On December 8, Financial Industry Regulatory Authority, Inc. Rule 2290 addressing conflicts of interest in fairness opinions issued by member broker-dealer firms became effective. Rule 2290 imposes disclosure and procedural requirements for fairness opinions issued to boards of directors of companies when the issuer of the opinion knows, or has reason to know, that the fairness opinion will be provided or described to the company’s public shareholders.
Pursuant to Rule 2290, FINRA members issuing fairness opinions must disclose if they:
i. have acted as financial advisors to any party to the transaction that is subject to the fairness opinion and, if applicable, if they will be receiving compensation contingent on the completion of such transaction;
ii. if the issuer of the fairness opinion will receive any other significant payment or contingent compensation based on the completion of such transaction;
iii. any material relationships over the past two years or that are mutually understood to be contemplated in which any compensation was received or will be received as a result of such relationship between the FINRA member and any party to the transaction subject to the fairness opinion;
iv. 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 that were verified;
v. whether a committee issued or approved of the fairness opinion; and
vi. whether 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 relative to the compensation of the public shareholders of the company.
FINRA members issuing fairness opinions must have written procedures for the approval of fairness opinions by the member, including the types of transactions and circumstances by which the member will use a fairness committee to approve or issue a fairness opinion.
When using a fairness committee, FINRA members must have a procedure by which the member selects personnel to be on its fairness committee, the necessary qualifications of such people, the process by which the member promotes a balanced review by its fairness committee, including the review and approval of professionals who did not serve on the member’s deal team and the process by which the member determined its valuation analyses to utilize when issuing its fairness opinions.