels.

Since its November lows, the S&P 500 has gained nearly 25 percent. In that time, corrections have been brief - with the largest drop a 3.8 percent fall over a five-day period in April. Wednesday's action looked like the initial stage of a larger pullback.

"This wobble is coming from sellers who view much of the stock market's ascent as being mostly attributable to central bank liquidity provisions, and less so to any fundamental economic improvement," said David Joy, chief market strategist at Ameriprise Financial in Boston.

With a stronger economy as a prerequisite for a Fed exit, for now analysts see U.S. stock market declines related to fears of Fed decisions as buying opportunities.

Thursday's action speaks to that point. In the early going, the market looked primed for its second consecutive drop of more than 0.8 percent, which would have been the first such occurrence since November. But buyers jumped in, and the S&P ended just 0.3 percent lower.

The Fed will however have to walk a thin line as it communicates its next policy steps. Officials including New York Fed President William Dudley have cautioned against investor over-reaction to policy adjustments.

"The Fed won't adjust unless and until it is convinced that the private sector can function well, and sustainably so, without the present extent of accommodation," Joy said. "That should be viewed as a welcome economic vote of confidence."

PULLBACK IN THE CARDS

With the sharp rally, stocks were nearing overbought levels in various technical readings and Bernanke's Congressional testimony on Wednesday, taken as slightly hawkish, was seen as an opportunity for investors to take some profits off the table.

Adding to investors' jitters, minutes from the latest Federal Open Market Committee meeting show a hawkish bent in the policy-setting group, with some members discussing if it would be appropriate for the unwinding of stimulus to begin as early as June.

When the Fed eventually reduces its monthly bond buying, known as quantitative easing, that should be reflected in the Treasury market. Goldman Sachs strategists said this week that the fair value of the 10-year yield is closer to 2.5 percent. That may also have an effect on corporate debt, where the yield on the average high-yield bond recently dipped below 5 percent.

"A cessation of QE would certainly precipitate a re-pricing in the market," said Bonnie Baha, head of Global Developed Credit at DoubleLine Capital LP, which manages more than $60 billion in Los Angeles.

"I doubt, however, that Bernanke envisions ending QE cold-turkey. His remarks yesterday were most likely a trial balloon. He has not taken ongoing bond-buying off the table," she said.

The rise in yields should be gradual. In its note, Goldman Sachs said rising yields may not even hurt equities, because it would suggest less uncertainty about the outlook for growth or inflation. That said, previous instances where it appeared the Fed was going to reduce support for markets have jolted the stock market.

"I think the market is overreacting, and overly focused on this notion of tapering," said Steven Einhorn, vice chairman at hedge fund Omega Advisors Inc in New York.

"I don't think it's at all imminent. I think Bernanke and his associates have made clear that before they opt to taper they want to see substantial improvement in the labor market."

(Additional reporting by Herbert Lash, Chuck Mikolajczak, Jennifer Ablan, Steven C. Johnson and Wanfeng Zhou; Editing by Martin Howell, David Gaffen and Leslie Gevirtz)

The Defense Department's annual report to lawmakers showed a $40 billion, or 2.4 percent, cost increase in 78 major arms programs, mainly due to accounting changes and higher order quantities. But none of the cost increases were big enough to trigger the congressionally mandated live-or-die reviews that have been commonplace in recent years.

The cost of the developing and building the F-35, a new radar-evading fighter jet, is now projected at $391.2 billion, down from last year's estimate of $395.7 billion, according to the Pentagon's "selected acquisition report.

The report did not revise the projected $1.1 trillion cost of operating and maintaining the fleet of 2,443 new fighter jets over the next five decades, or the projected cost per flying hour, despite ongoing work by the F-35 program office and the main contractors to reduce those costs.

Lockheed is developing three models of the supersonic, single-seat F-35 fighter for the U.S. Air Force, Navy and Marine Corps, as well as eight countries that are helping fund its development: Britain, Australia, Canada, Norway, Denmark, Italy, the Netherlands and Turkey. Israel and Japan have also placed orders for the new plane.

Current plans call for the U.S. military to buy a total of 2,443 F-35 jets in coming years, with its allies slated to buy 721 additional fighters, although many analysts believe mounting budget pressures could ultimately reduce the total purchase.

Lockheed, the Pentagon's largest supplier, said it would continue to work with defense officials to drive the cost of the F-35 program down even further.

"This is the first year a cost reduction was noted. We will work with the F-35 Joint Program Office to implement further cost saving measures which will result in additional significant decreases to the total program cost," said Lockheed spokesman Michael Rein.

