By Cydney Posner

The SEC has issued an order granting accelerated effectiveness to the request by FINRA for a proposed rule change relating to fairness opinion disclosures and procedures. The rule change, which has been in gestation since 2004, prescribes both proxy disclosure and procedures. FINRA has been concerned that the disclosures provided in fairness opinions may not sufficiently inform shareholders about the potential conflicts of interest that exist between the firm rendering the fairness opinion and the issuer, including conflicts related to contingent fees and other material relationships, such as serving as an advisor, underwriter, lender, market maker, asset manager or providing research coverage. FINRA has made clear that the rule change does not presume a conflict merely because the disclosures are made.

Disclosure

Under new rule 2290(a), if at the time a fairness opinion is issued to a company's board, the FINRA member issuing the opinion knows or has reason to know that the opinion will be provided or described to the company’s public shareholders, the member must disclose in the fairness opinion:

  • if the member has acted as a financial advisor to any party to the 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 and/or
    • serving as an advisor (note that the amount does not necessarily need to be disclosed under this rule);
  • if the member will receive any other significant payment or compensation contingent upon the successful completion of the transaction;
  • any material relationships that existed during the preceding two years or that are 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 any party to the transaction that is the subject of the fairness opinion;
  • if any information that formed a substantial basis for the fairness opinion that was supplied to the member by the company requesting the opinion concerning the companies that are parties to the transaction has been independently verified by the member, and if so, a description of the information or categories of information (such as projected earnings and revenues, expected cost-savings and synergies, industry trends and growth rate) that were verified (when no information has been verified, a blanket statement to that effect, as is common practice today, would be sufficient);
  • whether or not the fairness opinion was approved or issued by a fairness committee (including any committee or group that approves a fairness opinion in accordance with the procedural requirements of the rule, regardless of whether it is called a "fairness committee"); and
  • whether or not the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation to any of the company’s officers, directors or employees, or class of such persons, relative to the compensation to the public shareholders of the company (reflecting a change from the original proposal, which would have required a procedure to evaluate this information).

Procedures

Under new rule 2290(b), any FINRA member issuing a fairness opinion must have written procedures for approval of a fairness opinion by the member, 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 those transactions in which 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;
    • the process to promote a balanced review by the fairness committee, which shall include the review and approval by persons who do not serve on the deal team to the transaction (whether a person is considered to be part of the deal team requires an analysis of the particular facts and circumstances and will not be determined by whether a person is included on all document distributions or participated in meetings, but rather will depend on the nature and substance of his or her contacts and the advice rendered to the firm); and
  • the process to determine whether the valuation analyses used in the fairness opinion are appropriate.

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