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Research Enters a Glasnost Stage

New rules will put independent research calls on confirmation statements.

Given the way the stock market has performed the past three years, it's understandable if many investors don't want to look too closely at their brokerage statements.

But by year's end, many brokerage statements should make for interesting reading, no matter which direction the stock market heads. That's because this week's $1.4 billion settlement with 10 big Wall Street firms will make it easier than ever for investors to find out what others are saying about the stocks their brokers have urged them to buy.

One of the settlement's major reforms is a requirement that each Wall Street firm provide customers with alternative stock research produced by independent shops that don't do investment banking. And just in case an investor doesn't read those other reports, the settlement also requires the firms to tell its customers what those independent shops think on every single brokerage statement or trade confirmation slip they mail out.

Here's how it works.

Let's say you're a

Merrill Lynch


customer and your broker calls and recommends buying shares in

Cisco Systems

(CSCO) - Get Report

, claiming the firm's analyst believes the networking company's stock is undervalued. The broker mentions that Merrill also has some independent research reports on Cisco that you might want to read. But you tell the broker you don't need to read those other reports and tell him to just go ahead and buy some shares because you trust his judgment.

A few days later, Merrill sends you a trade confirmation slip in the mail that reports the number of shares of Cisco purchased and the price paid. Here's what's new: The confirmation slip indicates not only Merrill's rating on Cisco but the ratings of the other independent research firms as well.

It might be sobering for an investor to find out in our hypothetical case that a Merrill analyst rates shares of Cisco a buy, but analysts at other firms rate the stock a hold or even a sell.

And securities regulators say that's just the kind of checks-and-balances they were looking to achieve in the tainted stock research settlement. In forcing Wall Street's biggest players to offer alternative stock research to their customers, regulators say they will make it more difficult for firms to hype a stock.

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"It really puts the ratings for both the Wall Street firms and the independent research firms right in the forefront for investors," said Bruce Topman, a New York State assistant attorney general who had a hand in the Wall Street settlement. "

Investors are going to see the account statement, and it will be right there in front of them."

But don't look for this change for at least a few months.

First the firms must hire independent consultants, who will be responsible for deciding which outside firms are employed to provide the alternative research. Securities regulators say there is no preferred list of outside research firms, but some obvious candidates are

Sanford Bernstein



(VALU) - Get Report


Standard & Poor's


Argus Research

-- all of which don't do investment banking work.

Securities regulators say there's no hard-and-fast deadline for getting the independent research component of the settlement up and running. But look for most firms to start making alternative research reports available to customers some time around Thanksgiving.