The Pentagon report projected the total cost to develop, buy and operate the new fleet of F-35 fighter jets would be just over $1.50 trillion over the 50-year life of the program. That is down slightly from last year's estimate of $1.51 billion, reflecting the lower projected acquisition cost.

It said the average cost of the conventional F-35A model, excluding R&D costs, had dropped to $76.8 million per plane in 2012 dollars, compared with $78.7 million a year earlier.

Projected operating and maintenance costs, which include the cost of fuel, will be updated at a high-level meeting of U.S. defense officials this fall, according to an information guide released by the Pentagon's F-35 program.

The office noted that expected inflation in fuel costs, which account for 14 percent of the total operating cost estimate, would have a big impact. It assumes that fuel costs will rise to $8.04 per gallon, compared with $4.24 in 2012.

Measured in 2012 dollars, or excluding inflation, the program's total projected cost dropped $11.1 billion to $936.4 billion from $947.5 billion a year earlier.

The Pentagon report included updates on 77 other big weapons programs, including the Air Force's Evolved Expendable Launch Vehicle (EELV) program, which buys launch services to lift U.S. military and intelligence satellites into orbit.

The report said the cost of the EELV program was expected to more than double, to $70.7 billion, because of a new plan to buy 60 additional launches and extend the schedule for launches through fiscal 2028.

United Launch Alliance, a joint venture run by Lockheed Martin and Boeing Co., currently provides the launch services to the Air Force. But the service is trying to open the launch program to competition from other companies, including privately owned Space Exploration Technologies.

(Reporting by Andrea Shalal-Esa; Editing by Gerald E. McCormick, Leslie Adler and Dan Grebler)

The stocks each dropped more than 50 percent in the first minute of trading, though ended just down slightly.

The share drops were the latest such incidents for the market since the May 6, 2010, "flash crash," a computer-driven trading glitch that caused a sudden afternoon tumble in the major U.S. indexes. Last week, the NYSE canceled trades in Anadarko Petroleum Corp after a blip in trading cut the market value of the company by 99 percent.

The latest event generated criticism from NextEra and others over what it means for investors.

"This is naturally a concern for all our shareholders and potential shareholders," said Moray Dewhurst, vice chairman and chief financial officer of NextEra Energy. "This type of market behavior is not what we would expect from a well-functioning and well-regulated exchange."

The NYSE said while all transactions in those shares in the first minute of trading will stand, all trades in AEP at or below $46.03 in that period, and all trades in NextEra at or below $76.19, will be marked with an "aberrant report indicator."

An aberrant report indicator is used to indicate the market believes that the trade price does not accurately reflect the prevailing market for the security, according to the U.S. Securities and Exchange Commission.

Shares of AEP dropped as much as 54 percent while NextEra sank 62 percent, both hitting their lowest price of the day right at the opening, but ended the session with small losses.

The Standard & Poor's utility index , which contains both AEP and NextEra, led declines on the S&P 500. It ended down 0.8 percent, after having fallen as much as 8.1 percent earlier.

Individual stock moves of 10 percent or more in a five-minute period usually trigger a trading halt, based on SEC rules, but the rules do not apply to the first 15 minutes of trading or the last 30 minutes of a session. The exchanges are able to cancel trades in the event of irregular or erroneous activity.

To further reduce volatility, the SEC has approved a program called "limit up/limit down" on all major stock exchanges. But the program is just starting to be introduced on large-cap stocks.

Hundreds of trades occurred in AEP and NextEra shares in the first minute of trading, though many were on small volume, such as 100 or 200 shares. AEP's stock hit a low of $22.28 in the early action, but ended the day at $48.28, down just 0.6 percent. NextEra hit a low of $30.37 and closed at $78.22, down 1.2 percent.

After the NYSE ruling, AEP's intraday low stood at $46.07, while NextEra's low was at $76.50.

"Essentially you have a market that's unprotected for the first 15 minutes of the day and the last half hour," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. He noted, though, that the newer rules should help prevent the problem from happening in the future.

The limit up/limit down program aims to halt the trading of U.S.-listed stocks if they moved outside a recently traded price range.

"Limit up/limit down was effective April 8, (but) there is a further rollout period by ticker in alphabetical order," Credit Suisse analysts wrote in a recent research note. "So while a stock may be part of the S&P 500, it may not enter the pilot until a few weeks into the rollout."

(Reporting by Caroline Valetkevitch, additional reporting by Angela Moon; editing by James Dalgleish, Jeffrey Benkoe, Marguerita Choy and Leslie Adler)

Without admitting or denying wrongdoing, Neil Morrison, 38, accepted what the SEC said was the first industry ban for violating "pay-to-play" rules governing the $3.7 trillion municipal bond market.

