NASD Notice to Members 04-83 - November 2004

NASD Requests Comment on Whether to Propose New Rule That Would Address Conflicts of Interest When Members Provide Fairness Opinions in Corporate Control Transactions; Comment Period Extended to February 1, 2005

Executive Summary

NASD is requesting comment on whether it should propose a new rule that would address procedures, disclosure requirements, and conflicts of interest when members provide fairness opinions in corporate control transactions. A fairness opinion addresses the fairness, from a financial point of view, of the consideration involved in a transaction. Investment banks typically provide fairness opinions in corporate control transactions, including mergers and acquisitions, the disposition or divestiture of material assets, divisions or subsidiaries, and buybacks of outstanding securities (“transactions”). The scope of the investment bank’s involvement typically is set out in an engagement letter between the bank and the company.


Investment banks that render fairness opinions may be influenced by whether the company's management supports the transaction. In other words, the investment bank may find that the transaction is fair from a financial viewpoint if the transaction is favored by the company's management, and, alternatively, opine that the financial terms are not fair if management opposes the transaction. This conflict may be especially strong when a transaction that is supported by management is also one in which the investment bank acted as the financial advisor to the company in recommending or structuring the transaction and/or where the investment bank will receive financial advisory fees upon successful completion of the transaction.


NASD is considering whether to propose a new rule that would require members to:
(1) disclose in any fairness opinion appearing in any proxy statement any significant conflicts of interest, including, if applicable, that the member has served as an advisor on the transaction in question, and the nature of compensation that the member will receive upon the successful completion of the transaction; and (2) require specific procedures that members must follow to identify and disclose potential conflicts of interest in rendering fairness opinions.


Questions concerning this Notice should be directed to Joseph E. Price, Vice President, Corporate Financing, at (240) 386-4623; or Gary L. Goldsholle, Associate Vice President and Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8104

View Full Notice PDF 45 KB

The views, expressions, findings and opinions expressed in the comments on this Web page are solely those of the author(s) and FINRA accepts no responsibility for the content of the comments.

Comments By Date Received
Lerner College of Business and Economics (PDF 29 KB) 11/24/2004
Ohio Public Employees Retirement System (PDF 89 KB) 11/30/2004
Ohio Retirement Systems (PDF 155 KB) 12/9/2004
Charles M. Elson, Arthur H. Rosenbloom, Drew G.L. Chapman (PDF 23 KB) 12/21/2004
The Canandian Institute of Chartered Business Valuators (PDF 67 KB) 1/7/2005
American Federation of Labor and Congress of Industrial Organizations (PDF 143 KB) 1/13/2005
Kane & Company, Inc. (PDF 59 KB) 1/14/2005
Council of Institutional Investors (PDF 46 KB) 1/14/2005
Standard & Poor's (PDF 226 KB) 1/18/2005
New York State Bar Association (PDF 617 KB) 1/27/2005
Signal Hill Capital (PDF 465 KB) 1/31/2005
HFBE Capital, L.P. (PDF 164 KB) 1/31/2005
Davis Polk & Wardwell (PDF 65 KB) 1/31/2005
Cravath, Swaine & Moore LLP (PDF 111 KB) 1/31/2005
Houlihan Lokey Howard & Zukin (PDF 68 KB) 2/1/2005
Sutter Securities Incorporated (PDF 71 KB) 2/1/2005
The Association of the Bar of the City of New York (PDF 68 KB) 2/1/2005
Securities Industry Association (PDF 103 KB) 2/1/2005
Dewey Ballantine LLP (PDF 275 KB) 2/1/2005
CalPERS (PDF 28 KB) 2/1/2005