A new rule of the Financial Industry Regulatory Authority, Inc. (FINRA) that addresses conflicts of interest in fairness opinions provided by its member broker-dealer firms became effective on December 8. FINRA, which was formerly known as the National Association of Securities Dealers, originally proposed Rule 2290 in June 2005 to address concerns that the disclosures provided in fairness opinions to corporate boards may not adequately inform shareholders of potential conflicts of interest existing between the broker-dealer providing the opinion and the parties involved in the transaction. The Rule as originally proposed drew extensive public comment. After undergoing several rounds of revision, the Rule as adopted largely codifies current practice, but also imposes additional disclosure and procedural requirements. Rule 2290, which was approved by the SEC in October, is discussed in Release No. 34-56645. The text of the final Rule is available at  http://www.finra.org/web/groups/rules_regs/documents/rule_filing/p019261.pdf.

Disclosure Requirements

Rule 2290 requires that if, at the time of issuance to a board of directors (or a board committee), the member firm knows or has reason to know that the fairness opinion will be disclosed to the company’s public shareholders, the member firm must make certain disclosures in the opinion, as summarized below.

Contingent Compensation. If the member firm has acted as a financial adviser to any party to a transaction that is the subject of a fairness opinion issued by such firm, the firm must disclose whether it will receive compensation contingent upon the successful completion of the transaction for rendering the fairness opinion or serving as an adviser, or any other significant payment or compensation that is contingent upon the successful completion of the transaction. Although the rule does not require the quantification of such compensation, the current practice of some member firms is to disclose these amounts.

Material Relationship. The member firm must disclose any material relationships that existed during the past 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 firm and any party to the transaction that is the subject of the fairness opinion.

Independent Verification of Information. The member firm must disclose whether it independently verified any information provided by the company requesting the fairness opinion that formed a substantial basis for the fairness opinion, and provide a description of the information or categories of information that were verified. Notably, the Rule does not require the independent verification of any information provided to the member. Member firms may comply with the Rule by making a blanket statement confirming that no such independent verification occurred.

Fairness Committee. The member firm must disclose whether or not the fairness opinion was approved or issued by a fairness committee. Although this type of required disclosure is new, many member firms already require that a fairness committee approve a fairness opinion before it is rendered.

Compensation to Officers, Directors and Employees. The member firm must disclose whether or not the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation from the subject transaction to any of the company’s officers, directors or employees, relative to the compensation to the company’s shareholders. The Rule, however, does not require that the member firm perform this type of evaluation.

Procedural Requirements

Rule 2290 also requires that member firms have written procedures for approval of fairness opinions. The procedures must address the types of transactions and circumstances in which the firm will use a fairness committee to approve or issue an opinion, and, with respect to those transactions: 

  • The process for selecting personnel to be on the fairness committee; 
  • The necessary qualifications of those serving on the committee; and 
  • The process for promoting a balanced review by the committee, including participation by persons not serving on the transaction team.

Each member firm also must have written procedures that address the process it employs to determine whether the valuation analyses used in the fairness opinion are appropriate.


Rule 2290 prescribes minimum disclosure and procedural standards for the covered providers of fairness opinions to use in managing potential conflicts of interest. FINRA member broker-dealer firms will be required to review their fairness opinion procedures and disclosure practices to assure compliance with Rule 2290. Although most member firms already have written fairness opinion procedures in place, the new requirements should promote a uniform approach to the elements of the opinion process addressed by the Rule.