He also agreed to a $100,000 civil fine, which the SEC called the largest individual penalty in such a case.

Thursday's settlement was announced eight months after Goldman struck its own $12 million settlement with the SEC over the case, which involved contributions to the 2010 gubernatorial campaign of then-Massachusetts State Treasurer Timothy Cahill.

Pay-to-play refers to the providing of cash or other contributions to public officials in exchange for political favors or the awarding of contracts.

"These tough sanctions against Morrison show that we take abuses of the pay-to-play rules in the municipal securities industry very seriously and will hold individuals accountable for their violations," Elaine Greenberg, chief of the municipal securities and public pensions unit of the SEC's enforcement division, said in a statement.

Thomas Kiley, a lawyer for Morrison, had no immediate comment.

"Neil Morrison violated applicable regulatory rules as well as Goldman Sachs' internal policies," said Michael DuVally, a bank spokesman. "We detected his activities, promptly alerted regulators, terminated his employment, and fully cooperated with investigations."

WEARING MANY HATS

The SEC said Morrison, a resident of Taunton, Massachusetts, helped run Cahill's campaign from his Goldman office in Boston, where he was a vice president, during work hours while using the bank's phone and e-mail system.

By performing such roles as speechwriter, fundraiser, strategist and media coordinator, Morrison got more access to Cahill and his staff, giving Goldman a leg up on mandates to underwrite municipal bond offerings, the SEC said.

"From my standpoint as an advisor/consultant/friend I am saying, PLEASE don't give these (underwriter) slots away willy-nilly," Morrison once e-mailed a deputy treasurer in Cahill's office, according to the SEC. "You are in the fight of your lives and need to reward loyalty and encourage friendship."

The SEC said Goldman was able to participate in 30 Massachusetts bond offerings from which it should have been disqualified because of Morrison's activities.

Goldman did not admit wrongdoing in its agreement to settle with the SEC. At the time, it also settled a related case brought by Massachusetts Attorney General Martha Coakley.

The fine is small relative to the amount of business that Morrison may have generated for Goldman, said James Cox, a Duke University law professor. "What is significant is barring this guy from the securities industry for five years," he said.

FORMER TREASURER SETTLES

In April 2012, Cahill was indicted on charges that he misused $1.5 million in funds intended to promote the state lottery to boost his campaign prospects.

A mistrial was declared in December, and Massachusetts dropped the criminal case in March 2013 when Cahill admitted to violations of state ethics rules and accepted a $100,000 fine.

The case against Goldman and Morrison was part of a broader SEC crackdown on "pay-to-play" practices.

In 2010, the regulator adopted measures to target activities of investment advisers who seek out contracts to manage public pension plans and other investment accounts.

The SEC has recently also turned up the heat on the municipal bond market itself.

On Wednesday, it settled a fraud case in which it accused South Miami, Florida, of failing to disclose problems with the tax-exempt status of two bond deals to investors.

Earlier this month, the SEC settled a landmark fraud case against Harrisburg, Pennsylvania's capital city, in which it accused city officials of glossing over the city's financial problems in public speeches and presentations.

(Additional reporting by Sarah N. Lynch; Editing by Dan Grebler)

The source said that it was unlikely that the Federal Trade Commission had sent out civil investigative demands in relation to the probe, which would be the sign of a formal and more serious investigation.

The FTC wrapped up a previous investigation with Google in January, concluding that it had not manipulated its Web search results to hurt rivals but winning promises that it would change certain behaviors.

(Reporting by Diane Bartz, editing by Ros Krasny)

Morrison also was barred from the securities industry for five years in the first industry ban for violating municipal bond market rules on "pay-to-play," or the making of campaign donations in exchange for political favors, the SEC said.

Thomas Kiley, a lawyer for Morrison, had no immediate comment.

"These tough sanctions against Morrison show that we take abuses of the pay-to-play rules in the municipal securities industry very seriously and will hold individuals accountable for their violations," said Elaine Greenberg, chief of the Municipal Securities and Public Pensions Unit, in the SEC Enforcement Division.

Goldman Sachs settled charges relating to the case in September, paying $12 million. Goldman spokesman Michael DuVally was not immediately available for comment.

In recent months, the SEC has turned up the heat on the $3.7 trillion municipal bond market. In most of the cases, it has held off penalizing individuals.

(Reporting By Lisa Lambert and Jonathan Stempel; Additional reporting by Sarah N. Lynch)