The Securities and Exchange Commission on Oct. 11 approved proposed Rule 2290 of the Financial Industry Regulatory Authority Inc. ("FINRA") relating to fairness opinions. The new rule requires FINRA members to maintain written procedures with respect to the approval of fairness opinions and to include certain disclosures in fairness opinions. In many respects, Rule 2290, which will take effect 30 days after FINRA publishes a Notice to Members, codifies what is already common practice for fairness opinions. However, to comply with the new rule, most FINRA members will need to revise their internal procedures and modify their fairness opinion forms.

The final rule is available at www.finra.org/web/groups/rules_regs/documents/rule_filing/p019261.pdf. What follows are the highlights.

Fairness Opinion Procedures

The procedural requirements of Rule 2290 require members to maintain written procedures for approving a fairness opinion. Rule 2290(b) require these written procedures to include the following:

  • The types of transactions and the circumstances in which the member will use a fairness committee to approve or issue a fairness opinion.
  • In those transactions in which the member 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, which must include the review and approval by persons who do not serve on the deal team for the transaction.
  • The process for determining whether the valuation analyses used in the fairness opinion are appropriate.

Rule 2290 does not require that the fairness committee be comprised entirely of person not serving on the deal team. The rule only requires that there be enough persons (not necessarily committee members) who do not serve on the deal team to provide a balanced review.

Disclosure Requirements

The disclosure requirements of Rule 2290 are meant to inform public shareholders about potential conflicts of interest and apply if a member rendering a fairness opinion knows or has reason to know, at the time the opinion is issued to the recipient board (including to any committee or other subset of directors), that the opinion will be provided or described to the recipient's public shareholders. Members will be deemed to have such knowledge if the subject transaction requires a shareholder vote. Fairness opinions relating to non- Exchange Act registrants are not subject to the new disclosure rules, although, for consistency, members may wish to voluntarily comply with the disclosure requirements of Rule 2290 for all of their fairness opinions.

Rule 2290(a) requires members to disclose the following items in the fairness opinion:

  • If the member has acted as a financial advisor to any party to the subject transaction, 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. 
  • If the member will receive any other significant payment or compensation contingent upon the successful completion of the transaction.

(With respect to both of the above, Rule 2290 does not require quantification of the compensation. Descriptive disclosure of contingent compensation and material relationships is sufficient. No particular dollar or percentage threshold is specified as "significant." FINRA believes that a "significant" payment of contingent compensation is one that a reasonable reader of the fairness opinion would have an interest in knowing about in order to assess whether the opinion provider has a potential conflict of interest.)

  • Any material relationship that existed during the last two years or that 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 any party to the subject transaction.
  • If any information that formed a substantial basis for the fairness opinion that was supplied 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 that were verified.

(Where no information has been verified, a blanket statement to that effect is sufficient, which conforms to current fairness opinion practice.)

  • Whether the fairness opinion was approved or issued by a fairness committee.
  • Whether the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation to any of the recipient's officers, directors or employees, or any class of such persons, relative to the compensation to the public shareholders of the recipient.

In addition to modifying their fairness opinion forms to comply with Rule 2290, member firms also should consider revising their engagement letter forms to state whether or not the opinion provided will be Rule 2290 compliant and/or approved by a fairness committee. Member firms also may wish to modify their engagement letter forms to state that compensation payable to officers, directors or employees is not within the scope of the fairness determination.