Investment or other transaction banks typically issue fairness opinions regarding the fairness of a proposed merger, acquisition, sale or other transaction. Rule 22901 is intended to inform stockholders of potential conflicts of interest that may exist in the issuance of fairness opinions by FINRA members. FINRA is concerned that existing disclosures provided in fairness opinions may not adequately alert the shareholders to potential conflicts of interest that may exist between the firm issuing the fairness opinion and the parties to the proposed transaction.

The Rule imposes both disclosure requirements and procedural requirements on issuers of fairness opinions, including requiring member firms to maintain written procedures with respect to the approval of fairness opinions. While the SEC disclosure requirements apply only when the member firm knows or has reason to know the fairness opinion will be provided or described to the subject company's shareholders,2 the SEC has suggested that fairness opinions prepared for use by such a company's board of directors should include these disclosures because "the fairness opinion is usually included in materials provided to public shareholders."

The Rule requires:

Disclosure Requirements

  • Contingent Compensation. A member firm is required to disclose if it will receive compensation contingent upon successful completion of the transaction for the services in rendering the fairness opinion and/or serving as an advisor to any party to the transaction. Additionally, a member firm is required to disclose if it will receive any other significant payment or compensation3 that is contingent upon the successful completion of the transaction.
  • Material Relationships. A member firm must disclose any material relationships4 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 and any party to the subject transaction.
  • Independent Verification of Information that Formed a Substantial Basis for the Fairness Opinion. A member firm must disclose if any information that formed a substantial basis5 for the fairness opinion that was supplied to the firm by the company requesting the opinion concerning companies which are parties to the transaction has been independently verified by the member firm, and if so, a description of the information or categories of information that were verified.6 Use of a Fairness Committee. A member firm must disclose whether or not the fairness opinion was approved or issued by a fairness committee.
  • Compensation to Officers, Directors or Employees. A member firm must disclose 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.7

Procedural Requirements

A member firm issuing a fairness opinion must have written procedures for approval of the firm's opinion, including the following:

  • Procedures for Use of a Fairness Committee. 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: (a) the process of selecting personnel to be on the fairness committee; (b) the necessary qualifications of persons serving on the fairness committee; and (c) 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 transactions.8
  • Procedures Regarding Valuation Analyses. The member firm is required to adopt procedures addressing the process to determine whether the valuation analyses used in the fairness opinion are appropriate.