SEC posts for comment NASD proposal regarding fairness opinions

By:  Cydney Posner

The SEC has posted for public comment the NASD proposal to establish new rule 2290 regarding the issuance by NASD members of fairness opinions.   (See my posting of 7/5/05.) Comments must be submitted by May 2.

Disclosure

• Under the proposed rule, any NASD member issuing a fairness opinion that may be provided, described or otherwise referred to public shareholders must disclose, to the extent not otherwise required, in the fairness opinion:
• whether the member has acted as a financial advisor in any transaction that is the subject of the fairness opinion and, if applicable, that it will receive compensation that is contingent upon the successful completion of the transaction for:
  • rendering the fairness opinion;
  • serving as an advisor;
• whether the member will receive any other payment or compensation contingent upon the successful completion of the transaction;
• whether there is any material relationship that existed during the past two years or is mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between the member and the companies that are involved in the transaction that is the subject of the fairness opinion;
• the categories of information (such as projected earnings and revenues, expected cost-savings and synergies, industry trends and growth rate) that formed a substantial basis for the fairness opinion that was supplied to the member by the company requesting the opinion concerning the companies involved in the transaction and whether any of the information in each category has been independently verified by the member (i.e., blanket disclaimers will not suffice); and
• whether the fairness opinion was approved or issued by a fairness committee.

In addition, any NASD member issuing a fairness opinion must have procedures that address the process by which a fairness opinion is approved by a firm, including:

• the types of transactions and the circumstances in which the member will use a fairness committee to approve or issue a fairness opinion, and, in transactions where it uses a fairness committee:
  • the process for selecting personnel to be on the fairness committee;
  • the necessary qualifications of persons serving on the fairness committee; and
  • the process to promote a balanced review by the fairness committee, including review and approval by persons who do not serve on or advise the "deal team" for the transaction;
• the process to determine whether the valuation analyses used in the fairness opinion are appropriate (which procedures should state the extent to which the appropriateness of the use of the valuation analyses is determined by the type of company or transaction that is the subject of the fairness opinion); and
• the process to evaluate whether the amount and nature of the compensation from the transaction underlying the fairness opinion benefiting any individual officers, directors or employees, or class of these persons, relative to the benefits to shareholders of the company, is a factor in reaching a fairness determination.

NASD intends to announce the effective date of the proposed rule change in a Notice to Members to be published no later than 60 days following SEC approval. The effective date will be 30 days following publication of the Notice to Members announcing SEC approval.