Christmas came early last year to hundreds of thousands of investors. On July 27, 2004, 12 leading Wall Street firms started handing out free “independent” views on stocks – views presumably not tainted by investment bankers hoping to woo corporate clients.

Surprise! They didn’t do this by choice. The firms had been charged with dishing out biased and self-serving research, and having occasionally duped investors. Consequently, they were bullied into a five-year agreement with the SEC that regulates many aspects of investment research.

The new rules purport to 1) restrict analysts’ involvement with investment bankers and their clients, 2) alert investors as to potential conflicts of interest, and 3) make sure that their brokers are providing more balanced recommendations.

In theory, investors were given the opportunity for the first time to weigh the advice of their broker against that of an impartial source. Not only is this alternate opinion posted alongside the in-house report, it is also on the trade confirmation received by the investor, and on his monthly statement.

Presumably this could lead to sounder stock-picking, and a sharpening up of Street research. Is it working? Has it made a difference?

We posed these questions to some of the independent consultants, ICs, who were selected by the SEC to institute the mandated changes. They are a seasoned and respected group of former portfolio managers and investment professionals who do not have ties to the firms they now work with, but who know their way around Wall Street.

Bridget Macaskill was formerly chairman and CEO of Oppenheimer Funds, and one of the most senior women on Wall Street. She is currently serving as Merrill Lynch’s IC. She has had the daunting task of lining up an alternative opinion on each of the roughly 1,275 domestic stocks covered by Merrill research.

Not just any opinion. Ms. Macaskill considers it her job to seek out the best alternative research available for the SEC’s mandated expenditure of $15 million per year. She also wants to supply two, not just one, independent views.

Rather than just checking off the legal boxes, Ms. Macaskill worked to provide a valuable service to retail investors, who were the primary focus of the SEC’s efforts.

Where in the world do you turn for such broad coverage?

For many, a starting point has been Standard and Poor’s, or Morningstar. Both firms cover pretty much every domestic stock, and according to a number of ICs, both do a good, professional job.

However, even these firms’ coverage is incomplete. For instance, newly issued stocks, or IPOs, are typically not followed. And, though some of the Morningstar and S&P analysts are excellent, it is unlikely that each is the best in his respective field.

For more sources, Ms. Macaskill surveyed several hundred Independent Research Providers, IRPs, mainly with the help of an innovative firm called Jaywalk. This operation, a subsidiary of Bank of New York, helps marry the offerings of IRPs with the needs of investors, who pay for the service with soft dollars.

She ended up interviewing about 50 IRPs, and choosing around 20 to fill in missing coverage. What does she look for? First, the SEC has made clear a preference for qualitative over quantitative research.

Second, she tries to find firms that produce reports that make sense to retail investors. Research that is brilliant but incomprehensible is a waste of time.

Most important, she seeks analysts that are right on the stocks. This is not as simple as it sounds. What time frame should analysts be judged on? What kind of data should be used to assess an analyst’s capability?

Ms. Macaskill assumes that most investors have a one- to three-year time frame. However, some trade more actively and would like shorter-term indications.

Arguably, the quantitative analysts tend to perform better in forecasting short-term moves. However, these sources often change their opinions frequently, which makes analyzing their performance difficult, and makes using their opinions expensive and possibly confusing.

All these factors go into hiring the alternative research sources that Ms. Macaskill has lined up. It is not a one-shot deal, either. If a source turns sour, turning out consistently bad advice, Ms. Macaskill has no qualms about changing firms.

Patricia Chadwick is the IC for Credit Suisse First Boston. Ms. Chadwick is also well known in the investment community. She was formerly the chief investment strategist for Invesco and a long-time portfolio manager. She now has her own consulting firm, Ravengate Partners.

She has chosen S&P to supply much of that firm’s alternate coverage, and has supplemented their offerings with research from Renaissance Capital, which covers IPOs, and with various firms represented by Jaywalk for specialty needs.

Like Ms. Macaskill, Ms. Chadwick has taken her job seriously. She, too, has spent considerable time setting up the alternate system and weighing its effectiveness. Like the other ICs, she has had little interface with the research management of CSFB.

How can we determine the effectiveness of this program? In July the ICs are required to report back to the SEC, and no doubt by then there will be more data available on the impact the measures are having.

As expected, reviews on the Street are mixed: Some skeptics feel the program is utter nonsense, while other participants feel that research is becoming more balanced.

Ms. Chadwick sees some impact at CSFB, where analysts are publishing a higher percentage of “hold” and “sell” recommendations than in the past. At Goldman Sachs, analysts are now required to rate at least 10% of their covered stocks as likely to under perform and no more than 25% as expected to outperform.

According to Ms. Macaskill, Merrill’s system is recording more hits on the independent research sources, all combined, than on the in-house product. This certainly suggests that someone is paying attention.

The ultimate test will be if in-house research becomes more balanced in its coverage of potential investment banking clients. This is going to be tough, since CEOs typically do not take kindly to negative research. And so far, companies’ managements still have the final say on who is awarded lucrative investment banking deals.

Going forward, it is unclear what will happen at the end of the five-year settlement period. Most likely, the ICs will not stay on the payroll. However, brokers and investors may well continue to lobby for alternative research.

There’s another rather compelling question. If a major firm can provide decent coverage of all the stocks in its universe for $10 million to $15 million per year, will they continue to choose spending hundreds of millions on their own in-house product?

Stay tuned.