Five years after the largest Wall Street firms agreed to supply independent analyst reports to their clients as part of a massive regulatory settlement, the arrangement is coming to an end - something that could hurt both research shops and individual investors.

The majority of the banks involved in the 2003 case involving allegations of tainted analyst recommendations are scheduled to wind down the settlement's research obligations at the end of July. That means the spigot of mandated money - $460 million total - that financed alternative research reports will dry up.

Although every independent research company that benefited from that funding stream knew the end would come one day, they won't be able to immediately replace the drop in revenue beginning Aug. 1. Public companies that have struggled to attract analyst coverage will also lose out when some brokerage firms drop the extra research. For the individual investors who took advantage of the free reports, independent research will once again revert to its original audience: large institutions such as hedge funds and mutual funds.

There's considerable debate about whether individual investors will directly suffer from the end of the settlement-funded research. Many investment banks maintain it wasn't widely used by customers, and in any case, two of the largest brokerage firms - Citigroup Inc.'s (C) Smith Barney unit and Morgan Stanley (MS) - plan to continue paying for it after the settlement period ends. UBS AG (UBS) is the only bank so far that has said it doesn't plan to do so; others have remained noncommittal.

Of secondary concern to individual investors is whether offering independent research caused the banks' own research reports to become less biased; there was some evidence in the early years that the level of "sell" recommendations by banks rose, said Michael Mayhew, chairman of Integrity Research Associates LLC, which evaluates research services for asset managers.

"During the settlement period, I think the (Wall Street) sell side worked hard to try to make their research more objective. The big question is, without that competition will we start to see a slide back to pre-settlement "sell" levels? I'm not suggesting we will or not; I just don't know," said Mayhew.

The settlement's end coincides with a trend toward less research in general being available to individuals, thanks to unrelated market forces. Many brokerage firms have cut back on their stock analysts in the post-settlement environment because investment banking fees can no longer be used to finance it, and the economic slowdown has prompted further cuts.

"There are easily 1,400 companies in the U.S. markets with no analyst coverage at all. Fifty percent of all companies have two or fewer analysts covering them," said Bruce Aust, executive vice president of Nasdaq OMX Group Inc.'s (NDAQ) corporate client group. "We'll see if the number of under-covered companies goes up dramatically after the settlement dollars go away."

For independent research shops themselves, there's no getting around the fact that the settlement money - in some cases in the tens of millions - will disappear for the most part in August.

Morningstar Inc. (MORN) has warned investors that it expects its post-settlement revenue to be "significantly lower" beginning in the second half of the year. Morningstar received $21 million in settlement monies in 2008 - about 4% of its consolidated revenue last year.

But executives at Morningstar and other independent research firms - including heavy-hitters Standard & Poor's and Argus Research - say that they are optimistic that the many of the Wall Street banks will continue to hire them for research after the settlement ends.

At the same time, settlement money has helped firms build up their business and target more clients outside the original banks involved.

"Even though the settlement revenue will go away, we think we're emerging stronger than we were going into" the contracts five years ago, said John Eade, president of Argus Research.

While the traditional "buy, hold, sell" research used by retail investors has been in decline during the settlement period, an alternative research industry has flourished by creating exclusive research for institutional investors with deep pockets. The research spans a wide range of services, from collecting field data and surveys to providing specialized forensic accounting services. Integrity Research estimates the revenue spent on such research services in North America last year reached nearly $2 billion, or nearly half the amount of commissions spent on traditional Wall Street research.

-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com

-By Ed Welsch, Dow Jones Newswires; 201-938-5244; edward.welsch@dowjones.com