Rick Lacher

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NASD Rule 2290 Disclosures and Procedures
Concerning the Issuance of Fairness Opinions
October 21, 2006
Rick Lacher Houlihan Lokey Howard
Zukin Investment Banking Services 200 Crescent
Court, Suite 1900 Dallas, TX 75201 Phone (214)
220-8490 rlacher_at_hlhz.com
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NASD Rule 2290

• Timeline and Status
• The NASD proposed Rule 2290 on June 24, 2005.
• The NASD filed amendments with the SEC on
  November 30, 2005, January 25, 2006, and March 1,
  2006.
• The SEC solicited comments from interested
  persons on April 4, 2006.
• On August 24, 2006, the time period for SEC
  action was extended to November 1. It is not
  clear whether to expect Commission action by that
  date or merely another extension.

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NASD Rule 2290

• Disclosures
• Any NASD member issuing a fairness opinion that
  may be provided, or described, or otherwise
  referenced to public shareholders must disclose,
  to the extent not otherwise required, in such
  fairness opinion
• whether such member has acted as a financial
  advisor to any transaction that is the subject of
  the fairness opinion, and, if applicable, that it
  will receive compensation for
• rendering the fairness opinion that is contingent
  upon the successful completion of the
  transaction
• serving as an advisor that is contingent upon the
  successful completion of the transaction
• whether such member will receive any other
  payment or compensation contingent upon the
  successful completion of the transaction
• whether there is any material relationship that
  existed during the past two years or 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 the companies that are involved in
  the transaction that is the subject of the
  fairness opinion
• the categories of 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
  involved in the transaction and whether any such
  information in each such category has been
  independently verified by the member and
• whether the fairness opinion was approved or
  issued by a fairness committee.

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NASD Rule 2290

• Procedures
• Any member issuing a fairness opinion must have
  procedures that address the process by which a
  fairness opinion is approved by a firm,
  including
• 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
  such transactions where it 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, including review and approval
  by persons who do not serve on or advise the
  deal team to the transaction
• the process to determine whether the valuation
  analyses used in the fairness opinion are
  appropriate, and the procedures should state the
  extent to which the appropriateness of the use of
  such valuation analyses is determined by the type
  of company or transaction that is the subject of
  the fairness opinion and
• the process to evaluate whether the amount and
  nature of the compensation from the transaction
  underlying the fairness opinion benefiting any
  individual officers, directors or employees, or
  class of such persons, relative to the benefits
  to shareholders of the company, is a factor in
  reaching a fairness determination.

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NASD Rule 2290

• SECs Solicitation of Comments
• In the SECs Request for Comment, the SEC
  specifically notes
• The proposed Rule does not require member firms
  to quantify the amount of contingent fees that
  will be earned from either the client or others
  in the transaction. The SEC asks if such
  quantification should be required.
• The proposed Rule requires that a firm state if
  compensation is contingent. The SEC asks whether
  in the disclosure it should be stated that a
  conflict may exist and a description of the
  impact of such conflict be included.

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NASD Rule 2290

• Summary of Responses to SEC
• There were fewer responses than in the NASDs
  original request
• The Council on Institutional Investors was the
  only investor to respond. It supported the NASD
  rule and any expansion of disclosure that the
  SEC, or others who could impact policy (such as
  the NYSE and other exchanges), could require.
• The Wall Street banking community (through the
  Securities Industry Association) again responded
  with a desire for the status quo and to curtail
  any detailed disclosure of the size of contingent
  fees relative to the size of the fairness opinion
  fee.
• The NY State Bar and the City Bar of NY again
  aided the investment banking community with more
  harshly worded responses that support the NASD
  rule AS IS (but without increased disclosure
  requirements) and argue for limitations. The NY
  Bar even suggests that along with the disclosure
  of a contingent fee relationship should be an
  acknowledgement that such relationship does NOT
  create a conflict of interest.
• Generally, the investment banks believe that the
  evaluation of compensation is not within the
  members role as financial advisor or fairness
  opinion provider.

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NASD Rule 2290

• Observations of Change
• The SEC has generally increased its disclosure
  requirements regarding potential conflicts of
  interest (including in Risk Factors).